<PAGE> 1
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
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
--------- ---------
Commission file number 333-26853
------------------------------
CCA HOLDINGS CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 43-1720013
(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
------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether 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: None
=============================================================================
<PAGE> 2
CCA HOLDINGS CORP.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 24
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 1 30
</TABLE>
- 2 -
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
CCA Holdings Corp. ("Holdings") commenced operations in January 1995 and
currently serves as a holding company for entities that own, operate and
develop cable television systems. Its cable television operations are
principally conducted through Charter Communications Entertainment I, L.P.
("CCE-I"). Holdings has a direct and indirect equity interest in CCE-I and
also controls CCE-I's general partner, CCA Acquisition Corp. ("CAC").
Holdings, CCE-I, CAC, and Cencom Cable Entertainment, Inc. ("Cencom") (another
subsidiary controlled by Holdings), are referred to together herein as the
"Company", and their operations are consolidated for financial reporting
purposes. Holdings maintains its principal executive offices at 12444
Powerscourt Drive, Suite 400, St. Louis, Missouri 63131 and their telephone
number is (314) 965-0555.
CCE-I owns, operates and develops cable television systems which lie
principally within two geographic areas: northeastern and western Connecticut
and central Massachusetts (the "Connecticut/Massachusetts Systems"); and the
St. Louis, Missouri metropolitan area, including eastern Missouri and
southwestern Illinois (the "Missouri/Illinois Systems" and collectively with
the Connecticut/Massachusetts Systems, the "Systems"). As of December 31,
1997, CCE-I's cable television systems passed approximately 544,500 homes and
served approximately 350,300 basic subscribers.
The Company 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 equity interest in Holdings. See "Item 12. Security Ownership
of Certain Beneficial Owners and Management."
The Company's other interests include two investments, as to which CCT Holdings
Corp. ("CCT"), a commonly controlled affiliate of Holdings, also has an
interest. One investment is both a limited and general partnership interest
(aggregate of 55%) in Charter Communications Entertainment, L.P. ("CCE-LP"),
with CCT having both a limited and general partnership interest (aggregate of
45%). The second investment is an indirect equity investment in Charter
Communications Entertainment II, L.P. ("CCE-II"), which owns, operates and
develops cable television systems in the Los Angeles and Riverside metropolitan
areas of southern California. The general partner of CCE-II is CCT, which is
an affiliate of the Company. Holdings' interest in CCE-II is accounted for
under the equity method for financial reporting purposes.
SIGNIFICANT TRANSACTIONS IN 1997
On February 10, 1997, in connection with a secondary offering of subordinated
notes of Holdings outstanding since January 18, 1995, Holdings issued to the
secondary purchasers $82,000,000 million aggregate principal amount of Senior
Subordinated Notes due 1999 (the "Notes") pursuant to an Indenture with Harris
Trust and Savings Bank (the "Indenture"). (See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
The Notes were issued pursuant to a "Rule 144A" transaction exempt from
registration under the Securities Act of 1933 (the "1933 Act"). On August 28,
1997, Holdings exchanged the Notes for similar Notes registered under the 1933
Act. The obligations on the Notes are guaranteed by CAC, Cencom, and CCE-LP.
(See "Item 13. Certain Relationships and Related Transactions.")
In November 1997, CCE-I completed the sale of its equity interest in a
subsidiary that owned and operated a radio station, which station had been
operated by the purchaser since January 1997.
- 3 -
<PAGE> 4
BACKGROUND AND OWNERSHIP STRUCTURE
Holdings was organized in 1994 as a Delaware corporation. Ownership interests
in Holdings are held by Kelso Investments Associates V, L.P. and its affiliate
(collectively "Kelso") and certain other individuals, on the one hand, and
Charter, on the other hand, which maintain an 85% and 15% interest,
respectively. As a result of its investment, Kelso can exercise effective
control over the management and affairs of the Company.
Holdings owns all of the outstanding equity interests in CAC, which, in turn,
owns all of the equity interests in Cencom. CAC and Cencom each hold limited
partnership interests in CCE-LP. CAC also holds a 1% general partnership
interest in CCE-LP, a 1.22% general partnership interest in CCE-I and a 1.22%
limited partnership interest in CCE-II. CCE-LP holds a 97.78% limited
partnership interest in each of CCE-I and CCE-II. CCE-I owns all of the equity
interests in, and is the manager of, Cable Advertising of St. Louis, LLP.
- 4 -
<PAGE> 5
As of December 31, 1997, the organizational structure of the Company and
certain of its affiliates was as follows:
[FLOW CHART OMITTED]
- 5 -
<PAGE> 6
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. See "Item 1. Marketing, Programming and
Rates."
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.
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 Company 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. 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.
In addition to cable television services, the Company conducts advertising
sales for a non-affiliated cable television operator in the St. Louis
metropolitan area and certain of the Systems offer paging services and rent
paging equipment. The Systems continue to evaluate the possibility of offering
other related communications services.
- 6 -
<PAGE> 7
COMPETITION
Cable television systems compete with other providers of television signals and
other sources of home entertainment. The competitive environment has been
significantly affected both by technological developments as well as regulatory
changes enacted in the Telecommunications Act of 1996 ("1996 Telecom Act")
which were designed to enhance competition in the cable television and local
telephone markets (see "Regulation and Legislation" below). 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
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.
Telephone. Federal cross-ownership restrictions historically limited entry by
local telephone companies into the cable television business. The 1996 Telecom
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.
Although no current overbuild is operational, it is anticipated The Southern
New England Telecommunications Company, through its wholly-owned subsidiary,
personal Vision, will complete construction and begin offering cable television
service in the Trumbull, Connecticut area within the year (see "Regulation and
Legislation - Telephone company Entry Into Cable Television" below). The entry
of telephone companies as direct competitors is likely to continue and could
adversely affect the profitability and valuation of the Company's systems. The
entry of electric utility companies into the cable television business, as now
authorized by the 1996 Telecom 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.
- 7 -
<PAGE> 8
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, although certain similar investments around
the country are proceeding. Recently, for example, Pacific Bell has launched
digital MMDS in Los Angeles and BellSouth has launched digital MMDS 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 Company's
operations, and there has been a recent 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 Company's cable systems and does not
purport to describe all present, proposed, or possible laws and regulations
affecting the Company.
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
- 8 -
<PAGE> 9
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 40% of the LFA's (covering approximately
75% of subscribers of CCE-I) that oversee the franchises under which the
Systems operate are certified to regulate basic tier rates. As of the date of
this filing, one complaint with regard to the Missouri System was dismissed and
several complaints are still pending. 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 rulemaking with regard to this issue is outstanding
and the Company 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
- 9 -
<PAGE> 10
telephone service areas. Because of their resources, LECs could be formidable
competitors to traditional cable operators, and certain LECs have begun
offering cable service.
Various LECs currently are seeking to provide video programming services within
their telephone service areas through a variety of distribution methods,
including both the deployment of broadband wire facilities and the use of
wireless (MMDS) transmission. In Connecticut, the Department of Public Utility
Control ("DPUC") granted a subsidiary of a local telephone company, The
Southern New England Telecommunications Corporation("SNET"), a franchise to
serve the entire state of Connecticut. The SNET subsidiary, SNET Personal
Vision, Inc. ("Personal Vision") proposed to offer its services initially to a
"primary franchise area" of several Connecticut communities, including one in
which CCE-I provides cable television service, within its first two years of
operation (beginning by January 1997). Pursuant to the terms of Personal
Vision's eleven year franchise, its services must pass all homes in Connecticut
within eleven years. This new statewide cable franchise is currently being
challenged by a regional cable association, which recently filed an appeal in
the Connecticut Superior Court challenging the DPUC's grant of the statewide
franchise, on several substantive and procedural grounds. The Company cannot
predict the outcome of this litigation.
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 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
- 10 -
<PAGE> 11
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
Company'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, 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.
- 11 -
<PAGE> 12
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 Company's ability to obtain desired broadcast programming.
In addition, pursuant to an industry-wide arrangement in effect through
calendar year 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 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 123 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 revenues derived by a cable system from the provision of cable
television services is payable to the franchising authority. Currently, 51 of
the these franchises, serving approximately 48% of the Company's subscribers in
the aggregate, were within a three-year window period for renewal. The
Company's franchise for "Area 13" in Connecticut (the northeastern Connecticut
system) is scheduled to expire in July 1998. The Company requested the
commencement of renewal proceedings in January 1996 with the Connecticut DPUC.
The DPUC granted the Company's request for an "informal renewal", which
requests have traditionally been denied, and the Company has submitted its
Proposal for Renewal. The process is currently on track for a mid-year
renewal.
EMPLOYEES
The Company has no employees other than employees of CCE-I. As of December 31,
1997, CCE-I employed an aggregate of 634 full-time equivalent employees of
which 44 employees of the Illinois System were covered by a collective
bargaining arrangement. The Company considers its relationships with its
employees to be good and has never experienced a work stoppage.
Charter acts as the management company for CCE-I pursuant to certain management
agreements. See "Item 13. Certain Relationships and Related Transactions -
Management Agreement."
- 12 -
<PAGE> 13
OTHER MATTERS
The Company owns and operates cable television systems and does not engage in
any other identifiable industry segments except on a very limited basis as to
paging and advertising sales. The Company does not believe that changes of a
seasonal nature are material to the cable television business. The Company has
not expended material amounts during the last two years on research and
development activities. As the Company is a service-related organization,
little or no raw materials are utilized by the Company. 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 Company's
revenues. The Company believes it is not affected by inflation except to the
extent that the economy in general is affected thereby.
ITEM 2. PROPERTIES
The Company'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 Company 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 Company maintains insurance on its above-ground plant,
but not for its underground plant. The Company 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 Company's franchises.
The Company 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 Company
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, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company's cable television plant as of December 31, 1997 is summarized as
follows:
<TABLE>
<CAPTION>
42 or Fewer 43-54 55-62 63 or Greater
Channels Channels Channels Channels Total
--------- -------- -------- ------------- -------
<S> <C> <C> <C> <C> <C>
Number of Systems ............. 8 3 7 2 20
Miles of Plant ................ 937 4,032 2,583 2,920 10,472
Basic Subscribers ............. 46,900 141,700 68,600 93,100 350,300
% of Total Basic Subscribers .. 13.4% 40.4% 19.6% 26.6% 100.0%
</TABLE>
The Company's total mileage of fiber optic cable increased from approximately
11,500 miles at December 31, 1996 to approximately 23,700 miles at December 31,
1997.
- 13 -
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
On March 28, 1996, CCE-I purchased its 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, CCE-I 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, CCE-I 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 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 CCE-I, 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 management of CCE-I'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.
Cencom has been named as a defendant in two lawsuits arising out of certain
activities conducted prior to the time it was acquired by the Company. On April
15, 1997, a petition was filed, presently captioned Abeles v. Cencom Properties
II, Inc., Cause No. CV-97-9292, and two amended petitions were subsequently
filed in the Circuit Court of Jackson County, Missouri, by plaintiffs who are
limited partners of Cencom Cable Income Partners II, L.P. ("CCIP-II") against
the CCIP-II's General Partner (Cencom Properties II, Inc.); Cencom Partners,
Inc. ("Cencom Partners"), the general partner of Cencom Partners, L.P.
("CPLP"), an investment of CCIP-II; and Cencom. Cencom provided management
services to both CCIP-II and CPLP and also owned all of the stock of the
general partners of each of these partnerships prior to mid-1994. The
plaintiffs alleged that the defendants breached fiduciary duties and made
various misrepresentations in the marketing and sale of CCIP-II limited
partnership units and in the management of CCIP-II. The plaintiffs seek
recovery of the consideration paid for their partnership units, restitution of
all profits received by the defendants in connection with the management of the
partnership and punitive damages.
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 (which provided management services to
both CCIP-II and CPLP 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, certain other affiliates of
Charter, 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 CCIP-II
Partnership Agreement in connection with the investment in CPLP, the management
of the CCIP-II's assets and the sale of certain CCIP-II assets. In November
1997, the plaintiffs amended their complaint to restate their allegations as a
shareholder's derivation claim. As of December 31, 1997, the damages claimed
by the plaintiffs are unspecified.
The Company believes that it is too early in the litigation to assess the
likelihood of the outcome of the two lawsuits naming Cencom as a defendant.
Cencom intends to vigorously contest the claims in both lawsuits.
On October 20, 1997, a purported class action was filed in St. Louis County
Circuit Court under the name Gerald Ortbals v. Charter Communications, on
behalf of all persons residing in Missouri who are or were residential
subscribers of CCE-I cable television service, and who have been charged a
processing fee for delinquent payment of their cable bill. The action
- 14 -
<PAGE> 15
challenges the legality of CCE-I's processing fee and seeks declaratory
judgment, injunctive relief and unspecified damages. CCE-I believes the
lawsuit to be without merit and intends to defend the action vigorously. The
Company is not able at this early stage to project the expense which will be
associated with this action or to predict any potential outcome or financial
impact.
CCE-I is also involved from time to time in routine legal matters incidental to
its business. Management believes that the resolution of such matters will not
have a material adverse effect on the Company's financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, the shareholders voted unanimously at the
annual shareholders meeting on October 21, 1997 to re-elect the following five
directors to serve until the next annual meeting of shareholders and until
their successors are elected and qualified:
Howard L Wood
Jerald L. Kent
George E. Matelich
Thomas R. Wall, IV
Frank T. Nickell
- 15 -
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Holdings' common stock is held privately by two principal beneficial owners
(with a total of 15 holders of record) and is subject to substantial
restrictions on transfer. (See "Item 12. Security Ownership of Certain
Beneficial Owners and Management." and "Item 13. Certain Relationships and
Related Transactions - Stockholders' Agreement.") Thus, there is no
established public trading market for Holdings' equity securities. Holdings
has not sold any equity securities in the three year period prior to this
filing.
During 1996 and 1997, Holdings did not pay any dividends on its common equity.
Because of applicable contractual restrictions of the Indenture (and a related
subordination agreement), the CCE-I Credit Facility (as hereinafter defined)
and the provisions of the CCE-LP Partnership Agreement, no dividends are
expected to be paid by Holdings in the future until the Notes, the CCE-I Credit
Facility and CCE-II's bank credit facility have been repaid. (See "Item 13.
Certain Relationships and Related Transactions. - The Partnership Agreements)
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited
financial statements of the Company 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
------------- ------------- -------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service Revenues...................... $169,324,522 $143,023,261 $ 99,689,410
Income (loss) from Operations 11,345,179 733,638 (6,946,137)
Net loss.............................. (39,505,916) (38,634,050) (41,761,175)
BALANCE SHEET DATA:
Total assets.......................... 706,387,435 744,080,870 666,139,105
Long-term obligations, including
current maturities.................... 581,839,412 572,843,402 447,438,805
Shareholders' investment (deficit).... (39,901,141) (395,255) 38,238,825
MISCELLANEOUS DATA:
Ratio of earnings to fixed charges(1).. -- -- --
</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 and 1995 were insufficient to cover the
fixed charges by $39,505,916, $38,634,050, and $41,761,175, respectively. As a
result of such insufficiencies, these ratios are not presented above.
- 16 -
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis covers the operations of Holdings and its
consolidated subsidiaries (CAC, Cencom and CCE-I), of which only CCE-I conducts
active cable operations. The Company's interest in CCE-II is treated as an
equity investment for financial reporting purposes.
SIGNIFICANT ASSET ACQUISITIONS
The Company has operated cable television systems for a limited period of time
and had no operations prior to January 1995. The Company completed five
acquisitions during the period of January 1995 through November 1996,
summarized as follows:
<TABLE>
<CAPTION>
Approximate Location of
Acquisition Date Purchase Price Acquired Subscribers
---------------- -------------- -----------------------
<S> <C> <C>
January 1995 $488.2 million Missouri, Connecticut
October 1995 $96.0 million Missouri, Massachusetts
January 1996 $9.4 million Missouri
March 1996 $82.1 million Illinois
November 1996 $24.2 million Missouri
</TABLE>
As of the date of this filing, the Partnership had no pending acquisitions or
significant asset dispositions.
RESULTS OF OPERATIONS
The following table sets forth the approximate number of basic subscribers and
premium subscriptions of CCE-I's Systems as of the dates indicated:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Basic Subscribers:
Missouri/Illinois Systems 231,500 223,300 155,100
Connecticut/Massachusetts Systems 118,800 115,000 111,000
----------------- ----------------- -----------------
350,300 338,300 266,100
================= ================= =================
Premium Subscription Units:
Missouri/Illinois Systems 120,400 130,100 137,100
Connecticut/Massachusetts Systems 59,500 64,500 68,400
----------------- ----------------- -----------------
179,900 194,600 205,500
================= ================= =================
Homes Passed:
Missouri/Illinois Systems 403,500 394,900 277,000
Connecticut/Massachusetts Systems 141,000 138,700 136,900
----------------- ----------------- -----------------
544,500 533,600 413,900
================= ================= =================
</TABLE>
- 17 -
<PAGE> 18
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 $112,609,598 66.5 $96,560,920 67.5 $65,075,541 65.3
Premium Service 19,987,776 11.8 19,201,801 13.4 15,484,951 15.5
Other Services 36,727,148 21.7 27,260,540 19.1 19,128,918 19.2
---------------- ----- ---------------- ----- ---------------- -----
169,324,522 100.0 143,023,261 100.0 99,689,410 100.0
---------------- ----- ---------------- ----- ---------------- -----
Operating Expenses:
Total Operating and General
& Administrative 83,374,648 49.2 71,497,861 50.0 48,942,678 49.1
Management Fees 6,700,813 4.0 5,034,375 3.5 6,499,167 6.5
Depreciation & Amortization 67,903,882 40.1 65,757,387 46.0 51,193,702 51.4
---------------- ----- ---------------- ----- ---------------- -----
Total Operating Expense 157,979,343 93.3 142,289,626 99.5 106,635,547 107.0
---------------- ----- ---------------- ----- ---------------- -----
Income (Loss) from
Operations 11,345,179 6.7 733,638 0.5 (6,946,137) (7.0)
---------------- ----- ---------------- ----- ---------------- -----
Other Income (Expenses):
Interest Income 57,030 0.0 164,476 0.1 503,585 0.5
Interest Expense (52,999,769) (31.3) (46,654,020) (32.6) (35,461,026) (35.6)
Other, Net 156,257 0.1 (1,058,271) (0.7) 41,622 0.0
---------------- ----- ---------------- ----- ---------------- -----
Other Income (Expense) (52,786,482) (31.2) (47,547,815) (33.2) (34,915,819) (35.0)
---------------- ----- ---------------- ----- ---------------- -----
(41,441,303) (24.5) (46,814,176) (32.7) (41,861,956) (42.0)
Equity in Loss of
Unconsolidated Limited
Partnerships (10,255,675) (6.1) (6,302,990) (4.4) (1,402,194) (1.4)
Provision for Income Taxes 0 0.0 0 0.0 0 0.0
Loss from Discontinued
Operations 0 0.0 (1,515,558) (1.1) 0 0.0
Minority Interest in Loss of
Subsidiary 12,191,062 7.2 15,998,674 11.2 1,502,975 1.5
---------------- ----- ---------------- ----- ---------------- -----
Net Loss ($39,505,916) (23.3) ($38,634,050) (27.0) ($41,761,175) (41.9)
================ ===== ================ ===== ================ =====
</TABLE>
- 18 -
<PAGE> 19
FISCAL 1997 TO FISCAL 1996
Revenues. Revenues increased by $26.3 million, or approximately 18.4%, from
$143.0 million in fiscal 1996 to $169.3 million in fiscal 1997. Basic service
subscribers increased by 12,000 or 3.5% from 338,300 at December 31, 1996 to
350,300 at December 31, 1997. This increase in basic service subscribers was a
result of the Company's marketing efforts, which resulted in an increase in the
basic penetration rate from 63.4% at December 31, 1996 to 64.3% at December 31,
1997. During 1997, the Company increased the number of homes passed from
533,600 at December 31, 1996 to 544,500 at December 31, 1997 as a result of
new construction.
The premium ratio, the ratio determined by dividing the number of premium
subscriptions by the number of basic subscribers, decreased from .58 at
December 31, 1996 to .51 at December 31, 1997. The Company has begun to offer
premium services to customers in a packaged format with a discount from the
combined individual retail rates in an effort to maintain and potentially
increase the number of premium subscriptions. While revenue from premium
subscriptions will continue to be an important source of revenue for the
Company, there is concern that the premium ratio may continue to decline over
the next few years.
Operating and General and Administrative Expenses. Operating and general and
administrative expenses increased by $11.9 million, or approximately 16.6%,
from $71.5 million in fiscal 1996 to $83.4 million in fiscal 1997. Operating
and general and administrative expenses as a percentage of revenue decreased
from 50.0% in fiscal 1996 to 49.2% in fiscal 1997. The Company has been able
to achieve certain operating cost efficiencies during 1997 as part of the
integration of certain 1996 acquisitions into the Missouri/Illinois Systems.
Offsetting these efficiencies were significant increases in programming costs,
which the Company believes to be consistent throughout the cable television
industry. Programming cost increases are the result of increases in the
license fee rates per subscriber paid to the distributors of cable television
programming, increases in the Company's subscriber base, and increases in the
number of channels of cable television programming provided to customers. The
Company anticipates that programming cost increases will continue to be an
issue for the next several years.
Management Fees. Management fees increased by $1.7 million from $5.0 million
in fiscal 1996 to $6.7 million in fiscal 1997, representing an increase as a
percentage of revenue from 3.5% in fiscal 1996 to 4.0% in fiscal 1997.
Management services are provided to CCE-I by Charter under a Management
Agreement. See "Item 13. Certain Relationships and Related Transactions."
Depreciation and Amortization. Depreciation and amortization expense increased
by $2.1 million from $65.8 million fiscal 1996 to $67.9 million in fiscal 1997.
The increase in depreciation and amortization is the result of an increased
base of property, plant and equipment and franchise costs as a result of
acquisitions during 1996, offset by a reduction in amortization expense as a
result of the completion of the amortization period for a covenant not to
compete entered into in 1995.
Interest Expense. Interest expense increased by $6.3 million, or approximately
13.6%, as a result of an increase in the weighted average balance of debt
outstanding in fiscal 1997 versus fiscal 1996, primarily due to additional
indebtedness incurred as a result of acquisitions during 1996.
Net Loss. Net loss increased by $0.9 million from fiscal 1996 to fiscal 1997,
or approximately 2.3%. Although income from operations increased from $0.7
million in fiscal 1996 to $11.3 million in fiscal 1997, this was more than
offset by an increase in interest expense and an increase in equity in loss of
unconsolidated limited partnerships.
- 19 -
<PAGE> 20
EBITDA. EBITDA increased by $14.4 million, or approximately 20.1% from $71.5
million in fiscal 1996 to $85.9 million in fiscal 1997, primarily due to an
increase in revenues which was partially offset by an increase in systems
operating expenses. EBITDA, as a percentage of revenues, increased slightly
from 50.0% in fiscal 1996 to 50.8% in fiscal 1997. 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 does not
include debt obligations, management fees or other significant commitments.
FISCAL 1996 TO FISCAL 1995
Revenues. Revenues increased by $43.3 million, or approximately 43.4%, from
$99.7 million in fiscal 1995 to $143.0 million in fiscal 1996. Homes passed
increased 28.9% from 413,900 at December 31, 1995 to 533,600 at December 31,
1996. Basic service subscribers increased 27.1% from 266,100 at December 31,
1995 to 338,300 at December 31, 1996. The significant increase in homes passed
and subscriber counts resulted primarily from the acquisitions made in 1996.
Operating and General and Administrative Expenses. Operating and general and
administrative expenses increased by $22.6 million, or approximately 46.2%,
from $48.9 million in fiscal 1995 to $71.5 million in fiscal 1996. These
increases for 1996 were due to the additional costs associated with the cable
television systems acquired in October 1995, March 1996 and November 1996.
Management Fees. Management fees decreased by $1.5 million, or approximately
23.1% from $6.5 million in fiscal 1995 to $5.0 million in fiscal 1996,
representing a decrease, as a percentage of revenues, from 6.5% in fiscal 1995
to 3.5% in fiscal 1996.
Depreciation and Amortization.. Depreciation and amortization expense
increased by $14.6 million, or 28.5%, from $51.2 million in fiscal 1995 to
$65.8 million in fiscal 1996. There was a significant increase in amortization
resulting from the additional costs associated with the cable television
systems acquired in October 1995, March 1996 and November 1996. In connection
with such acquisitions, the acquired franchises were recorded at fair market
value which resulted in a stepped-up basis upon acquisition. In addition, the
increase in depreciation and amortization expense occurred as a result of the
amortization of certain acquisition-related costs such a legal, accounting and
due diligence expenses and deferred debt costs.
Interest Expense. Interest expense increased by $11.2 million, or
approximately 31.5% from $35.5 million in fiscal 1995 to $46.7 million in
fiscal 1996. This increase resulted primarily from the additional indebtedness
incurred in connection with the acquisitions of certain cable television
systems in October 1995, March 1996 and November 1996.
Discontinued Operation. CCE-I acquired and began operating a radio station in
April 1996. The revenues generated by the radio operation from April 1996 to
December 31, 1996 were approximately $1.5 million. The net loss related to
this operation during the same period of time was approximately $1.5 million
and is classified as a discontinued operation. Subsequent to year-end, CCE-I
entered into an agreement to sell the radio operation.
Net Loss. Net loss decreased by approximately $3.2 million from approximately
$41.8 million in fiscal 1995 to approximately $38.6 million in fiscal 1996.
Significant increases in operating expenses and interest expense were offset by
increased revenues and an allocation of CCE-I's loss to a minority interest
holder in CCE-I. The increase in revenues that resulted from cable television
subscriber growth (including growth from acquisitions during October 1995 and
in 1996) was not sufficient to offset the significant costs related to such
acquisitions, including a substantial increase in interest expense due to
increased borrowings.
- 20 -
<PAGE> 21
EBITDA. EBITDA increased by $20.8 million, or approximately 41.0%, from $50.7
million in fiscal 1995 to $71.5 million in fiscal 1996, due to an increase in
revenues which was offset by an increase in systems operating expenses.
EBITDA, as a percentage of revenues, decreased slightly from 50.9% in fiscal
1995 to 50.0% in fiscal 1996. 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 does not include debt
obligations, management fees or other significant commitments.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business has substantial ongoing capital requirements for
construction, expansion and maintenance of plant, and for the Company, in
particular, additional capital requirements to complete acquisitions. Although
no acquisitions were made during 1997, and the Company currently has no pending
acquisitions or significant asset sales, subject to the availability of
sufficient financing, the Company intends to continue a business strategy which
includes selective strategic acquisitions. Historically, the Company has been
able to meet its capital requirements through its operating cash flow, equity
contributions and available borrowings. The Company expects that it will be
able, during the next 12 months, to meet its anticipated debt service, working
capital and capital expenditure requirements through its operating cash flow
and borrowings under the CCE-I Credit Facility, with future acquisitions, if
any, to be financed through borrowings, either presently available under the
CCE-I Credit Facility or as a result of amending such facility to allow for
increased borrowing capacity. To date the Company has been able to obtain
financing on satisfactory terms, although there can be no assurance that this
will continue to be the case in the future.
The historical cash flow from operating activities for the Company totaled
approximately $48.3 million, $37.0 million and $27.1 million for the years
ended December 31, 1997, 1996 and 1995 respectively.
As of December 31, 1997, the Company had total indebtedness of approximately
$581.8 million, consisting of $469.2 million outstanding under the CCE-I Credit
Facility and approximately $118.9 million outstanding related to the Notes, as
described below.
As of December 31, 1997, CCE-I had an aggregate of approximately $462.9 million
of indebtedness outstanding and $33.3 million unused and available for
borrowing under a credit facility with a group of banks (the "CCE-I Credit
Facility"). Availability was reduced by approximately $8.8 million during 1997
as a result of scheduled loan amortization under the facility. CCE-I intends
to utilize the CCE-I Credit Facility as it presently exists or as amended in
the future to fund capital expenditures and working capital, to acquire
additional cable systems and for related strategic acquisitions and for general
corporate purposes. Under the CCE-I Credit Facility, cash interest is payable
on a monthly and quarterly basis for borrowings outstanding. At December 31,
1997, outstanding borrowings had interest rates ranging between 7.63% and
8.50%, based upon its existing LIBOR contracts and applicable interest rate
spreads. The weighted average interest rates and weighted average borrowings
were approximately 8.02%, 8.05% and 8.71% and $470.0 million, $425.1 million
and $272.9 million, respectively, for the years ended December 31, 1997, 1996
and 1995. A commitment fee of 0.375% per annum is payable on the unused
availability of the facility. Borrowings under this facility are
collateralized by the assets or partnership interests of Holdings, CAC, Cencom
and CCE-LP.
As part of the Company's first acquisition of cable assets in January 1995,
Holdings issued $82.0 million of subordinated notes. In connection with a
sales of these notes by the original holder in a secondary offering in February
1997, the Company entered into the Indenture and issued to the secondary
purchasers Senior Subordinated Notes due 1999 (the "Notes"). Interest accrues
on the Notes at an annual rate of 13%, compounded semi-annually on June 30 and
December 31, until December 31, 1999. If at December 31, 1999 the principal
plus accrued interest is not paid, the annual rate at which interest accrues
will increase to 18% and continue to increase by an additional 2% on each
successive anniversary date up to a maximum of 26%. The Notes are redeemable
at Holdings' option, in whole or in part, at any time without premium or
penalty, provided that any such payment of principal shall also include all
payments of accrued interest on the principal amount prepaid. There are no
mandatory redemption or sinking fund requirements. The Notes are unsecured
obligations of Holdings and are subordinate in right and priority to the CCE-I
Credit Facility. Except under certain limited circumstances, the ultimate
source of repayment for the Notes will be distribution from CCE-I. Although
repayment of the
- 21 -
<PAGE> 22
Notes is guaranteed by CAC, Cencom and CCE-LP, the guarantees are subject to
additional limitations. (See "Item 13. Certain Relationships and Related
Transactions - The Guarantees.") The outstanding balance of principal plus
accrued interest at December 31, 1997 was approximately $118.9 million.
CCE-I manages risk arising from fluctuations in interest rates through the use
of interest rate swap and cap agreements. The CCE-I Credit Facility requires
CCE-I to purchase and maintain interest rate protection on at least 50% of the
outstanding principal under the CCE-I Credit Facility, so that the weighted
average interest rate protection is not less than 18 months at all dates of
determination. CCE-I may enter into interest hedge agreements to satisfy this
requirement, provided that the interest rate related thereto shall not exceed
by 2% per annum the United States Treasury rate in effect on the date of the
agreement for the applicable hedge period. Interest rate swap and cap
agreements are accounted for by CCE-I as a hedge of the related debt
obligation. As a result, the net settlement amount of any such swap or cap
agreement is recorded as an adjustment to interest expense in the period
incurred. The effects of CCE-I's hedging practices on its weighted average
borrowing rate and on reported interest expense were not material for the years
ended December 31, 1997, 1996 and 1995.
Capital expenditures for CCE-I (excluding acquisition costs of systems) totaled
approximately $40.7 million, $33.9 million and $22.0 million for the years
ended December 31, 1997, 1996 and 1995, respectively. These expenditures were
primarily for expansion and rebuild of cable plant, converters, office
expansion and relocation, upgrade and replacement of service vehicles, and
routine maintenance and replacement of cable plant and related equipment. The
Company's total mileage of fiber optic cable increased from approximately
11,500 miles at December 31, 1996 to approximately 23,700 miles at December 31,
1997. Capital expenditures for CCE-I for 1998 are anticipated to be between
$60.0 million, and $65.0 million and are expected to include maintenance
capital expenditures, expansion of the cable plant, converter, land and
building renovation costs, new vehicles, test equipment and computer equipment.
The remaining capital items will include capitalized labor and capital
expenditures required to add new subscribers and to upgrade plant.
CCE-I 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, CCE-I does not maintain insurance
covering its underground plant, the cost of which management believes is
currently prohibitive. Management believes that CCE-I's insurance coverage is
adequate. However, it intends to monitor the insurance markets to attempt to
obtain coverage for CCE-I underground plants at reasonable and cost-effective
rates.
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.
- 22 -
<PAGE> 23
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 ACQUIRED ON Systems Acquired SYSTEMS ACQUIRED ON Systems Acquired
OR BEFORE 1/1/96 After 1/1/96 Actual OR BEFORE 1/1/96 After 1/1/96 Total
------------------- ---------------- ------ ------------------- ---------------- -----
<S> <C> <C> <C> <C> <C> <C>
Service Revenues $145,293 $ 24,032 $169,325 $129,359 $ 13,664 $143,023
---------------- ---------------- -------- ---------------- ---------------- --------
Operating Expenses:
Operating Costs and
General & Administrative 71,761 11,614 83,375 64,838 6,660 71,498
---------------- ---------------- -------- ---------------- ---------------- --------
EBITDA (a) $ 73,532 $ 12,418 $ 85,950 $ 64,521 $ 7,004 $ 71,525
================ ================ ======== ================ ================ ========
EBITDA Margin 50.6% 51.7% 50.8% 49.9% 51.3% 50.0%
================ ================ ======== ================ ================ ========
Operating Statistical Data, at
end of Period:
Revenue per sub $ 41.41 -- -- $ 38.36 -- --
Homes passed 439,000 105,500 544,500 430,900 102,700 533,600
Basic subscribers 292,400 57,900 350,300 281,000 57,300 338,300
Basic penetration 66.6% 54.9% 64.3% 65.2% 55.8% 63.4%
Premium subscriptions 153,700 26,200 179,900 166,100 28,500 194,600
</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 Company's debt obligations or
other significant commitments.
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 Company during the year ended
December 31, 1997 versus the year ended December 31, 1996. The comparable
analysis includes the results of operations for these systems acquired on or
before January 1, 1996, which the Company operated for the entire fiscal years
of 1997 and 1996. See "Significant Asset Acquisitions" above for a complete
listing of
- 23 -
<PAGE> 24
all acquisitions by the Company. Specifically, the systems acquired after
January 1, 1996 were the Illinois System and certain subscribers added to the
Missouri System.
Service revenues increased by $15.9 million or 12.3% 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 11,400 basic subscribers from year end 1996 to year end
1997 and, also, to retail rate increases implemented in certain of the
Company's systems. The internal growth for basic subscribers was approximately
4.1% when comparing basic subscribers at December 31, 1997 to December 31,
1996.
Operating expenses increased approximately $6.9 million or 10.7% when comparing
the operating expenses for the year ended fiscal 1997 to the results for the
comparable systems for fiscal 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 to the
programming services. The growth in programming expense is consistent with
industry-wide increases.
The Company experienced growth in operating cash flow (EBITDA) of approximately
$9.0 million or 14.0% when comparing the operating cash flow for fiscal 1997 to
the results for the comparable systems for fiscal 1996. EBITDA margin
increased from 49.9% to 50.6% when comparing the similar periods, primarily due
to the revenue increase associated with the growth in basic subscribers, offset
partially by increases in license fees paid for programming.
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.
- 24 -
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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
Holdings.
NAME AGE POSITION WITH HOLDINGS YEAR FIRST ELECTED
- ------------------ --- ---------------------------------- ------------------
Jerald L. Kent 41 President, Chief Executive Officer 1994
and Director
Howard L. Wood 58 Vice Chairman and Director 1994
George E. Matelich 42 Director 1995
Frank T. Nickell 50 Director 1995
Thomas R. Wall IV 39 Director 1995
Barry L. Babcock 51 Chairman 1994
Kent D. Kalkwarf 38 Senior Vice President and Chief 1995
Financial Officer
BUSINESS EXPERIENCE
Mr. Kent has been affiliated with Charter since 1993 and now holds the position
of President and Chief Executive Officer. Mr. Kent co-founded Charter
Communications Group ("CCG") in 1992. Prior to that time, he was associated
with Cencom Cable Associates, Inc. ("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. Matelich has been a Manager Director of Kelso & Company since 1990. Mr.
Matelich is also a director of Harris Specialty Chemicals, Inc., Humphreys
Inc., MJD Communications, Inc., and a Trustee of The University of Puget Sound.
Mr. Nickell has been President and a director of Kelso & Company since March
1989. He is also a director of The Bear Stearns Companies Inc., Earle M.
Jorgensen Company and Peebles, Inc.
Mr. Wall has been a Managing Director of Kelso & Company since 1990. Mr. Wall
is also a director of AMF Bowling, Inc., Consolidated Vision Group, Inc.,
Cygnus Publishing, Inc., Hillside Broadcasting, Inc., IXL Holdings, Inc.,
Mitchell Supreme Fuel Company, Mosler Inc., Peebles Inc., 21st Century
Newspapers, Inc. and TransDigm, Inc.
Mr. Babcock has been affiliated with Charter since 1993 and now holds the
position of Chairman of the Board of Charter. Mr. Babcock also co-founded CCG
in 1992. Prior to that time, he was associated with CCA as the Executive Vice
president of CCA from February 1996 to November 1992, and as Chief Operating
Officer of CCA from May 1986 to
- 25 -
<PAGE> 26
November 1992. Mr. Babcock currently serves as Chairman of the Board of
Directors of the Cable Television Association (CATA), and serves on the Board
of Directors of National Cable Television Association (NCTA) and Mercantile
Bank-St. Louis.
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.
The stockholders of Holdings have entered into an agreement regarding the
election of directors. See "Item 13. Certain Relationships and Related
Transactions - Stockholders' Agreement."
ITEM 11. EXECUTIVE COMPENSATION
During 1997, none of the executive officers or the chief financial officer of
Holdings received any compensation in his or her capacity as an officer or
director of Holdings or as an employee of the Systems and none of such
individuals expects to receive any compensation in such capacity at any time in
the future. Such individuals are compensated by Charter in their capacities as
officers and employees of Charter. Charter performs management services for
the Company and other companies pursuant to the terms of management agreements
including the management agreement between Charter and CCE-I. (See "Item 13.
Certain Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1997, the ownership of
Holdings. Kelso and certain other individuals, on the one hand, and Charter,
on the other hand, own 85% and 15%, respectively, of the outstanding capital
stock of Holdings. As a result of its investment in Holdings, Kelso can
exercise effective control over the management and affairs of the Company.
<TABLE>
<CAPTION>
Name and Address % of
of Beneficial Owners Type of Interest Common Stock
- ---------------------------------------------------- ---------------- ------------
<S> <C> <C>
KELSO INVESTMENT ASSOCIATES V, L.P. ("KIA V") (1) .. Common Stock 85.0%(2)
320 Park Avenue, 24th Floor
New York, New York 10022
CHARTER COMMUNICATIONS, INC. ....................... Common Stock 15.0%
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131
</TABLE>
- ---------------
(1) The General partner of KIA V is Kelso partners V, L.P., the general
partners of which are: Frank T. Nickell, George E. Matelich, Thomas R.
Wall, IV and Joseph S. Schuchert, all of whom may be deemed to
beneficially own all the shares held of record by KIA V, all of whom
disclaim such beneficial ownership, and three of whom, Messrs. Nickell,
Matelich and Wall, are directors of Holdings.
(2) The percentage of Common Stock includes shares owned by another limited
partnership which is an affiliate of KIA V and certain unaffiliated
designees of KIA V. KIA V does not beneficially own the shares of Common
Stock owned by such designees.
- 26 -
<PAGE> 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE PARTNERSHIP AGREEMENTS
The Partnership Agreements of CCE-I and CCE-II each provide for, among other
things, distributions to the partners of CCE-I and CCE-II, respectively, in
accordance with their respective interests in such partnerships. Accordingly,
97.78% of all distributions by CCE-I and CCE-II will be made to CCE-LP. Through
CAC, Holdings has a 1% general partnership interest in CCE-LP and a 1.22%
general partnership interest in CCE-I. CCT holds a 1% general partnership
interest in CCE-LP and a 1% general partnership interest in CCE-II. Certain
distributions as permitted pursuant to the terms of the applicable credit
facilities will be made by CCE-I and CCE-II directly to CAC and Cencom, and
such amounts may be distributed by CAC and Cencom to Holdings.
Distributions received by CCE-LP from CCE-I and CCE-II, in turn, can be
distributed to the partners of CCE-LP pursuant to the terms of the CCE-LP
Partnership Agreement. The CCE-LP Partnership Agreement essentially directs
the distributions it receives from CCE-I to CAC and Cencom, and directs the
distributions received from CCE-II to CCT until the respective partners have
received distributions sufficient in amount to cover such partner's non-bank
acquisition indebtedness outstanding in connection with acquisition of assets
now held by CCE-I and CCE-II, respectively. The Partnership Agreement of
CCE-LP provides for, among other things, (i) "Preferred Capital Accounts" for
CAC and Cencom, on the one hand, and CCT, on the other hand, the amounts of
which correspond to the amounts owing pursuant to the Notes and the seller note
executed by CCT in 1995 in connection with CCE-II's acquisition of its
California Systems (the "California Note"), respectively; (ii) "Preferred
Returns" for those partners with Preferred Capital Accounts, such Preferred
Returns to (be equal to the interest accruing during the relevant period on
the Notes and the California Note, respectively; and (iii) distributions of
cash or other property such that (A) to the extent each of CAC, Cencom and CCT
has a positive balance in its Preferred Capital Account, (1) amounts
distributed to CCE-LP by CCE-I will be distributed to CAC and Cencom to the
extent of and pro rata in accordance with the positive balances in their
respective Preferred Capital Accounts and (2) amounts distributed to CCE-LP by
CCE-II will be distributed to CCT to the extent of the positive balance in its
Preferred Capital Account and (B) to the extent that any partner in CCE-LP has
a positive balance in its Preferred Capital Account, distributions will be made
to such partner to the extent of and in accordance with such positive Preferred
Capital Account balance. Accordingly, while any amounts remain outstanding
under both the Notes and the California Note, distributions to CCE-LP from
CCE-I will be used solely to make distributions to CAC and Cencom and
distributions to CCE-LP from CCE-II will be used solely to make distributions
to CCT. If the California Note is repaid prior to payment in full of all
amounts payable under the Notes, then all distributions to CCE-LP from both
CCE-I and CCE-II will be used to make distributions to CAC and Cencom, and vice
versa. Subject to certain restrictions, CCE-LP may establish new CCE-LP
subsidiaries from time to time, which could have financing arrangements that
result in the sharing with other creditors of distributions to CCE-LP from
CCE-II and/or such new CCE subsidiaries. In connection with the creation of
new CCE-LP subsidiaries, the CCE-LP Partnership Agreement's distribution
provisions may be amended.
THE GUARANTEES
In conjunction with the issuance of the Notes pursuant to the Indenture, each
of CAC, Cencom and CCE-LP (collectively, the "Guarantors") has irrevocably
guaranteed on a subordinated basis the obligations on the Notes on
substantially the same terms as the Indenture. These guarantees are limited by
their terms to the proceeds of distributions received by the Guarantors from
CCE-I. The CCE-LP guarantee cannot be enforced until the indefeasible
repayment in full in cash of and termination of commitments to lend under the
CCE-I Credit Facility, the CCE-II bank credit facility, any other senior
indebtedness of CCE-II and senior indebtedness of any new CCE-LP subsidiaries.
The CAC guarantee and the Cencom guarantee cannot be enforced until the
indefeasible repayment in full of and termination of commitments to lend under
the CCE-I credit facility.
STOCKHOLDERS' AGREEMENTS
Holdings, Charter and Kelso have entered into a stockholders' agreement
("Stockholders' Agreement") restricting the transfer by Charter and Kelso of
the common stock of Holdings held by them except under certain circumstances.
The
- 27 -
<PAGE> 28
Stockholders' Agreement provides Charter with certain rights to sell common
stock if Kelso sells common stock to a third party, and provides Kelso with
certain rights to cause Charter to sell its common stock to a third party if
Kelso sells all of its common stock to such third party. Pursuant to the
Stockholders' Agreement, Holdings has a right of first refusal to purchase
shares in connection with a proposed sale of common stock by Charter to a third
party, and Charter has a right of first negotiation pursuant to which it may
make an offer to purchase common stock owned by Kelso before Kelso negotiates
with a third party with respect to a sale of its common stock. In the event
that the management Agreement (defined below) is terminated, or the term of the
management Agreement ends without being extended by the parties, Charter has
the right to cause Holdings to purchase its shares of common stock, and
Holdings has the right to cause Charter to sell its shares of common stock to
Holdings. The Stockholders' Agreement provides that, in the event of a sale of
all of the common stock of Holdings by Charter and Kelso, or the sale of all of
the assets of Holdings, any cash to be paid or distributed to Charter and Kelso
shall be allocated based upon the ownership percentages of Charter.
The Stockholders' Agreement provides that, until the earliest of January 18,
2005, the closing of an initial public offering or the termination of the
Management Agreement, three of the five members of the board of directors of
Holdings will be chosen by KIA V and two will be chosen by Charter.
A separate stockholders' agreement entered into between CCT, Charter and Kelso,
is in effect with respect to CCT. This second agreement contains provisions
similar to the CCA Stockholders' Agreement with respect to the choice of CCT's
directors.
HOLDINGS REGISTRATION RIGHTS AGREEMENT
Holdings, Charter and Kelso have entered into a registration rights agreement
("Registration Rights Agreement") pursuant to which Charter and Kelso have
certain rights with respect to the registration of the shares of common stock
of Holdings. The Registration Rights Agreement provides that any stockholder
that owns 50% or more of the "Registrable Securities" of Holdings (defined as
common stock of Holdings beneficially owned by Charter, Kelso or their
successors or assignees) has the right to make four requests that Holdings
effect registration under the Securities Act of the Registrable Securities held
by such stockholder. Kelso owns more than 50% of the stock of Holdings. The
Registration Rights Agreement also provides that at any time after an initial
public offering of equity securities of Holdings, Charter will have the right
to make up to two requests that Holdings effect registration under the
Securities Act of any of the Registrable Securities held by Charter. In the
event that Holdings proposes to register any of its equity securities under the
Securities Act, the Registration Rights Agreement provides that Holdings must
give notice to all holders of Registrable Securities and, upon request of any
such holder, use its best efforts to effect the registration of the Registrable
Securities held by such person, subject to customary cut-back provisions.
CONTINGENT PAYMENT AGREEMENT
Pursuant to an agreement entered into among Cencom Cable Television, Inc. (the
"Gaylord Affiliate"), CCE-LP and CCT (the "Contingent Payment Agreement") in
connection with the California Note, until such time as the California Note is
paid in full, the holder of the California Note is entitled to certain
protections upon the occurrence of certain of the following events. The
Contingent Payment Agreement provides for payments to be made to the Gaylord
Affiliate if the California Note remains unpaid and CCT receives a distribution
from CCE-LP, CCE-I or CCE-II that is not used by CCT to pay outstanding
principal on the California Note or certain expenses. The Contingent Payment
Agreement also provides that if Kelso or Charter sells any equity securities of
CCT, or if CCT or Holdings sells any assets, including the partnership
interests of either in subsidiary partnerships, then CCE-LP will be required to
pay the Gaylord Affiliate an amount determined according to formulas set forth
in the Contingent Payment Agreement. The ability of CCE-LP to make any of the
foregoing payments to the Gaylord Affiliate is limited by the terms of the
Indenture, which precludes certain distributions by CCE-LP and CCE-I until the
CCE-I Credit Facility and the Notes are paid in full. The Contingent Payment
Agreement further provides that upon an initial public offering by CCT, CCE-LP
or Holdings, the Gaylord Affiliate will receive certain amounts of the
publicly-offered securities.
MANAGEMENT AGREEMENT
Pursuant to a management agreements entered into between CCE-I and Charter (the
"Management Agreement"), Charter is responsible for managing the day-to-day
operations of the CCE-I systems. The term of the Management Agreement is 10
years, subject to earlier termination for Cause (as defined in the Management
Agreement) or upon the sale of the Systems which are the subject of the
Management Agreement. Annual management fees paid to Charter by CCE-I with
respect to the year ended December 31, 1997 were $4.8 million. In addition, as
of December 31, 1997, Charter had earned an accrued but unpaid bonus from CCE-I
of approximately $4.0 million, of which $1.9 million was recorded during 1997.
The payment of the bonuses payable by CCE-I is deferred until termination of
the CCE-I Credit Facility. The base amount of annual management fees pursuant
to the CCE-I Management Agreement payable to Charter was $4,845,000 as of
December 31, 1997.
CCE-II and Charter are parties to a management agreement, which, like the CCE-I
Management Agreement, provides for payment of management fees to Charter.
Annual management fees paid to Charter by CCE-II with respect to the year ended
December 31, 1997 were $3.2 million. In addition, as of December 31, 1997,
Charter had earned an accrued but unpaid bonus from CCE-II of approximately
$161,000, $12,000 of which was recorded during 1997. The payment of the bonuses
payable by CCE-II is deferred until termination of the CCE-II bank credit
facility. The base amount of annual management fees pursuant to the CCE-II
Management Agreement payable to Charter was $3.2 million as of December 31,
1997.
TRANSACTION AND ADVISORY FEES
In connection with specific acquisitions and financing transactions by CCE-I
and CCE-II, Kelso & Company (an affiliate of Kelso) and Charter 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. Neither Kelso and Company nor Charter received any investment
banking fees during the year ended December 31, 1997 from CCE-I or CCE-II. The
financial advisory fees paid to Kelso & Company by CCE-I were approximately
$553,000 with respect to the year ended December 31, 1997. The financial
advisory fees paid to Kelso & Company by CCE-II were approximately $400,000
with respect to the year ended December 31, 1997.
- 28 -
<PAGE> 29
MANAGEMENT AGREEMENT
Pursuant to a management agreement entered into between CCE-I and Charter (the
"Management Agreement"), Charter is responsible for managing the day-to-day
operations of the CCE-I systems. The term of the Management Agreement is 10
years, subject to earlier termination for Cause (as defined in the Management
Agreement) or upon the sale of the CCE-I systems which are the subject of the
Management Agreement. Annual management fees paid to Charter by CCE-I with
respect to the year ended December 31, 1997 were $4.8 million. In addition, as
of December 31, 1997, Charter had earned an accrued but unpaid bonus from CCE-I
of approximately $4.0 million, of which $1.9 million was recorded during 1997.
The payment of the bonuses payable by CCE-I is deferred until termination of
the CCE-I Credit Facility. The base amount of annual management fees pursuant
to the CCE-I Management Agreement payable to Charter was $4,845,000 as of
December 31, 1997.
CCE-II and Charter are parties to a management agreement, which, like the CCE-I
Management Agreement, provides for payment of management fees to Charter.
Annual management fees paid to Charter by CCE-II with respect to the year ended
December 31, 1997 were $3.2 million. In addition, as of December 31, 1997,
Charter had earned an accrued but unpaid bonus from CCE-II of approximately
$161,000, $12,000 of which was recorded during 1997. The payment of the bonuses
payable by CCE-II is deferred until termination of the CCE-II bank credit
facility. The base amount of annual management fees pursuant to the CCE-II
Management Agreement payable to Charter was $3.2 million as of December 31,
1997.
TRANSACTION AND ADVISORY FEES
In connection with specific acquisitions and financing transactions by CCE-I
and CCE-II, Kelso & Company (an affiliate of Kelso) and Charter 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. Neither Kelso and Company nor Charter received any investment
banking fees during the year ended December 31, 1997 from CCE-I or CCE-II. The
financial advisory fees paid to Kelso & Company by CCE-I were approximately
$553,000 with respect to the year ended December 31, 1997. The financial
advisory fees paid to Kelso & Company by CCE-II were approximately $400,000
with respect to the year ended December 31, 1997.
- 29 -
<PAGE> 30
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.
- 30 -
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized.
CCA HOLDINGS CORP.
By: /s/ Jerald L. Kent
---------------------------------
Name: Jerald L. Kent
Title: President and Chief Executive Officer
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
Registrant and in the capacities and on the date indicated.
Signature and Title Date
- ------------------- ----
By: /s/ Jerald L. Kent March 27, 1998
-------------------------------------------------
Jerald L. Kent
President, Chief Executive Officer and Director
By: /s/ Howard L. Wood March 27, 1998
-------------------------------------------------
Howard L. Wood
Chairman and Director
By: /s/ Kent D. Kalkwarf March 27, 1998
-------------------------------------------------
Kent D. Kalkwarf
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
By: /s/ George E. Matelich March 27, 1998
-------------------------------------------------
George E. Matelich
Director
By: /s/ Frank T. Nickell March 27, 1998
-------------------------------------------------
Frank T. Nickell
Director
By: /s/ Thomas R. Wall IV
------------------------------------------------- March 27, 1998
Thomas R. Wall IV
Director
S-1
<PAGE> 32
CCA HOLDINGS CORP.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
CCA HOLDING CORP. 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 Statements of Shareholders' Investment (Deficit) 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
CCA ACQUISITION CORP. FINANCIAL STATEMENTS:
Report of Independent Public Accountants F-23
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-24
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-26
Consolidated Statements of Shareholder's Investment (Deficit) for the years ended December 31, 1997, 1996 and 1995 F-27
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-28
Notes to Consolidated Financial Statements F-30
CENCOM CABLE ENTERTAINMENT, INC. FINANCIAL STATEMENTS:
Report of Independent Public Accountants F-44
Balance Sheets as of December 31, 1997 and 1996 F-45
Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-46
Statements of Shareholder's Investment (Deficit) for the years ended December 31, 1997, 1996 and 1995 F-47
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-48
Notes to Financial Statements F-49
CHARTER COMMUNICATIONS ENTERTAINMENT, L.P. FINANCIAL STATEMENTS:
Report of Independent Public Accountants F-55
Balance Sheets as of December 31, 1997 and 1996 F-56
Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-57
Statements of Partners' Capital (Deficit) for the years ended December 31, 1997, 1996 and 1995 F-58
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-59
Notes to Financial Statements F-60
CHARTER COMMUNICATIONS ENTERTAINMENT I, L.P. FINANCIAL STATEMENTS:
Report of Independent Public Accountants F-66
Balance Sheets as of December 31, 1997 and 1996 F-67
Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-68
Statements of Partners' Capital (Deficit) for the years ended December 31, 1997, 1996 and 1995 F-69
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-70
Notes to Financial Statements F-72
CHARTER COMMUNICATIONS ENTERTAINMENT II, L.P. FINANCIAL STATEMENTS:
Report of Independent Public Accountants F-83
Balance Sheets as of December 31, 1997 and 1996 F-84
Statements of Operations for the years ended December 31, 1997, and 1996 and the period from inception
(April 20, 1995) to December 31, 1995 F-85
Statements of Partners' Capital (Deficit) for the years ended December 31, 1997, and 1996 and
the period from inception (April 20, 1995) to December 31, 1995 F-86
Statements of Cash Flows for the years ended December 31, 1997, and 1996 and the period from inception
(April 20, 1995) to December 31, 1995 F-87
Notes to Financial Statements F-89
FINANCIAL STATEMENT SCHEDULES FOR ENTITIES LISTED ABOVE:
None Required.
</TABLE>
F-1
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCA Holdings Corp.:
We have audited the accompanying consolidated balance sheets of CCA Holdings
Corp. (a Delaware corporation) and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
investment (deficit) and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company'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 CCA Holdings Corp. 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> 34
CCA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,595,272 $ 2,934,939
Accounts receivable, net of allowance for
doubtful accounts of $454,097 and $371,166 5,305,049 5,465,750
Prepaid expenses and other 754,073 490,443
Net assets of discontinued operation - 108,827
------------------ ------------------
Total current assets 8,654,394 8,999,959
------------------ ------------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment, net 204,645,667 206,351,379
Franchise costs, net of accumulated amortization
of $87,601,155 and $51,761,758 414,800,499 439,232,345
------------------ ------------------
619,446,166 645,583,724
------------------ ------------------
OTHER ASSETS, net 10,472,734 9,667,356
------------------ ------------------
INVESTMENT IN UNCONSOLIDATED LIMITED PARTNERSHIPS 67,814,141 78,069,816
------------------ ------------------
NET NONCURRENT ASSETS OF DISCONTINUED OPERATION - 1,760,015
------------------ ------------------
$ 706,387,435 $ 744,080,870
================== ==================
</TABLE>
(Continued on the following page)
F-3
<PAGE> 35
CCA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
(Continued)
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT)
--------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 25,625,000 $ 5,880,000
Accounts payable and accrued expenses 23,897,249 18,890,302
Subscriber deposits 452,642 473,601
Payables to manager of cable television systems 1,014,710 2,245,009
Other current liabilities - 1,401,951
------------------ ------------------
Total current liabilities 50,989,601 28,890,863
------------------ ------------------
DEFERRED REVENUE 1,465,287 708,339
------------------ ------------------
DEFERRED INCOME TAXES 55,500,000 55,500,000
------------------ ------------------
LONG-TERM DEBT, less current maturities 437,295,000 462,120,000
------------------ ------------------
DEFERRED MANAGEMENT FEES 4,036,987 2,140,140
------------------ ------------------
NOTE PAYABLE 82,000,000 82,000,000
------------------ ------------------
ACCRUED INTEREST ON NOTE PAYABLE 36,919,412 22,843,402
------------------ ------------------
MINORITY INTEREST IN SUBSIDIARY 78,082,289 90,273,351
------------------ ------------------
SHAREHOLDERS' INVESTMENT (DEFICIT):
Class A Voting Common Stock, $.01 par value,
100,000 shares authorized; 75,515 shares
issued and outstanding 755 755
Class B Voting Common Stock, $.01 par value,
20,000 shares authorized; 4,300 shares issued
and outstanding 43 43
Class C Non-Voting Common Stock, $.01 par
value, 5,000 shares authorized; 185 shares
issued and outstanding 2 2
Additional paid-in capital 79,999,200 79,999,200
Accumulated deficit (119,901,141) (80,395,225)
------------------- -------------------
Total shareholders' investment (deficit) (39,901,141) (395,225)
------------------- -------------------
$ 706,387,435 $ 744,080,870
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 36
CCA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
SERVICE REVENUES $ 169,324,522 $ 143,023,261 $ 99,689,410
------------------- ------------------ ------------------
EXPENSES:
Operating costs 66,935,944 59,869,348 41,800,111
General and administrative 16,438,704 11,628,513 7,142,567
Depreciation and amortization 67,903,882 65,757,387 51,193,702
Management and financial advisory service fees -
related parties 6,700,813 5,034,375 6,499,167
------------------ ------------------ ------------------
157,979,343 142,289,623 106,635,547
------------------ ------------------ ------------------
Income (loss) from continuing operations 11,345,179 733,638 (6,946,137)
------------------ ------------------ ------------------
OTHER INCOME (EXPENSE):
Interest income 57,030 164,476 503,585
Interest expense (52,999,769) (46,654,019) (35,461,026)
Other, net 156,257 (1,058,271) 41,622
------------------ ------------------ ------------------
(52,786,482) (47,547,814) (34,915,819)
------------------ ------------------ ------------------
Loss before equity in loss of
unconsolidated limited partnerships,
provision for income taxes, loss from
discontinued operation and minority
interest in loss of subsidiary (41,441,303) (46,814,176) (41,861,956)
EQUITY IN LOSS OF UNCONSOLIDATED LIMITED
PARTNERSHIPS (10,255,675) (6,302,990) (1,402,194)
------------------ ------------------ ------------------
Loss before provision for income taxes,
loss from discontinued operation and
minority interest in loss of subsidiary (51,696,978) (53,117,166) (43,264,150)
PROVISION FOR INCOME TAXES - - -
------------------ ------------------ ------------------
Loss before loss from discontinued
operation and minority interest in loss
of subsidiary (51,696,978) (53,117,166) (43,264,150)
LOSS FROM DISCONTINUED OPERATION - (1,515,558) -
------------------ ------------------ ------------------
Loss before minority interest in loss of
subsidiary (51,696,978) (54,632,724) (43,264,150)
MINORITY INTEREST IN LOSS OF SUBSIDIARY 12,191,062 15,998,674 1,502,975
------------------ ------------------ ------------------
Net loss $ (39,505,916) $ (38,634,050) $ (41,761,175)
================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 37
CCA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1995 $ - $ - $ - $ -
Issuance of common stock 800 79,999,200 - 80,000,000
Net loss - - (41,761,175) (41,761,175)
------- ------------- --------------- -------------
BALANCE, December 31, 1995 800 79,999,200 (41,761,175) 38,238,825
Net loss - - (38,634,050) (38,634,050)
------- ------------- --------------- -------------
BALANCE, December 31, 1996 800 79,999,200 (80,395,225) (395,225)
Net loss - - (39,505,916) (39,505,916)
------- ------------- --------------- -------------
BALANCE, December 31, 1997 $ 800 $ 79,999,200 $ (119,901,141) $ (39,901,141)
======= ============= =============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 38
CCA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (39,505,916) $ (38,634,050) $ (41,761,175)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 67,903,882 65,757,387 51,193,702
Amortization of debt issuance costs 1,193,634 - -
(Gain) loss on sale of property, plant and
equipment (156,257) 1,256,945 -
Loss from discontinued operation - 1,515,558 -
Equity in loss of unconsolidated limited
partnerships 10,255,675 6,302,990 1,402,194
Minority interest in loss of subsidiary (12,191,062) (15,998,674) (1,502,975)
Changes in assets and liabilities, net of
effects from acquisitions-
Accounts receivable, net 160,701 (1,748,468) (1,387,654)
Prepaid expenses and other (263,630) 279,406 (250,428)
Accounts payable and accrued expenses 5,006,947 4,429,157 4,249,587
Subscriber deposits (20,959) (257,062) (11,303)
Payables to manager of cable television
systems, including deferred management
fees 666,548 462,620 3,922,529
Other current liabilities (1,401,951) 1,401,951 -
Deferred revenue 525,790 (144,748) 780,612
Accrued interest on note payable 14,076,010 12,404,597 10,438,805
------------------ ------------------ ------------------
Net cash provided by operating activities 46,249,412 37,027,609 27,073,894
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (40,724,243) (33,898,020) (22,023,524)
Proceeds from sale of property, plant and equipment 260,924 986,359 -
Payments for acquisitions, net of cash acquired - (122,017,267) (523,679,458)
Other investing activities (763,362) (820,827) (1,652,067)
Investment in unconsolidated limited partnerships - - (85,775,000)
Minority investment in subsidiary - - 107,775,000
------------------ ------------------ ------------------
Net cash used in investing activities (41,226,681) (155,749,757) (525,355,049)
------------------ ------------------ ------------------
</TABLE>
(Continued on the following page)
F-7
<PAGE> 39
CCA HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Continued)
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt issuance costs $ (282,398) $ (2,773,844) $ (7,287,914)
Borrowings under revolving credit and term loan
facility 22,900,000 120,500,000 355,000,000
Payments of revolving credit and term loan facility (27,980,000) (7,500,000) -
Borrowings under note payable - - 82,000,000
Issuance of common stock - - 80,000,000
---------------- ------------------ ------------------
Net cash provided by (used in) financing
activities (5,362,398) 110,226,156 509,712,086
---------------- ------------------ ------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (339,667) (8,495,992) 11,430,931
CASH AND CASH EQUIVALENTS, beginning of year 2,934,939 11,430,931 -
---------------- ------------------ ------------------
CASH AND CASH EQUIVALENTS, end of year $ 2,595,272 $ 2,934,939 $ 11,430,931
================ ================== ==================
CASH PAID FOR INTEREST $ 34,980,126 $ 33,921,715 $ 22,907,403
================ ================== ==================
CASH PAID FOR TAXES, net of refunds $ - $ - $ -
================ ================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 40
CCA HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
CCA Holdings Corp. (CCA Holdings) was formed on November 17, 1994. CCA
Holdings commenced operations in January 1995 in connection with consummation
of the Crown Transaction (as defined below). The accompanying consolidated
financial statements include the accounts of CCA Holdings; its wholly-owned
subsidiary, CCA Acquisition Corp. (CAC); CAC's wholly-owned subsidiary, Cencom
Cable Entertainment, Inc. (CCE); and Charter Communications Entertainment I,
L.P. (CCE-I), which is controlled by CAC through its general partnership
interest (collectively referred to as the "Company"). CCA Holdings is
approximately 85% owned by Kelso Investment Associates V, L.P., an investment
fund, together with an affiliate (collectively referred to as "Kelso" herein)
and certain other individuals and approximately 15% by Charter Communications,
Inc. (Charter), manager of CCE-I's cable television systems (see Note 11). All
material intercompany transactions and balances have been eliminated.
In January 1995, CAC completed the acquisition of certain cable television
systems from Crown Media, Inc. (Crown), a subsidiary of Hallmark Cards,
Incorporated (Hallmark) (the "Crown Transaction"). On September 29, 1995, CAC
and CCT Holdings Corp. (CCT Holdings), an entity affiliated with CCA Holdings
by common ownership, entered into an Asset Exchange Agreement whereby CAC
exchanged a 1% undivided interest in all of its assets for a 1.22% undivided
interest in certain assets to be acquired by CCT Holdings from an affiliate of
Gaylord Entertainment Company, Inc. (Gaylord). Effective September 30, 1995,
CCT Holdings acquired certain cable television systems from Gaylord. Upon
execution of the Asset Purchase Agreement, CAC and CCT Holdings entered into a
series of agreements to contribute the assets acquired under the Crown
Transaction to CCE-I and certain assets acquired in the Gaylord acquisition to
Charter Communications Entertainment II, L.P. (CCE-II). As a result of
entering into these agreements, CCA Holdings owns a 55% interest and CCT
Holdings owns a 45% interest in the operations of CCE-I and CCE-II,
respectively. The net loss of CCE-I for the period prior to September 29,
1995, was allocated entirely to CCA Holdings.
As of December 31, 1997, CCE-I provided cable television service to
approximately 350,300 basic subscribers in Connecticut, Illinois,
Massachusetts, Missouri and New Hampshire.
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 residence 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.
F-9
<PAGE> 41
Depreciation is provided on a straight-line basis over the estimated useful
life of the related asset as follows:
Cable distribution systems 5-15 years
Buildings and leasehold improvements 15 years
Premium subscription units 3-5 years
Vehicles and equipment 3-5 years
During 1997, CCE-I shortened the estimated useful lives of certain property,
plant and equipment for depreciation purposes. As a result, an additional
$4,631,000 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 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.
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 asset is not recoverable, the carrying value of such asset is reduced
to its estimated fair value.
Investment in Unconsolidated Limited Partnerships
CCA Holdings has a 1% general partnership interest and a 54% limited partnership
interest in Charter Communications Entertainment, L.P. (CCE, L.P.). CCT Holdings
has a 1% general partnership interest and a 44% limited partnership interest in
CCE, L.P. CCE, L.P. has a 97.78% limited partnership interest in both CCE-I and
CCE-II. CCA Holdings' interest in CCE, L.P., together with its 1.22% general
partnership interest in CCE-I and its 1.22% limited partnership interest in
CCE-II, provide CCA Holdings with a 55% interest in both CCE-I and CCE-II. CCT
Holdings, owns the remaining 45% interest in both CCE-I and CCE-II, including a
1% general partnership interest in CCE-II. CCE-II is controlled by CCT Holdings
through its general partnership interest in CCE-II and provisions in CCE-II's
partnership agreement and CCE, L.P. is jointly controlled by the Company and CCT
Holdings through their general partnership interests in CCE, L.P. and provisions
in CCE, L.P.'s partnership agreement; therefore, CCA Holdings' investment in
CCE-II is accounted for using the equity method. Under this method, the
investment in CCE-II is originally recorded at cost and is subsequently adjusted
to recognize CCA Holdings' share of net earnings or losses as they occur and
distributions when received.
F-10
<PAGE> 42
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 income over the life of the contracts. Franchise fees collected
from cable subscribers and paid to local franchises are reported as Service
revenues.
Other Income (Expense)
Other, net includes gain and loss on disposition of property, plant and
equipment and other miscellaneous income and expense items, which are not
directly related to the Company's primary business. A loss of $1,256,945 was
recognized on the sale of two buildings for the year ended December 31, 1996.
Interest Rate Hedge Agreements
CCE-I manages fluctuations in interest rates by using interest rate hedge
agreements, as required by its debt agreement. The interest rate swaps, caps
and collars are being accounted for as hedges of the debt obligation, and
accordingly, the net settlement amount is recorded as an adjustment 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.
CCE-I's interest rate swap agreements require CCE-I to pay a fixed rate and
receive a floating rate thereby creating fixed rate debt. Interest rate caps
and collars are entered into by CCE-I to reduce the impact of rising interest
rates on floating rate debt.
CCE-I's participation in interest hedging transactions involves instruments
that have a close correlation with its debt, thereby managing its risk. The
interest rate hedge agreements have been designed for hedging purposes and are
not held or issued for speculative purposes.
Income Taxes
Income taxes are recorded in accordance with SFAS No. 109, "Accounting for
Income Taxes."
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.
Reclassifications
Certain reclassifications have been made to prior years' financial statements
to conform with current year presentation.
F-11
<PAGE> 43
2. INVESTMENT IN UNCONSOLIDATED LIMITED PARTNERSHIPS:
Effective September 30, 1995, CCT Holdings acquired certain assets from Gaylord
for approximately $340.9 million, which included cable television systems in
California. As described above, these assets were contributed to CCE-II. To
finance the acquisition, CCE-II entered into a revolving credit and term loan
facility and CCT Holdings executed a subordinated seller note to Gaylord (the
"Gaylord Note").
Summary financial information of CCE-II as of December 31, 1997 and 1996, and
for the years then ended and for the period from inception (April 20, 1995) to
December 31, 1995, which is not consolidated with the operating results of the
Company, is as follows:
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------
1997 1996
------------------- -------------------
<S> <C> <C>
Current assets $ 5,482,625 $ 10,904,830
Noncurrent assets - primarily investment in
cable television properties 362,850,452 338,316,421
------------------- ------------------
Total assets $ 368,333,077 $ 349,221,251
================== ==================
Current liabilities $ 14,269,423 $ 12,949,304
Long-term debt 228,500,000 194,000,000
Other long-term liabilities 29,888,353 27,949,964
Partners' capital 95,675,301 114,321,983
------------------ ------------------
Total liabilities and partners' capital $ 368,333,077 $ 349,221,251
================== ==================
<CAPTION>
Period Ended December 31
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
<S> <C> <C> <C>
Service revenues $ 96,659,228 $ 90,368,332 $ 21,156,209
=================== ================== ===================
Income from operations $ 1,603,828 $ 5,039,834 $ 983,638
================== ================== ===================
Net loss $ (18,646,682) $ (11,459,982) $ (3,458,535)
================== ================== ===================
</TABLE>
As of December 31, 1997, CCE-II provided cable television service to
approximately 173,000 basic subscribers in southern California.
3. COMMON STOCK:
The Class A Voting Common Stock (Class A Common Stock) and Class C Non-Voting
Common Stock (Class C Common Stock) have certain preferential rights upon
liquidation of CCA Holdings. In the event of liquidation, dissolution or
"winding up" of CCA Holdings, holders of Class A and Class C Common Stock are
entitled to a preference of $1,000 per share. After such amount is paid,
holders of Class B Voting Common Stock (Class B Common Stock) are entitled to
receive $1,000 per share. Thereafter, Class A and Class C shareholders shall
ratably receive the remaining proceeds.
F-12
<PAGE> 44
If upon liquidation, dissolution or "winding up" the assets of CCA Holdings are
insufficient to permit payment to Class A and Class C shareholders for their
full preferential amounts, all assets of CCA Holdings shall then be distributed
ratably to Class A and Class C shareholders. Furthermore, if the proceeds from
liquidation are inadequate to pay Class B shareholders their full preferential
amounts, the proceeds are to be distributed on a pro rata basis to Class B
shareholders.
Upon the occurrence of any Conversion Event (as defined within the Amended and
Restated Certificate of Incorporation) Class C shareholders may convert any or
all of their outstanding shares into the same number of Class A Common Stock.
Furthermore, CCA Holdings may automatically convert outstanding Class C shares
into the same number of Class A shares.
CCA Holdings is restricted from making cash dividends on its common stock until
the balance outstanding under the HC Crown Note (as defined in Note 8) is
repaid.
Charter and Kelso entered into a Stockholders' Agreement providing for certain
restrictions on the transfer, sale or purchase of CCA Holdings' Common Stock.
4. ACQUISITIONS:
In 1995, CCE-I acquired cable television systems in two separate transactions
for an aggregate purchase price, net of cash acquired, of approximately $579.2
million. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the dates of acquisition was $391.7 million
and is included in Franchise costs.
In 1996, CCE-I acquired cable television systems in three separate transactions
for an aggregate purchase price, net of cash acquired, of approximately $122.0
million. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the dates of acquisition was $100.2 million
and is included in Franchise costs.
These 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 respective dates of acquisition.
The following are the unaudited pro forma operating results as though the 1996
acquisitions by CCE-I 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,
1996
------------
<S> <C>
(Unaudited)
Service revenues $151,548,000
Income from operations 1,439,000
Net loss (40,297,000)
</TABLE>
F-13
<PAGE> 45
5. 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 $ 215,261,554 $ 186,885,508
Land, buildings and leasehold improvements 14,186,428 17,135,488
Premium subscription units 32,833,036 27,097,454
Vehicles and equipment 16,569,801 14,784,041
Construction-in-progress 172,851 3,243,405
------------------ ------------------
279,023,670 249,145,896
Less- Accumulated depreciation (74,378,003) (42,794,517)
------------------- -------------------
$ 204,645,667 $ 206,351,379
=================== ===================
</TABLE>
6. OTHER ASSETS, net:
Other assets, net consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------- --------------
<S> <C> <C>
Debt issuance costs, net of accumulated amortization of
$2,872,754 and $1,656,817, respectively $ 7,471,402 $ 8,404,941
Note receivable 2,100,000 -
Organizational expenses, net of accumulated amortization
of $920,899 and $574,589, respectively 661,090 965,489
Brokerage commissions, net of accumulated
amortization of $76,341 and $13,459, respectively 240,242 296,926
---------------- --------------
$ 10,472,734 $ 9,667,356
================ ==============
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Capital expenditures $ 941,285 $ 3,482,531
Accrued salaries and related benefits 2,218,276 1,613,024
Accounts payable 2,963,548 1,763,895
Programming expenses 3,106,929 2,726,803
Franchise fees 3,659,032 3,187,335
Accrued interest 5,338,313 2,442,525
Other 5,669,866 3,674,189
---------------- ----------------
$ 23,897,249 $ 18,890,302
================ ================
</TABLE>
F-14
<PAGE> 46
8. NOTE PAYABLE:
In connection with the Crown Transaction, the Company entered into an $82.0
million senior subordinated loan agreement with a subsidiary of Hallmark, HC
Crown Corp., and pursuant to such loan agreement issued a senior subordinated
note (the "HC Crown Note"). The HC Crown Note is an unsecured obligation. The
HC Crown Note is limited in aggregate principal amount to $82.0 million and has
a stated maturity date of December 31, 1999 (the "Stated Maturity Date").
Interest accrues at 13% per annum, compounded semiannually, but is not due and
payable until the Stated Maturity Date. If principal plus accrued interest is
not paid at the Stated Maturity Date, or if there are any other events of
default, the annual rate at which interest accrues will initially increase to
18% and will increase by an additional 2% on each successive anniversary of the
Stated Maturity Date (up to a maximum of 26%) until the HC Crown Note is
repaid; in addition, a 3% default rate of interest can, in certain instances,
be in effect simultaneously with the stated rate of interest in the HC Crown
Note. The HC Crown Note is redeemable in whole or in part at the option of the
Company at any time, without premium or penalty, provided that accrued interest
is paid on the portion of the HC Crown Note so redeemed.
Borrowings under the HC Crown Note are subject to certain financial and
nonfinancial covenants and restrictions, including the maintenance of a ratio
of debt (excluding the HC Crown Note) to adjusted consolidated annualized
operating cash flow, as defined, not to exceed 6.75 to 1 at December 31, 1997.
In addition to the subordination in right of payment provisions contained in
the HC Crown Note, the HC Crown Note is subject to a subordination agreement in
favor of senior bank debt of CCE-I. Pursuant to the subordination agreement,
substantially all rights and remedies under the HC Crown Note, including the
rights to accelerate the maturity upon an event of default (including a payment
of default), are suspended until the obligations under the Credit Agreement (as
defined herein) are paid in full.
The HC Crown Note is subordinated to the Credit Agreement. Pursuant to the
terms of the Credit Agreement, payments on the HC Crown Note are prohibited
until the indefeasible payment in full in cash, and the termination of
commitments to lend under the Credit Agreement. The HC Crown Note will not
have the benefit of any distributions from CCE-II until repayment in full of
CCE-II's credit facility and the Gaylord Note.
The obligations owing on the HC Crown Note are guaranteed by CAC, CCE and CCE,
L.P. (collectively referred to as the "Guarantors"). The CCE, L.P. guarantee
cannot be enforced until the repayment in full and termination of the Credit
Agreement (as defined herein) and the CCE-II credit facility. The CAC and CCE
guarantees cannot be enforced until the repayment in full and termination of
the Credit Agreement. The guarantees, by their terms, are limited to the
proceeds of distributions received from CCE-I, and income, if any, generated by
the Guarantors. CCA Holdings and the Guarantors are dependent primarily upon
distributions from CCE-I to service the HC Crown Note.
9. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Credit Agreement:
Term loans $ 274,120,000 $ 280,000,000
Fund loans 85,000,000 85,000,000
Revolving credit facility 103,800,000 103,000,000
------------------- -------------------
462,920,000 468,000,000
Less- Current maturities (25,625,000) (5,880,000)
------------------- -------------------
$ 437,295,000 $ 462,120,000
=================== ===================
</TABLE>
F-15
<PAGE> 47
CCE-I maintains a credit agreement (the "Credit Agreement"), which terminates
in June 2004, with a consortium of banks for borrowings up to $505.0 million,
consisting of a revolving credit facility of $140.0 million, term loans
totaling $280.0 million and fund loans totaling $85.0 million. The debt bears
interest, at CCE-I's option, at rates based upon the Base Rate, as defined in
the Credit Agreement, LIBOR or prevailing bid rates of certificates of deposit
plus the applicable margin based upon CCE-I's leverage ratio at the time of the
borrowings. The variable interest rates ranged from 7.63% to 8.50% and 7.63%
to 8.38% at December 31, 1997 and 1996, respectively.
Borrowings under the Credit Agreement are collateralized by the assets of
CCE-I. In addition, CAC, CCE and CCT Holdings have pledged their partnership
interests as additional security.
Borrowings under the Credit Agreement are subject to certain financial and
nonfinancial covenants and restrictions, including maintenance of a ratio of
debt to annualized operating cash flow, as defined, not to exceed 6.0 to 1 at
December 31, 1997. A quarterly commitment fee of 0.375% per annum is payable
on the unused portion of the Credit Agreement.
Commencing September 30, 1997, and at the end of each calendar quarter
thereafter, available borrowings under the revolving credit facility shall be
reduced on an annual basis by 9.0% in 1998, 12.0% in 1999, 12.3% in 2000, 16.5%
in 2001 and 20.3% in 2002.
In addition to the foregoing, effective April 30, 1999, and on each April 30th
thereafter, CCE-I is required to make a repayment of principal of the term
loans and fund loans (pro rata) in an amount equal to 75% of Annual Excess Cash
Flow, as defined in the Credit Agreement, for the preceding year if the
leverage ratio is greater than 5.5 to 1, or 50% of Annual Excess Cash Flow if
the leverage ratio is less than 5.5 to 1.
Based upon outstanding indebtedness at December 31, 1997, and the amortization
of term loans and fund loans, and scheduled reductions in available borrowings
described above, aggregate future principal payments on the Credit Agreement at
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------------------
<S> <C>
1998 $ 25,625,000
1999 34,025,000
2000 48,440,000
2001 70,150,000
2002 85,900,000
Thereafter 198,780,000
------------------
$ 462,920,000
==================
</TABLE>
F-16
<PAGE> 48
10. 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>
Credit Agreement $462,920,000 $ - $462,920,000
HC Crown Note (including accrued interest) 118,919,412 - 118,587,000
Interest Rate Hedge Agreements
- ------------------------------
Swaps - 230,000,000 (499,883)
Caps - 120,000,000 891
Collars - 120,000,000 (229,282)
<CAPTION>
1996
----------------------------------------------------------------
Carrying Notional Fair
Value Amount Value
-------------------- -------------------- --------------------
Debt
- ----
<S> <C> <C> <C>
Credit Agreement $468,000,000 $ - $468,000,000
HC Crown Note (including accrued interest) 104,843,402 - 89,500,000
Interest Rate Hedge Agreements
- ------------------------------
Swaps - 150,000,000 1,005,654
Caps - 100,000,000 28,111
</TABLE>
As the CCE-I Credit Agreement bears interest at current market rates, its
carrying amount approximates fair market value at December 31, 1997 and 1996.
Fair value of the HC Crown Note is based upon trading activity at December 31,
1997 and 1996.
The weighted average interest pay rates for interest rate swap agreements were
7.78% and 7.61% at December 31, 1997 and 1996, respectively. The weighted
average interest rate for interest rate cap agreements was 8.49% at December
31, 1997 and 1996. The weighted average interest rates for interest rate
collar agreements were 9.04% and 7.53% 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 CCE-I's exposure
through its use of interest rate hedge agreements. The amounts exchanged are
determined by reference to the notional amount and the other terms of the
contracts.
F-17
<PAGE> 49
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that CCE-I 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 CCE-I'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. CCE-I 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 CCE-I.
11. RELATED-PARTY TRANSACTIONS:
Charter provides management services to CCE-I under the terms of a contract
which provides for annual base fees equal to $4,845,000 as of December 31, 1997
and 1996, respectively, per annum plus an additional fee equal to 30% of the
excess, if any, of operating cash flow (as defined in the management agreement)
over the projected operating cash flow for the year. Payment of the additional
fee is deferred until termination of the Credit Agreement due to restrictions
provided within the Credit Agreement. Deferred management fees bear interest
at 8.0% per annum. The additional fees for the years ended December 31, 1997,
1996 and 1995, totaled approximately $1,897,000, $1,137,000 and $1,003,000,
respectively. In addition, CCE-I receives financial advisory services from an
affiliate of Kelso, under terms of a contract which provides for fees equal to
$552,500 at December 31, 1997 and 1996, respectively, per annum. These
agreements were amended during 1996 and 1995 in conjunction with each
acquisition of cable television systems to increase the annual base fees for
Charter and Kelso. Expenses recognized by CCE-I under these contracts during
1997, 1996 and 1995 were $6,700,813, $5,034,375 and $6,499,167, respectively.
Management and financial advisory service fees currently payable of $1,211,250
and $1,181,300 are included in Payables to manager of cable television systems
at December 31, 1997 and 1996, respectively.
CCE-I pays certain acquisition advisory fees to an affiliate of Kelso and
Charter, which typically equal approximately 1% of the total purchase price
paid for cable television systems acquired. Total acquisition fees paid to the
affiliate of Kelso in 1997, 1996 and 1995 were $-0-, $1,400,000 and $5,250,000,
respectively. Total acquisition fees paid to Charter in 1997, 1996 and 1995
were $-0-, $1,400,000 and $950,000.
CCE-I and all entities managed by Charter collectively utilize a combination of
insurance coverage and self-insurance programs for medical, dental and workers'
compensation claims. CCE-I 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
CCE-I. During 1997, 1996 and 1995, CCE-I expensed approximately $1,451,500,
$1,401,300 and $840,000, respectively, relating to insurance allocations.
Beginning in 1996, CCE-I and other entities managed by Charter 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 to CCE-I and other affiliated
entities. The cost of these services is allocated based on the number of
subscribers. Management considers this allocation to be reasonable for the
operations of CCE-I. During 1997 and 1996, CCE-I expensed approximately
$466,300 and $340,600 relating to these services, respectively.
CCE-I maintains a regional office. The regional office performs certain
operational services on behalf of CCE-I and other affiliated entities. The
cost of these services is allocated to CCE-I and affiliated entities based on
their number of subscribers. Management considers this allocation to be
reasonable for the operations of CCE-I. During 1997, 1996 and 1995, CCE-I
expensed approximately $861,100, $799,400 and $512,000, respectively, relating
to these services.
CCE-II has similar arrangements as discussed above, which have been reflected
in CCE-II's results of operations.
F-18
<PAGE> 50
12. COMMITMENTS AND CONTINGENCIES:
Leases
CCE-I leases certain facilities and equipment under noncancelable operating
leases. Rent expense incurred under these leases during 1997, 1996 and 1995
was approximately $431,800, $617,600 and $533,000, respectively.
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1998 $494,700
1999 292,200
2000 182,600
2001 130,000
2002 61,800
Thereafter 287,700
</TABLE>
CCE-I rents utility poles in its operations. Generally, pole rental agreements
are short term, but CCE-I anticipates that such rentals will recur. Rent
expense for pole attachments during 1997, 1996 and 1995 was approximately
$1,914,400, $1,773,100 and $1,363,000, respectively.
Litigation
CCE-I is a named defendant in a purported class action lawsuit (the "Action")
filed in October 1995 on behalf of the Cencom Cable Income Partners, L.P.
(CCIP) limited partners. The Action named as defendants the general partner of
CCIP, the purchasers of all the systems previously owned by CCIP (which
includes CCE-I and certain other entities managed by Charter), Charter and
certain individuals, including the directors and executive officers of the
general partner of CCIP. 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.
Based upon, among other things, the advice of counsel, each of the defendants
in the Action believe the Action to be without merit and is contesting it
vigorously. 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 are legally inadequate and in
January 1997, filed a dispositive motion as to all remaining claims in the
Action. In October 1997, the court granted in part, and denied in part,
defendants motion for summary judgment, the effect of which narrowed the
remaining issues significantly. The plaintiffs filed a motion to alter or
amend the court order. There can be no assurance, however, that the plaintiff
will not be awarded damages in connection with the Action, some or all of which
may be payable by CCE-I.
CCE is a named defendant in two actions involving Cencom Cable Income Partners
II, L.P. (CCIP II), a public limited partnership. In April 1997, a petition
was filed, and two amended petitions subsequently filed, by plaintiffs who are
limited partners of CCIP II against Cencom Properties II, Inc., the general
partner of CCIP II, Cencom Partners, Inc., the general partner of Cencom
Partners, L.P. (CPLP), an entity in which CCIP II invested, certain named
brokerage firms involved in the original sale of the limited partnership units
and CCE. CCE provided management services to both CCIP II and CPLP and also
owned all of the stock of the general partners of each of these partnerships
prior to mid-1994. The plaintiffs allege that the defendants breached
fiduciary duties and the terms of the CCIP II partnership agreement in
connection with the investment in CPLP, the management of certain CCIP II
assets and the sale of certain CCIP II assets. By an agreement between the
parties, the brokerage defendants and fraud allegations were dismissed without
prejudice. The plaintiffs seek recovery of the consideration paid for their
partnership units, restitution of all profits received by the defendants in
connection with the CCIP II transaction and
F-19
<PAGE> 51
punitive damages. In June 1997, a purported class action was filed on behalf
of the limited partners of CCIP II against Cencom Properties II, CCE, Charter,
certain other entities managed by Charter and certain individuals, including
officers of Charter or Cencom Properties II. The plaintiffs allege that the
defendants breached fiduciary duties and the terms of the CCIP II partnership
agreement in connection with the investment in CPLP, the management of certain
CCIP II assets and the sale of certain CCIP II assets. In November 1997, the
plaintiffs amended their complaint to restate their allegations as a
shareholders' derivative claim. The damages claimed by the plaintiffs are as
yet unspecified. CCE believes that it has meritorious defenses in both actions
and intends to defend the actions vigorously. CCE is not able at this stage to
project the expenses which will be associated with the actions or to predict
any potential outcome or financial impact.
In October 1997, a purported class action was filed under the name Gerald
Ortbals v. Charter Communications, on behalf of all persons residing in
Missouri who are or were residential subscribers of CCE-I cable television
service, and who have been charged a processing fee for delinquent payment of
their cable bill. The action challenges the legality of CCE-I's processing fee
and seeks declaratory judgment, injunctive relief and unspecified damages.
CCE-I believes the lawsuit to be without merit and intends to defend the action
vigorously. CCE-I is not able, at this early stage, to project the expenses
which will be associated with this action or to predict any potential outcome
or financial impact.
The Company 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
Company's consolidated financial position or results of operations.
13. 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.
While management believes that the Company 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 CCE-I and CCE-II are
unable to justify its rates through a benchmark or 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 CCE-I and CCE-II 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 Company.
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.
F-20
<PAGE> 52
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 Company. 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 or results of operations of the Company.
14. INCOME TAXES:
Deferred tax assets and liabilities are recognized for the estimated future tax
consequence attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using the
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. Deferred income tax expense or
benefit is the result of changes in the liability or asset recorded for
deferred taxes. A valuation allowance must be established for any portion of a
deferred tax asset for which it is more likely than not that a tax benefit will
not be realized.
During 1997, 1996 and 1995, changes in the Company's temporary differences and
losses from operations, which pertain primarily to depreciation and
amortization, resulted in deferred tax benefits which were offset by valuation
allowances of equal amounts.
No current provision (benefit) for income taxes was recorded during 1997, 1996
and 1995.
Deferred taxes are comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable $ 182,000 $ 148,000
Covenant not to compete 6,400,000 6,933,000
Accrued expenses 2,358,000 2,119,000
Deferred revenue 586,000 283,000
Deferred management fees 1,615,000 856,000
Tax loss carryforwards 69,420,000 44,352,000
Valuation allowance (29,534,000) (21,528,000)
---------------- ----------------
Total deferred income tax assets 51,027,000 33,163,000
---------------- ----------------
Deferred income tax liabilities:
Property, plant and equipment (33,754,000) (37,191,000)
Franchise costs (61,366,000) (44,362,000)
Investment in unconsolidated limited partnerships (5,484,000) (3,767,000)
Minority interest in subsidiary (5,923,000) (3,343,000)
---------------- ----------------
Total deferred income tax liabilities (106,527,000) (88,663,000)
---------------- ----------------
Net deferred income tax liability $ (55,500,000) $ (55,500,000)
================ ================
</TABLE>
F-21
<PAGE> 53
At December 31, 1997, the Company had net operating loss (NOL) carryforwards
for regular income tax purposes aggregating approximately $173.6 million, which
expire in various years through 2011. Utilization of the NOLs is subject to
certain limitations.
15. DISCONTINUED OPERATION:
CCE-I sold its radio operation maintained by its former subsidiary, Charter
Communications Radio St. Louis, LLC. CCE-I recorded the proceeds from the sale
in the form of a note receivable from the purchasers of $2.1 million.
The net losses of this operation prior to December 31, 1996, are included in
the consolidated statement of operations under "Loss from discontinued
operation." Revenues from such operation were $1,532,572 for 1996. The
noncurrent net assets of this operation are comprised primarily of property,
plant and equipment, license fees and other deferred costs. No material gain
or loss was incurred in connection with the disposition of these net assets.
16. EMPLOYEE BENEFIT PLANS:
CCE-I'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.
CCE-I contributes an amount equal to 50% of the first 5% contributed by each
employee. During 1997, 1996 and 1995, CCE-I contributed approximately
$308,000, $269,900 and $177,000, to the 401(k) Plan, respectively.
Certain CCE-I employees are participants in the 1996 Charter
Communications/Kelso Group Appreciation Rights Plan (the "Plan"). The Plan
covers certain key employees and consultants within the group of companies and
partnerships controlled by affiliates of Kelso and managed by Charter
(collectively, the "Investment Group"). The Plan permits the granting of up to
1,000,000 units, of which 705,000 were outstanding at December 31, 1997.
Unless otherwise provided in a particular instance, units vest at a rate of 20%
per annum. The Plan entitles participants to receive payment of the
appreciated unit value for vested units, upon the occurrence of certain events
specified in the Plan (i.e., change in control, employee termination). The
units do not represent a right to an equity interest to any entities within the
Investment Group. Compensation expense is based on the appreciated unit value
and is amortized over the vesting period. The obligation and related expenses
of the Plan are the responsibility of and have been recorded (pro rata) at CCA
Holdings and CCT Holdings.
17. SIGNIFICANT NONCASH TRANSACTION:
The Company engaged in the following significant noncash transaction:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ------------
<S> <C> <C> <C>
Issuance of note receivable for sale of
radio operation (see Note 15) $2,100,000 $ - $ -
</TABLE>
F-22
<PAGE> 54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCA Acquisition Corp.:
We have audited the accompanying consolidated balance sheets of CCA Acquisition
Corp. (a Delaware corporation) and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholder's
investment (deficit) and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
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 CCA Acquisition Corp. 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-23
<PAGE> 55
CCA ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,595,272 $ 2,934,939
Accounts receivable, net of allowance for
doubtful accounts of $454,097 and $371,166,
respectively 5,305,049 5,465,750
Prepaid expenses and other 754,073 490,443
Net assets of discontinued operations - 108,827
------------ ------------
Total current assets 8,654,394 8,999,959
------------ ------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment, net 204,645,667 206,351,379
Franchise costs, net of accumulated amortization
of $87,601,155 and $51,761,758, respectively 414,800,499 439,232,345
------------ ------------
619,446,166 645,583,724
------------ ------------
OTHER ASSETS, net 10,472,734 9,667,356
------------ ------------
INVESTMENT IN UNCONSOLIDATED LIMITED PARTNERSHIPS 67,814,141 78,069,816
NET NONCURRENT ASSETS OF DISCONTINUED OPERATIONS - 1,760,015
------------ ------------
$706,387,435 $744,080,870
============ ============
</TABLE>
(Continued on the following page)
F-24
<PAGE> 56
CCA ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
(Continued)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
LIABILITIES AND SHAREHOLDER'S INVESTMENT (DEFICIT)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 25,625,000 $ 5,880,000
Accounts payable and accrued expenses 23,309,249 18,517,775
Subscriber deposits 452,642 473,601
Payables to manager of cable television systems 956,136 2,245,009
Other current liabilities - 1,401,951
------------- ------------
Total current liabilities 50,343,027 28,518,336
------------- ------------
DEFERRED REVENUE 1,465,287 708,339
------------- ------------
DEFERRED INCOME TAXES 55,500,000 55,500,000
------------- ------------
LONG-TERM DEBT, less current maturities 437,295,000 462,120,000
------------- ------------
DEFERRED MANAGEMENT FEES 4,036,987 2,140,140
------------- ------------
NOTE PAYABLE 82,000,000 82,000,000
------------- ------------
ACCRUED INTEREST ON NOTE PAYABLE 36,919,412 22,843,402
------------- ------------
MINORITY INTEREST IN SUBSIDIARY 78,082,289 90,273,351
------------- ------------
SHAREHOLDER'S INVESTMENT (DEFICIT):
Common stock, $.01 par value, 100 shares
authorized; 100 shares issued and outstanding 1 1
Additional paid-in capital 79,999,999 79,999,999
Accumulated deficit (119,254,567) (80,022,698)
------------- ------------
Total shareholder's investment (deficit) (39,254,567) (22,698)
------------- ------------
$ 706,387,435 $744,080,870
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-25
<PAGE> 57
CCA ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
SERVICE REVENUES $169,324,522 $143,023,261 $ 99,689,410
------------ ------------ ------------
EXPENSES:
Operating costs 66,935,944 59,869,348 41,800,111
General and administrative 16,164,658 11,255,985 7,142,567
Depreciation and amortization 67,903,882 65,757,387 51,193,702
Management and financial advisory service fees -
related parties 6,700,813 5,034,375 6,499,167
------------ ------------ ------------
157,705,297 141,917,095 106,635,547
------------ ------------ ------------
Income (loss) from continuing operations 11,619,225 1,106,166 (6,946,137)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 57,030 164,476 503,585
Interest expense (52,999,769) (46,654,020) (35,461,026)
Other 156,258 (1,058,271) 41,622
------------ ------------ ------------
(52,786,481) (47,547,815) (34,915,819)
------------ ------------ ------------
Loss before equity in loss of unconsolidated
limited partnerships, provision for income taxes,
loss from discontinued operations and minority
interest in loss of subsidiary (41,167,256) (46,441,649) (41,861,956)
EQUITY IN LOSS OF UNCONSOLIDATED LIMITED
PARTNERSHIPS (10,255,675) (6,302,990) (1,402,194)
------------ ------------ ------------
Loss before provision for income taxes, loss from
discontinued operations and minority interest in
loss of subsidiary (51,422,931) (52,744,639) (43,264,150)
PROVISION FOR INCOME TAXES - - -
------------ ------------ ------------
Loss before loss from discontinued and minority
interest in loss of subsidiary (51,422,931) (52,744,639) (43,264,150)
LOSS FROM DISCONTINUED OPERATIONS - (1,515,558) -
------------ ------------ ------------
Loss before minority interest in loss of
subsidiary (51,422,931) (54,260,197) (43,264,150)
MINORITY INTEREST IN LOSS OF SUBSIDIARY 12,191,062 15,998,674 1,502,975
------------ ------------ ------------
Net loss $(39,231,869) $(38,261,523) $(41,761,175)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-26
<PAGE> 58
CCA ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S INVESTMENT (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1995 $ - $ - $ - $ -
Issuance of common stock 1 79,999,999 - 80,000,000
Net loss - - (41,761,175) (41,761,175)
---- ------------ ------------- ------------
BALANCE, December 31, 1995 1 79,999,999 (41,761,175) 38,238,825
Net loss - - (38,261,523) (38,261,523)
---- ------------ ------------- ------------
BALANCE, December 31, 1996 1 79,999,999 (80,022,698) (22,698)
Net loss - - (39,231,869) (39,231,869)
---- ------------ ------------- ------------
BALANCE, December 31, 1997 $ 1 $ 79,999,999 $(119,254,567) $(39,254,567)
==== ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-27
<PAGE> 59
CCA ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(39,231,869) $ (38,261,523) $ (41,761,175)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 67,903,882 65,757,387 51,193,702
Amortization of debt issuance costs 1,193,633 - -
(Gain) loss on sale of property, plant and equipment (156,257) 1,256,945 -
Loss from discontinued operation - 1,515,558 -
Equity in loss of unconsolidated limited partnerships 10,255,675 6,302,990 1,402,194
Minority interest in loss of subsidiary (12,191,062) (15,998,674) (1,502,975)
Changes in assets and liabilities, net of effects
from acquisitions-
Accounts receivable, net 160,701 (1,748,468) (1,387,654)
Prepaid expenses and other (263,630) 279,406 (250,428)
Accounts payable and accrued expenses 4,791,474 4,056,630 4,249,587
Subscriber deposits (20,959) (257,062) (11,303)
Payables to manager of cable television systems,
including deferred management fees 607,975 462,620 3,922,529
Other current liabilities (1,401,951) 1,401,951 -
Deferred revenue 525,790 (144,748) 780,612
Accrued interest on note payable 14,076,010 12,404,597 10,438,805
------------ ------------- -------------
Net cash provided by operating activities 46,249,412 37,027,609 27,073,894
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (40,724,243) (33,898,020) (22,023,524)
Proceeds from sale of property, plant and equipment 260,924 986,359 -
Payments for acquisitions, net of cash acquired - (122,017,267) (523,679,458)
Other investing activities (763,362) (820,829) (1,652,067)
Investment in unconsolidated limited partnerships - - (85,775,000)
Minority investment in subsidiary - - 107,775,000
------------ ------------- -------------
Net cash used in investing activities (41,226,681) (155,749,757) (525,355,049)
------------ ------------- -------------
</TABLE>
(Continued on the following page)
F-28
<PAGE> 60
CCA ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Continued)
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt issuance costs $ (282,398) $ (2,773,844) $ (7,287,914)
Borrowings under revolving credit and term loan facility 22,900,000 120,500,000 355,000,000
Payments under revolving credit and term loan facility (27,980,000) (7,500,000) -
Borrowings under note payable to seller - - 82,000,000
Issuance of common stock - - 80,000,000
------------ ------------ ------------
Net cash provided by (used in) financing
activities (5,362,398) 110,226,156 509,712,086
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (339,667) (8,495,992) 11,430,931
CASH AND CASH EQUIVALENTS, beginning of year 2,934,939 11,430,931 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 2,595,272 $ 2,934,939 $ 11,430,931
============ ============ ============
CASH PAID FOR INTEREST $ 34,980,126 $ 33,921,715 $ 22,907,403
============ =========== ============
CASH PAID FOR TAXES, net of refunds $ - $ - $ -
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-29
<PAGE> 61
CCA ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
CCA Acquisition Corp. (CAC) was formed on June 27, 1994, and is a wholly-owned
subsidiary of CCA Holdings Corp. (CCA Holdings). CAC commenced operations in
January 1995 in connection with consummation of the Crown Transaction (as
defined below). CCA Holdings is approximately 85% owned by Kelso Investment
Associates V, L.P., an investment fund, together with an affiliate
(collectively referred to as "Kelso" herein) and certain other individuals, and
approximately 15% by Charter Communications, Inc. (Charter), manager of CCE-I's
cable television systems (see Note 10). All material intercompany transactions
and balances have been eliminated.
In January 1995, CAC completed the acquisition of certain cable television
systems from Crown Media, Inc. (Crown), a subsidiary of Hallmark Cards,
Incorporated (Hallmark) (the "Crown Transaction"). On September 29, 1995, CAC
and CCT Holdings Corp. (CCT Holdings), an entity affiliated with CCA Holdings
by common ownership, entered into an Asset Exchange Agreement whereby CAC
exchanged a 1% undivided interest in all of its assets for a 1.22% undivided
interest in certain assets to be acquired by CCT Holdings from an affiliate of
Gaylord Entertainment Company, Inc. (Gaylord). Effective September 30, 1995,
CCT Holdings acquired certain cable television systems from Gaylord. Upon
execution of the Asset Purchase Agreement, CAC and CCT Holdings entered into a
series of agreements to contribute the assets acquired under the Crown
Transaction to CCE-I and certain assets acquired in the Gaylord acquisition to
Charter Communications Entertainment II, L.P. (CCE-II). As a result of
entering into these agreements, CAC owns a 55% interest and CCT Holdings owns a
45% interest in the operations of CCE-I and CCE-II, respectively. The net loss
of CCE-I for the period prior to September 29, 1995, was allocated entirely to
CAC.
The accompanying consolidated financial statements include the accounts of CAC;
its wholly-owned subsidiary, Cencom Cable Entertainment, Inc. (CCE); and
Charter Communications Entertainment I, L.P. (CCE-I), which is controlled by
CAC through its general partnership interest (collectively referred to as the
"Company").
As of December 31, 1997, CCE-I provided cable television service to
approximately 350,300 basic subscribers in Connecticut, Illinois,
Massachusetts, Missouri and New Hampshire.
Cash Equivalents
Cash equivalents at December 31, 1997, 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 residence 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.
F-30
<PAGE> 62
Depreciation is provided on a straight-line basis over the estimated useful
life of the related asset as follows:
<TABLE>
<S> <C>
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
</TABLE>
During 1997, CCE-I shortened the estimated useful lives of certain property,
plant and equipment for depreciation purposes. As a result, an additional
$4,631,000 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 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.
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 asset is not recoverable, the carrying value of such asset is reduced
to its estimated fair value.
Investment in Unconsolidated Limited Partnerships
CAC has a 1% general partnership interest and a 54% limited partnership
interest in Charter Communications Entertainment, L.P. (CCE, L.P.). CCT
Holdings has a 1% general partnership interest and a 44% limited partnership
interest in CCE, L.P. CCE, L.P. has a 97.78% limited partnership interest in
both CCE-I and CCE-II. CAC's interest in CCE, L.P., together with its 1.22%
general partnership interest in CCE-I and its 1.22% limited partnership
interest in CCE-II, provide CAC with a 55% interest in both CCE-I and CCE-II.
CCT Holdings, owns the remaining 45% interest in both CCE-I and CCE-II,
including a 1% general partnership interest in CCE-II. CCE-II is controlled by
CCT Holdings through its general partnership interest in CCE-II and provisions
in CCE-II's partnership agreement and CCE, L.P. is jointly controlled by the
Company and CCT Holdings through their general partnership interests in CCE,
L.P. and provisions in CCE, L.P.'s partnership agreement; therefore, CAC's
investment in CCE L.P. and CCE-II, is accounted for using the equity method.
Under this method, the investment in CCE L.P. and CCE-II, is originally
recorded at cost and is subsequently adjusted to recognize CAC's share of net
earnings or losses as they occur and distributions when received.
F-31
<PAGE> 63
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 income over the life of the contracts. Franchise fees collected
from cable subscribers and paid to local franchises are reported as Service
revenues.
Other Income (Expense)
Other, net includes gain and loss on disposition of property, plant and
equipment and other miscellaneous income and expense items, which are not
directly related to the Company's primary business. A loss of $1,256,945 was
recognized on the sale of two buildings for the year ended December 31, 1996.
Interest Rate Hedge Agreements
CCE-I manages fluctuations in interest rates by using interest rate swap and
cap agreements, as required by its debt agreement. The interest rate swaps,
caps and collars are being accounted for as hedges of the debt obligation, and
accordingly, the net settlement amount is recorded as an adjustment 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.
CCE-I's interest rate swap agreements require CCE-I to pay a fixed rate and
receive a floating rate thereby creating fixed rate debt. Interest rate caps
and collars are entered into by CCE-I to reduce the impact of rising interest
rates on floating rate debt.
CCE-I'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.
Income Taxes
Income taxes are recorded in accordance with SFAS No. 109, "Accounting for
Income Taxes."
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.
Reclassifications
Certain reclassifications have been made to prior years' financial statements
to conform with current year presentation.
F-32
<PAGE> 64
2. INVESTMENT IN UNCONSOLIDATED LIMITED PARTNERSHIPS:
Effective September 30, 1995, CCT Holdings acquired certain assets from Gaylord
for approximately $340.9 million, which included cable television systems in
California. As described above, these assets were contributed to CCE-II. To
finance the acquisition, CCE-II entered into a revolving credit and term loan
facility and CCT Holdings executed a subordinated seller note to Gaylord (the
"Gaylord Note").
Summary financial information of CCE-II as of December 31, 1997 and 1996, and
for the years then ended and for the period from inception (April 20, 1995) to
December 31, 1995, which is not consolidated with the operating results of the
Company, is as follows:
<TABLE>
<CAPTION>
As of December 31
---------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Current assets $ 5,482,625 $ 10,904,830
Noncurrent assets - primarily
investment in cable television
properties 362,850,452 338,316,421
------------- -------------
Total assets $ 368,333,077 $ 349,221,251
============= =============
Current liabilities $ 14,269,423 $ 12,949,304
Long-term debt 228,500,000 194,000,000
Other long-term liabilities 29,888,353 27,949,964
Partners' capital 95,675,301 114,321,983
------------- -------------
Total liabilities and partners' $ 368,333,077 $ 349,221,251
capital ============= =============
<CAPTION>
Period Ended December 31
-------------------------------------------------
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
Service revenues $ 96,659,228 $ 90,368,332 $21,156,209
============= ============ ===========
Income from operations $ 1,603,828 $ 5,039,834 $ 983,638
============= ============ ===========
Net loss $ (18,646,682) $(11,459,982) $(3,458,535)
============= ============ ===========
</TABLE>
As of December 31, 1997, CCE-II provided cable television service to
approximately 173,000 basic subscribers in southern California.
3. ACQUISITIONS:
In 1995, CCE-I acquired cable television systems in two separate transactions
for an aggregate purchase price, net of cash acquired, of approximately $579.2
million. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the dates of acquisition was $391.7 million
and is included in Franchise costs.
F-33
<PAGE> 65
In 1996, CCE-I acquired cable television systems in three separate transactions
for an aggregate purchase price, net of cash acquired, of approximately $122.0
million. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the dates of acquisition was $100.2 million
and is included in Franchise costs.
These 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 respective dates of acquisition.
The following are the unaudited pro forma operating results as though the 1996
acquisitions by CCE-I 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,
1996
------------
(Unaudited)
<S> <C>
Service revenues $151,548,000
Income from operations 818,000
Net loss (39,529,000)
</TABLE>
4. 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 $215,261,554 $186,885,508
Land, buildings and leasehold improvements 14,186,428 17,135,488
Premium subscription units 32,833,036 27,097,454
Vehicles and equipment 16,569,801 14,784,041
Construction-in-progress 172,851 3,243,405
------------ ------------
279,023,670 249,145,896
Less- Accumulated depreciation (74,378,003) (42,794,517)
------------ ------------
$204,645,667 $206,351,379
============ ============
</TABLE>
5. 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 $2,872,754 and $1,656,817, respectively $ 7,471,402 $ 8,404,941
Note receivable 2,100,000 -
Organizational expenses, net of accumulated
amortization of $920,899 and $574,589, respectively 661,090 965,489
Brokerage commissions, net of accumulated amortization of
$76,341 and $13,459, respectively 240,242 296,926
----------- ------------
$10,472,734 $ 9,667,356
=========== ============
</TABLE>
F-34
<PAGE> 66
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Capital expenditures $ 941,285 $ 3,482,531
Accrued salaries and related benefits 1,688,276 1,283,024
Accounts payable 2,963,548 1,763,895
Programming expenses 3,106,929 2,726,803
Franchise fees 3,659,032 3,187,335
Accrued interest 5,338,313 2,442,525
Other 5,611,866 3,631,662
----------- -----------
$23,309,249 $18,517,775
=========== ===========
</TABLE>
7. NOTE PAYABLE:
In connection with the Crown Transaction, CAC issued a guarantee of payment to
the holder of the HC Crown Note. Accordingly, the debt has been reflected as a
liability of the Company in the accompanying financial statements. The HC
Crown Note is also guaranteed by CCE and CCE, L.P. The HC Crown Note is an
unsecured obligation. The HC Crown Note is limited in aggregate principal
amount to $82.0 million and has a stated maturity date of December 31, 1999
(the "Stated Maturity Date"). Interest accrues at 13% per annum, compounded
semiannually, but is not due and payable until the Stated Maturity Date. If
principal plus accrued interest is not paid at the Stated Maturity Date, or if
there are any other events of default, the annual rate at which interest
accrues will initially increase to 18% and will increase by an additional 2% on
each successive anniversary of the Stated Maturity Date (up to a maximum of
26%) until the HC Crown Note is repaid; in addition, a 3% default rate of
interest can, in certain instances, be in effect simultaneously with the stated
rate of interest on the HC Crown Note. The HC Crown Note is redeemable in
whole or in part at the option of CCA Holdings at any time, without premium or
penalty, provided that accrued interest is paid on the portion of the HC Crown
Note so redeemed.
Pursuant to its terms, payment under the guarantees issued by CAC and CCE and
the exercise of certain remedies with respect thereto are prohibited until the
indefeasible payment in full in cash and the termination of commitments to lend
under CCE-I's credit facility. The guarantees, by their terms, are limited to
the proceeds of distributions received from CCE-I, and income, if any,
generated by CAC and CCE.
Borrowings under the HC Crown Note are subject to certain financial and
nonfinancial covenants and restrictions, including the maintenance of a ratio
of debt (excluding the HC Crown Note) to adjusted consolidated annualized
operating cash flow, as defined, not to exceed 6.75 to 1 at December 31, 1997.
In addition to the subordination in right of payment provisions contained in
the HC Crown Note, the HC Crown Note is subject to a subordination agreement in
favor of senior bank debt of CCE-I. Pursuant to the subordination agreement,
substantially all rights and remedies under the HC Crown Note, including the
rights to accelerate the maturity upon an event of default (including a payment
of default), are suspended until the obligations under the Credit Agreement (as
defined herein), are paid in full.
F-35
<PAGE> 67
8. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Credit Agreement:
Term loans $274,120,000 $280,000,000
Fund loans 85,000,000 85,000,000
Revolving credit facility 103,800,000 103,000,000
------------ ------------
462,920,000 468,000,000
Less- Current maturities (25,625,000) (5,880,000)
------------ ------------
$437,295,000 $462,120,000
============ ============
</TABLE>
CCE-I maintains a credit agreement (the "Credit Agreement"), which terminates
in June 2004, with a consortium of banks for borrowings up to $505.0 million,
consisting of a revolving credit facility of $140.0 million, term loans
totaling $280.0 million and fund loans totaling $85.0 million. The debt bears
interest, at CCE-I's option, at rates based upon the Base Rate, as defined in
the Credit Agreement, LIBOR or prevailing bid rates of certificates of deposit
plus the applicable margin based upon CCE-I's leverage ratio at the time of the
borrowings. The variable interest rates ranged from 7.63% to 8.50% and 7.63%
to 8.38% at December 31, 1997 and 1996, respectively.
Borrowings under the Credit Agreement are Collateralized by the assets of
CCE-I. In addition, CAC, CCE and CCT Holdings have pledged their partnership
interests as additional security to the Credit Agreement.
Borrowings under the 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 6.0 to 1 at
December 31, 1997. A quarterly commitment fee of 0.375% per annum is payable on
the unused portion of the Credit Agreement.
Commencing September 30, 1997, and at the end of each calendar quarter
thereafter, available borrowings under the revolving credit facility shall be
reduced on an annual basis by 9.0% in 1998, 12.0% in 1999, 12.3% in 2000, 16.5%
in 2001 and 20.3% in 2002.
In addition to the foregoing, effective April 30, 1999, and on each April 30th
thereafter, CCE-I is required to make a repayment of principal of the term
loans and fund loans (pro rata) in an amount equal to 75% of Annual Excess Cash
Flow, as defined in the Credit Agreement, for the preceding year if the
leverage ratio is greater than 5.5 to 1, or 50% of Annual Excess Cash Flow if
the leverage ratio is less than 5.5 to 1.
Based upon outstanding indebtedness at December 31, 1997, and the amortization
of term loans and fund loans, and scheduled reductions in available borrowings
depicted above, aggregate future principal payments on the Credit Agreement at
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------------
<S> <C>
1998 $ 25,625,000
1999 34,025,000
2000 48,440,000
2001 70,150,000
2002 85,900,000
Thereafter 198,780,000
------------
$462,920,000
============
</TABLE>
F-36
<PAGE> 68
9. 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
------------ -------- -------------
<S> <C> <C> <C>
Debt
CCE-I Credit Agreement $462,920,000 $ - $462,920,000
HC Crown Note (including accrued interest) 118,919,412 - 118,587,000
Interest Rate Hedge Agreements
Swaps - 230,000,000 (499,883)
Caps - 120,000,000 891
Collars - 120,000,000 (229,282)
<CAPTION>
1996
---------------------------------------------
Carrying Notional Fair
Value Amount Value
------------ ---------------- -------------
<S> <C> <C> <C>
Debt
CCE-I Credit Agreement $468,000,000 $ - $468,000,000
HC Crown Note (including accrued interest) 104,843,402 - 89,500,000
Interest Rate Hedge Agreements
Swaps - 150,000,000 1,005,654
Caps - 100,000,000 28,111
</TABLE>
As the CCE-I Credit Agreement bears interest at current market rates, its
carrying amount approximates fair market value at December 31, 1997 and 1996.
Fair value of the HC Crown Note is based upon trading activity at December 31,
1997 and 1996.
The weighted average interest pay rates for interest rate swap agreements were
7.78% and 7.61% at December 31, 1997 and 1996, respectively. The weighted
average interest rates for interest rate cap agreements was 8.49% at December
31, 1997 and 1996. The weighted average interest rates for interest rate
collar agreements were 9.04% and 7.53% 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 CCE-I's exposure
through its use of 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 CCE-I 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 CCE-I's interest rate hedge agreements.
F-37
<PAGE> 69
Management believes that the sellers of the interest rate hedge agreements will
be able to meet their obligations under the agreements. CCE-I 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 CCE-I.
10. RELATED-PARTY TRANSACTIONS:
Charter provides management services to CCE-I under the terms of a contract
which provides for annual base fees equal to $4,845,000 as of December 31, 1997
and 1996, plus an additional fee equal to 30% of the excess, if any, of
operating cash flow (as defined in the management agreement) over the projected
operating cash flow for the year. Payment of the additional fee is deferred
until termination of the Credit Agreement due to restrictions provided within
the Credit Agreement. Deferred management fees bear interest at 8% per annum.
The additional fees bonus for the year ended December 31, 1997, 1996 and 1995,
totaled approximately $1,897,000, $1,137,000 and $1,003,000, respectively. In
addition, CCE-I receives financial advisory services from an affiliate of Kelso
under terms of a contract which provides for fees equal to $552,500 at December
31, 1997, 1996 and 1995. These agreements were amended during 1996 and 1995 in
conjunction with each acquisition of cable television systems to increase the
annual base fees for Charter and Kelso. Expenses recognized by CCE-I under
these contracts during 1997, 1996 and 1995 were $6,700,813, $5,034,375 and
$6,499,167, respectively. Management and financial advisory service fees
currently payable of $1,211,250 and $1,181,300 are included in Payables to
manager of cable television systems at December 31, 1997 and 1996,
respectively.
CCE-I pays certain acquisition advisory fees to an affiliate of Kelso and
Charter, which typically equal approximately 1% of the total purchase price
paid for cable television systems acquired. Total acquisition fees paid to the
affiliate of Kelso in 1997, 1996 and 1995 were $-0-, $1,400,000 and $5,250,000,
respectively. Total acquisition fees paid to Charter in 1997, 1996 and 1995
were $-0-, $1,400,000 and $95,000, respectively.
CCE-I and all entities managed by Charter collectively utilize a combination of
insurance coverage and self-insurance programs for medical, dental and workers'
compensation claims. CCE-I 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
CCE-I. During 1997, 1996 and 1995, CCE-I expensed approximately $1,451,500,
$1,401,300 and $840,000, respectively, relating to insurance allocations.
Beginning in 1996, CCE-I and other entities managed by Charter 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 to CCE-I and other affiliated
entities. The cost of these services is allocated based on the number of
subscribers. Management considers this allocation to be reasonable for the
operations of CCE-I. During 1997 and 1996, CCE-I expensed approximately
$466,300 and $340,600, respectively, relating to these services.
In 1996, certain of CCE-I and CCE-II's employees became participants in the
1996 Charter Communications/Kelso & Company 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 affiliates of Kelso and managed by Charter (collectively, the
"Investment Group").
CCE-I maintains a regional office. The regional office performs certain
operational services on behalf of CCE-I and other affiliated entities. The
cost of these services is allocated to CCE-I and affiliated entities based on
their number of subscribers. Management considers this allocation to be
reasonable for the operations of CCE-I. During 1997, 1996 and 1995, CCE-I
expensed approximately $861,000, $799,400 $512,000, respectively, relating to
these services.
CCE-II has similar arrangements as discussed above, which have been reflected
in CCE-II's results of operations.
F-38
<PAGE> 70
11. COMMITMENTS AND CONTINGENCIES:
Leases
CCE-I leases certain facilities and equipment under noncancellable operating
leases. Rent expense incurred under these leases during 1997, 1996 1995 and
was approximately $431,800, $617,600 and $533,000, respectively.
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1998 $494,700
1999 292,200
2000 182,600
2001 130,000
2002 61,800
Thereafter 287,700
</TABLE>
CCE-I rents utility poles in its operations. Generally, pole rental agreements
are short term, but CCE-I anticipates that such rentals will recur. Rent
expense for pole attachments during 1997, 1996 and 1995 was approximately
$1,914,400, $1,773,100 and $1,363,000, respectively.
Litigation
CCE-I is a named defendant in a purported class action lawsuit filed on October
20, 1995, on behalf of the Cencom Cable Income Partners, L.P. (CCIP) limited
partners, which was filed in the Chancery Court of New Castle County, Delaware
(the "Action"). The Action named as defendants the general partner of CCIP,
the purchasers of all the systems previously owned by CCIP (which includes
CCE-I and certain other entities whose systems are managed by Charter), Charter
and certain individuals, including the directors and executive officers of the
general partner of CCIP. On February 15, 1996, the Court of Chancery of the
State of Delaware in and for New Castle County dismissed all of the plaintiff's
claims for injunctive relief (including that which sought to prevent the
consummation of the Illinois system acquisition); the plaintiff's claims for
money damages which may have resulted from the sale by CCIP of its assets
(including the Illinois system acquired by CCE-I) remain pending. Based upon,
among other things, the advice of counsel, each of the defendants to the Action
believe the Action to be without merit and is contesting it vigorously. 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 in January 1997, filed a
motion for summary judgment to dismiss all remaining claims in the Action. In
October 1997, the court granted in part and denied in part defendants motion
for summary judgment, the effect of which narrowed the remaining issues
significantly. The plaintiff filed a motion to alter or amend the court order
which was denied. There can be no assurance, however, that the plaintiff will
not be awarded damages, some or al of which may be payable by CCE-I, in
connection with the Action.
CCE is a named defendant in two actions involving an affiliate of Charter,
Cencom Cable Income Partners II, L.P. (CCIP II), a publicly limited
partnership. In April 15, 1997, a petition was filed, and two amended
petitions subsequently filed, in the Circuit Court of Jackson County, Missouri,
by plaintiffs who are limited partners of CCIP II against Cencom Properties II,
Inc. (Cencom Properties II), the general partner of CCIP II, Cencom Partners,
Inc., the general partner of Cencom Partners, L.P. (CPLP), an entity in which
CCIP II invested, certain named brokerage firms involved in the original sale
of the limited partnership units and CCE. CCE provided management services to
both CCIP II and CPLP and also owned all of the stock of the general partners
of each of these partnerships prior to mid-1994. The plaintiffs alleged that
the defendants breached fiduciary duties and the terms of the CCIP II
partnership agreement in connection
F-39
<PAGE> 71
with the investment in CPLP, the management of certain CCIP II assets and the
sale of certain CCIP II assets. By an agreement between the parties, the
brokerage defendants and the fraud allegations in the sale of the units were
dismissed without prejudice. The plaintiffs seek recovery of the consideration
paid for their partnership units, restitution of all profits received by the
defendants in connection with the CCIP II transaction and punitive damages. On
June 10, 1997, a purported class action was filed in the Court of Chancery of
the State of Delaware, in and for New Castle County on behalf of the limited
partners of CCIP II against Cencom Properties II, CCE, Charter, certain other
entities whose systems are managed by Charter and certain individuals,
including officers of Charter or Cencom Properties II. The plaintiffs allege
that the defendants breached fiduciary duties and the terms of the CCIP II
partnership agreement in connection with the investment in CPLP, the management
of certain CCIP II assets and the sale of certain CCIP II assets. In November
1997, the plaintiffs amended their complaint to restate their allegations as a
shareholders' derivation claim. The damages claimed by the plaintiffs are
unspecified. CCE believes that it has meritorious defenses in both actions.
CCE intends to defend the actions vigorously. CCE is not able at this stage to
project the expenses which will be associated with the actions or to predict
any potential outcome or financial impact.
On October 20, 1997, a purported class action was filed in St. Louis County
Circuit under the name Gerald Ortbals v. Charter Communications, on behalf of
all persons residing in Missouri who are or were residential subscribers of
CCE-I cable television service, and who have been charged a processing fee for
delinquency payment of their cable bill. The action challenges the legality of
CCE-I's processing fee and seeks declaratory judgment, injunctive relief and
unspecified damages. CCE-I believes the lawsuit to be without merit and
intends to defend the action vigorously. CCE-I is not able at this stage to
project the expense which will be associated with this action or to predict any
potential outcome or financial impact.
The Company 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
Company's consolidated financial position or results of operations.
12. 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.
Management believes that CCE-I and CCE-II have 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 CCE-I and CCE-II are
unable to justify their rates through a benchmark or 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 CCE-I and CCE-II in the event
certain of their 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 Company.
F-40
<PAGE> 72
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 CCE-I and CCE-II. 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 or results of operations of the
Company.
13. INCOME TAXES:
CAC is part of the CCA Holdings consolidated group which files a consolidated
federal income tax return. Deferred tax assets and liabilities are recognized
for the estimated future tax consequence attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred income tax assets and liabilities are
measured using the enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. Deferred income
tax expense or benefit is the result of changes in the liability or asset
recorded for deferred taxes. A valuation allowance must be established for any
portion of a deferred tax asset for which it is more likely than not that a tax
benefit will not be realized.
During 1997, 1996 and 1995, changes in the Company's temporary differences and
losses from operations, which pertain primarily to depreciation and
amortization, resulted in deferred tax benefits which were offset by valuation
allowances of equal amounts.
No current provision (benefit) for income taxes was recorded during 1997, 1996
and 1995.
F-41
<PAGE> 73
Deferred taxes are comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable $ 182,000 $ 148,000
Covenant not to compete 6,400,000 6,933,000
Accrued expenses 2,593,000 2,119,000
Deferred revenue 586,000 283,000
Deferred management fees 1,615,000 856,000
Tax loss carryforwards 54,653,000 44,352,000
Valuation allowance (15,002,000) (21,528,000)
------------- ------------
Total deferred income tax assets 51,027,000 33,163,000
------------- ------------
Deferred income tax liabilities:
Property, plant and equipment (33,754,000) (37,191,000)
Franchise costs (61,366,000) (44,362,000)
Investment in unconsolidated limited partnerships (5,484,000) (3,767,000)
Minority interest in subsidiary (5,923,000) (3,343,000)
------------- ------------
Total deferred income tax liabilities (106,527,000) (88,663,000)
------------- ------------
Net deferred income tax liability $ (55,500,000) $(55,500,000)
============= ============
</TABLE>
As of December 31, 1997, the Company had net operating loss (NOL) carryforwards
for regular income tax purpose aggregating approximately $136.6 million, which
expire in various years through 2011. Utilization of the NOLs is subject to
certain limitations.
14. DISCONTINUED OPERATION:
CCE-I sold its radio operation maintained by its former subsidiary, Charter
Communications Radio St. Louis, LLC. CCE-I recorded the proceeds from the sale
in the form of a note receivable from the purchasers of $2.1 million.
The net losses of this operation prior to December 31, 1996, are included in
the consolidated statement of operations under "Loss from discontinued
operation." Revenues from such operation were $1,532,572 for the period then
ended. The noncurrent net assets of this operation are comprised primarily of
property, plant and equipment, license fees and other deferred costs. No
material gain or loss was incurred in connection with the disposition of these
net assets.
15. EMPLOYEE BENEFIT PLANS:
CCE-I'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.
CCE-I contributes an amount equal to 50% of the first 5% contributed by each
employee. During 1997, 1996 and 1995, CCE-I contributed approximately
$308,000, $269,900 and $177,000 to the 401(k) Plan, respectively.
F-42
<PAGE> 74
In 1996, certain CCE-I employees became participants in the 1996 Charter
Communications/Kelso & Company 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
affiliates of Kelso and managed by Charter. The obligation and related
expenses of the Appreciation Rights Plan are the responsibility of and have
been recorded (pro rata) at CCA Holdings and CCT Holdings.
16. SIGNIFICANT NONCASH TRANSACTION:
The Company engaged in the following significant noncash transaction:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Issuance of note receivable for sale of
radio operation (see Note 14) $2,100,000 $ - $ -
</TABLE>
F-43
<PAGE> 75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cencom Cable Entertainment, Inc.:
We have audited the accompanying balance sheets of Cencom Cable Entertainment,
Inc. (a Delaware corporation) as of December 31, 1997 and 1996, and the related
statements of operations, shareholder's investment (deficit) and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company'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 Cencom Cable Entertainment,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
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-44
<PAGE> 76
CENCOM CABLE ENTERTAINMENT, INC.
BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
INVESTMENT IN UNCONSOLIDATED LIMITED PARTNERSHIP $ 108,478,907 $ 122,582,298
------------- -------------
$ 108,478,907 $ 122,582,298
============= =============
LIABILITIES AND SHAREHOLDER'S INVESTMENT (DEFICIT)
NOTE PAYABLE $ 82,000,000 $ 82,000,000
------------- -------------
ACCRUED INTEREST ON NOTE PAYABLE 36,919,412 22,843,403
------------- -------------
DEFERRED INCOME TAXES 55,500,000 55,500,000
------------- -------------
SHAREHOLDER'S INVESTMENT (DEFICIT):
Common stock, $1 par value, 300,000 shares authorized; 245,973 shares issued
and outstanding 245,973 245,973
Additional paid-in capital 21,954,139 21,954,139
Accumulated deficit (88,140,617) (59,961,217)
------------- -------------
Total shareholder's investment (deficit) (65,940,505) (37,761,105)
------------- -------------
$ 108,478,907 $ 122,582,298
============= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-45
<PAGE> 77
CENCOM CABLE ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
EQUITY IN LOSS OF UNCONSOLIDATED LIMITED
PARTNERSHIP $(14,103,391) $(14,536,801) $(22,581,013)
INTEREST EXPENSE (14,076,009) (12,404,598) (10,438,805)
------------ ------------ ------------
Net loss $(28,179,400) $(26,941,399) $(33,019,818)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE> 78
CENCOM CABLE ENTERTAINMENT, INC.
STATEMENTS OF SHAREHOLDER'S INVESTMENT (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
------- ------------ ------------- ------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1995 $ 245,973 $ 21,954,139 $ - $ 22,200,112
Net loss - - (33,019,818) (33,019,818)
---------- -------------- ------------- ------------
BALANCE, December 31, 1995 245,973 21,954,139 (33,019,818) (10,819,706)
Net loss - - (26,941,399) (26,941,399)
---------- -------------- ------------- ------------
BALANCE, December 31, 1996 245,973 21,954,139 (59,961,217) (37,761,105)
Net loss - - (28,179,400) (28,179,400)
---------- -------------- ------------- ------------
BALANCE, December 31, 1997 $ 245,973 $ 21,954,139 $(88,140,617) $(65,940,505)
========= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE> 79
CENCOM CABLE ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(28,179,400) $(26,941,399) $(33,019,818)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Equity in loss of unconsolidated limited partnership 14,103,391 14,536,801 22,581,013
Changes in assets and liabilities-
Accrued interest on note payable 14,076,009 12,404,598 10,438,805
------------ ------------ ------------
Net cash provided by operating activities - - -
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES - - -
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES - - -
------------ ------------ ------------
CASH, beginning and end of year $ - $ - $ -
============ ============ ============
CASH PAID FOR INTEREST $ - $ - $ -
============ ============ ============
CASH PAID FOR TAXES, net of refunds $ - $ - $ -
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-48
<PAGE> 80
CENCOM CABLE ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Cencom Cable Entertainment, Inc. (CCE or the "Company") is a wholly owned
subsidiary of CCA Acquisition Corp. (CAC). CAC is a wholly owned subsidiary of
CCA Holdings Corp. (CCA Holdings). CCA Holdings is approximately 85% owned by
Kelso Investment Associates V, L.P., an investment fund, together with an
affiliate (collectively referred to as "Kelso" herein) and certain other
individuals and approximately 15% by Charter Communications, Inc. (Charter),
manager of Charter Communications Entertainment I, L.P.'s (CCE-I) and Charter
Communications Entertainment II, L.P.'s (CCE-II) cable television systems.
In January 1995, CAC completed certain acquisitions, including stock and asset
acquisitions of CCE and cable television systems located in Connecticut from
Crown Media, Inc. (Crown), a subsidiary of Hallmark Cards, Incorporated
(Hallmark) (the "Crown Transaction"). CCE's assets were comprised primarily of
cable television systems serving communities in St. Louis County, Missouri (the
"Missouri System"). On September 29, 1995, CAC and CCT Holdings Corp. (CCT
Holdings), an entity affiliated with CCA Holdings by common ownership, entered
into an Asset Exchange Agreement whereby CAC exchanged a 1% undivided interest
in all of its assets (including CCE's assets) for a 1.22% undivided interest in
certain assets to be acquired by CCT Holdings from an affiliate of Gaylord
Entertainment Company, Inc. (Gaylord). In September 1995, CCT Holdings acquired
certain cable television systems from Gaylord. Upon execution of the Asset
Purchase Agreement, CAC and CCT Holdings entered into a series of agreements to
contribute their assets to Charter Communications Entertainment, L.P. (CCE,
L.P.). CCE, L.P. contributed the assets acquired under the Crown Transaction to
CCE-I and certain assets acquired in the Gaylord acquisition to CCE-II.
The series of transactions representing the contribution of assets to CCE-I
acquired under the Crown Transaction is a reorganization of entities under
common control and has been accounted for in a manner similar to a pooling of
interests. Accordingly, CCE-I's financial statements reflect the activity of
these systems for the entire year ended December 31, 1995. Thus, the net loss of
CCE-I generated by the Missouri System for the period prior to September 9,
1995, was allocated entirely to CCE.
As a result of these transactions, CCE owns a 33% limited partnership interest
in CCE, L.P., CAC owns a 21% limited partnership interest in CCE, L.P. and CCT
Holdings owns a 44% limited partnership interest in CCE, L.P. In addition, CAC
and CCT Holdings each own a 1% general partnership interest in CCE, L.P.
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.
F-49
<PAGE> 81
2. INVESTMENT IN UNCONSOLIDATED LIMITED PARTNERSHIP:
CCE has a 33% limited partnership interest in CCE, L.P. CCE, L.P. is controlled
by CAC and CCT Holdings through their general partnership interests and
provisions within CCE, L.P.'s partnership agreement, therefore, CCE's investment
is accounted for using the equity method of accounting. Under this method, the
investment is originally recorded at cost and is subsequently adjusted to
recognize CCE's share of net earnings or losses as they occur and distributions
when received.
Summary financial information of CCE-I and CCE-II as of December 31, 1997 and
1996, and for the years then ended, and for the year ended December 31, 1995,
for CCE-I, and for the period from inception (April 20, 1995) to December 31,
1995, for CCE-II which is not consolidated with the operating results of the
Company, is as follows:
<TABLE>
<CAPTION>
CCE-I
----------------------------------------
As of December 31
----------------------------------------
1997 1996
------------ -------------
<S> <C> <C>
Current assets $ 8,654,394 $ 8,999,959
Noncurrent assets - primarily investment in cable
television properties 629,918,900 657,011,095
------------- -------------
Total assets $ 638,573,294 $ 666,011,054
============= =============
Current liabilities $ 50,343,028 $ 28,518,335
Long-term debt 437,295,000 462,120,000
Other long-term liabilities 5,502,274 2,848,479
Partners' capital 145,432,992 172,524,240
------------- -------------
Total liabilities and partners' capital $ 638,573,294 $ 666,011,054
============= =============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1997 1996 1995
-------------- ------------ ------------
<S> <C> <C> <C>
Service revenues $ 169,324,522 $143,023,261 $ 99,689,410
============= ============ ============
Income (loss) from continuing operations $ 11,619,225 $ 1,106,166 $ (6,946,137)
============= ============ ============
Net loss $ (27,091,248) $(35,552,609) $(31,423,151)
============= ============ ============
</TABLE>
As of December 31, 1997, CCE-I provided cable television service to
approximately 350,300 basic subscribers in Connecticut, Illinois, Massachusetts
and New Hampshire.
F-50
<PAGE> 82
<TABLE>
<CAPTION>
CCE-II
----------------------------------
As of December 31
----------------------------------
1997 1996
------------ ---------------
<S> <C> <C>
Current assets $ 5,482,625 $ 10,904,830
Noncurrent assets - primarily investment in cable
television properties 362,850,452 338,316,421
------------- -------------
Total assets $ 368,333,077 $ 349,221,251
============= =============
Current liabilities $ 14,269,423 $ 12,949,304
Long-term debt 228,500,000 194,000,000
Other long-term liabilities 29,888,353 27,949,964
Partners' capital 95,675,301 114,321,983
------------- -------------
Total liabilities and partners' capital $ 368,333,077 $ 349,221,251
============= =============
</TABLE>
<TABLE>
<CAPTION>
Period Ended December 31
-------------------------------------------------
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Service revenues $ 96,659,228 $ 90,368,332 $ 21,156,209
============= ============= ============
Income from operations $ 1,603,828 $ 5,039,834 $ 983,638
============= ============= ============
Net loss $ (18,646,682) $ (11,459,982) $ (3,458,535)
============= ============= ============
</TABLE>
As of December 31, 1997, CCE-II provided cable television service to
approximately 173,000 basic subscribers in southern California.
3. NOTE PAYABLE:
In connection with the Crown Transaction, the Company issued a guarantee of
payment to the holder of the HC Crown Note. Accordingly, the debt has been
reflected as a liability of the Company in the accompanying financial
statements. The HC Crown Note is also guaranteed by CAC and CCE, L.P. The HC
Crown Note is an unsecured obligation. The HC Crown Note is limited in aggregate
principal amount to $82.0 million and has a stated maturity date of December 31,
1999 (the "Stated Maturity Date"). Interest accrues at 13% per annum, compounded
semiannually, but is not due and payable until the Stated Maturity Date. If
principal plus accrued interest is not paid at the Stated Maturity Date, or if
there are any other events of default, the annual rate at which interest accrues
will initially increase to 18% and will increase by an additional 2% on each
successive anniversary of the Stated Maturity Date (up to a maximum of 26%)
until the HC Crown Note is repaid. In addition, a 3% default rate of interest
can, in certain instances, be in effect simultaneously with the stated rate of
interest on the HC Crown Note. The HC Crown Note is redeemable in whole or in
part at the option of CCA Holdings at any time, without premium or penalty,
provided that accrued interest is paid on the portion of the HC Crown Note so
redeemed.
F-51
<PAGE> 83
Borrowings under the HC Crown Note are subject to certain financial and
nonfinancial covenants and restrictions, including the maintenance of a ratio of
debt (excluding the HC Crown Note) to adjusted consolidated annualized operating
cash flow, as defined, not to exceed 6.75 to 1 at December 31, 1997. In addition
to the subordination in right of payment provisions contained in the HC Crown
Note, the HC Crown Note is subject to a subordination agreement in favor of the
senior bank debt of CCE-I. Pursuant to the subordination agreement,
substantially all rights and remedies under the HC Crown Note, including the
rights to accelerate the maturity upon an event of default (including a payment
of default), are suspended until the obligations under CCE-I's Credit Agreement
(the "CCE-I Credit Agreement") are paid in full.
The HC Crown Note is subordinated to the CCE-I Credit Agreement. Pursuant to the
terms of the CCE-I Credit Agreement, payments on the HC Crown Note are
prohibited until the indefeasible payment in full in cash, and the termination
of commitments to lend under the CCE-I Credit Agreement. The HC Crown Note will
not have the benefit of any distributions from CCE-II until repayment in full of
CCE-II's credit facility (the "CCE-II Credit Agreement") and the Gaylord Note.
The obligations owing on the HC Crown Note are guaranteed by CAC, CCE and CCE,
L.P. (collectively referred to as the "Guarantors"). The CCE, L.P. guarantee
cannot be enforced until the repayment in full and termination of the CCE-I
Credit Agreement and the CCE-II Credit Agreement. The CAC and CCE guarantees
cannot be enforced until the repayment in full and termination of the CCE-I
Credit Agreement. The guarantees, by their terms, are limited to the proceeds of
distributions received from CCE-I and income, if any, generated by the
Guarantors. CCA Holdings and the Guarantors are dependent primarily upon
distributions from CCE-I to service the HC Crown Note.
The fair value of the HC Crown Note plus accrued interest, based upon trading
activity, was approximately $118.6 million and $89.5 million at December 31,
1997 and 1996, respectively.
4. COMMITMENTS AND CONTINGENCIES:
Litigation
CCE-I is a named defendant in a purported class action lawsuit filed on
October 20, 1995, on behalf of the Cencom Cable Income Partners, L.P. (CCIP)
limited partners, which was filed in the Chancery Court of New Castle County,
Delaware (the "Action"). The Action named as defendants the general partner of
CCIP, the purchasers of all the systems previously owned by CCIP (which includes
CCE-I and certain other entities managed by Charter), Charter and certain
individuals, including the directors and executive officers of the general
partner of CCIP. On February 15, 1996, the Court of Chancery of the State of
Delaware in and for New Castle County dismissed all of the plaintiff's claims
for injunctive relief (including that which sought to prevent the consummation
of the Illinois system acquisition); the plaintiff's claims for money damages
which may have resulted from the sale by CCIP of its assets (including the
Illinois system) remain pending. Based upon, among other things, the advice of
counsel, each of the defendants to the Action believes the Action to be without
merit and is contesting it vigorously. 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 are
legally inadequate and in January 1997, filed a motion for summary judgment to
dismiss all remaining claims in the Action. In October 1997, the court granted
in part and denied in part defendants motion for summary judgment, the effect of
which narrowed the remaining issues significantly. The plaintiff filed a motion
to alter or amend the court's order which was denied. There can be no assurance,
however, that the plaintiff will not be awarded damages, some or all of which
may be payable by CCE-I, in connection with the Action.
CCE is a named defendant in two actions involving Cencom Cable Income
Partners II, L.P. (CCIP II), a public limited partnership. On April 15, 1997, a
petition was filed, and two amended petitions subsequently filed, in the Circuit
Court of Jackson County, Missouri, by plaintiffs who are limited partners of
CCIP II against Cencom Properties II, Inc. (Cencom Properties II), the general
partner of CCIP II, Cencom Partners Inc., the general partner of Cencom
Partners, L.P. (CPLP), an entity in which CCIP II invested, certain named
brokerage firms involved in the original sale of the limited partnership units
and CCE. CCE provided management services to both CCIP II and CPLP and also
owned all of the stock of the general
F-52
<PAGE> 84
partners of each of these partnerships prior to mid-1994. The plaintiffs allege
that the defendants breached fiduciary duties and the terms of the CCIP II
partnership agreement in connection with the investment in CPLP, the management
of certain CCIP II assets and the sale of certain CCIP II assets. By an
agreement between the parties, the brokerage defendants and the fraud
allegations in the sale of the units were dismissed without prejudice. The
plaintiffs seek recovery of the consideration paid for their partnership units,
restitution of all profits received by the defendants in connection with the
CCIP II transaction and punitive damages. On June 10, 1997, a purported class
action was filed in the Court of Chancery of the State of Delaware, in and for
New Castle County on behalf of the limited partners of CCIP II against Cencom
Properties II, CCE, Charter, certain other entities managed by Charter and
certain individuals, including officers of Charter or Cencom Properties II. The
plaintiffs allege that the defendants breached fiduciary duties and the terms of
the CCIP II partnership agreement in connection with the investment in CPLP, the
management of certain CCIP II assets and the sale of certain CCIP II assets. In
November 1997, the plaintiffs amended their complaint to restate their
allegations as a shareholders' derivative claim. The damages claimed by the
plaintiffs are unspecified. CCE believes that it has meritorious defenses in
both actions and intends to defend the actions vigorously. CCE is not able at
this stage to project the expenses which will be associated with the actions or
to predict any potential outcome or exposure.
On October 20, 1997, a purported class action was filed in St. Louis County
Circuit Court under the name Gerald Ortbals v. Charter Communications, on behalf
of all persons residing in Missouri who are or were residential subscribers of
CCE-I cable television service, and who have been charged a processing fee for
delinquent payment of their cable bill. The action challenges the legality of
CCE-I's processing fee and seeks declaratory judgment, injunctive relief and
unspecified damages. CCE-I believes the lawsuit to be without merit and intends
to defend the action vigorously. CCE-I is not able, at this early stage, to
project the expenses which will be associated with this action or to predict any
potential outcome or financial impact.
The Company 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
Company's financial position or results of operations.
5. RATE 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.
While management believes that CCE-I and CCE-II have 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 CCE-I and CCE-II are unable
to justify their rates through a benchmark or 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 CCE-I and CCE-II in the event certain of their
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 financial position or
results of operations of the Company.
F-53
<PAGE> 85
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,
telecommunication and other services. Under the Telecommunications Act,
telephone companies can complete 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 CCE-I and CCE-II. 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 financial position or results of operations of the Company.
6. INCOME TAXES:
CCE is part of the CCA Holdings consolidated group which files consolidated tax
returns. Deferred tax assets and liabilities are recognized for the estimated
future tax consequence attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their
respective tax bases. Deferred income tax assets and liabilities are measured
using the enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Deferred income tax expense
or benefit is the result of changes in the liability or asset recorded for
deferred taxes. A valuation allowance must be established for any portion of a
deferred tax asset for which it is more likely than not that a tax benefit will
not be realized.
During 1997 and 1996, changes in the Company's temporary differences and losses
from operations, resulted in deferred tax benefits of approximately $6.7 million
and $6.1 million, respectively. These amounts were offset by valuation
allowances of equal amounts.
No current provision (benefit) for income taxes was recorded during 1997 and
1996.
Deferred income taxes are comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards $ 29,562,000 $ 24,046,000
Valuation allowance (12,973,000) (6,843,000)
------------ ------------
Total deferred income tax assets 16,589,000 17,203,000
Deferred income tax liability:
Investment in unconsolidated limited partnership (72,089,000) (72,703,000)
-------------- --------------
Net deferred income tax liability $(55,500,000) $(55,500,000)
============ ============
</TABLE>
At December 31, 1997, the Company had net operating loss (NOL) carryforwards for
regular income tax purposes aggregating approximately $73.9 million, which
expire in various years through 2011. Utilization of the NOLs is subject to
certain limitations.
F-54
<PAGE> 86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Entertainment, L.P.:
We have audited the accompanying balance sheets of Charter Communications
Entertainment, L.P. (a Delaware limited partnership) as of December 31, 1997 and
1996, and the related statements of operations, partners' capital (deficit) and
cash flows for each of the three years in the period ended December 31, 1997.
These 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
Entertainment, L.P. as of December 31, 1997 and 1996, and the results of its
operations and its 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-55
<PAGE> 87
CHARTER COMMUNICATIONS ENTERTAINMENT, L.P.
BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
ASSETS
------
<S> <C> <C>
INVESTMENTS IN UNCONSOLIDATED LIMITED PARTNERSHIPS $235,132,242 $279,854,790
SUBORDINATED NOTE RECEIVABLE FROM UNCONSOLIDATED LIMITED PARTNERSHIP
25,000,000 25,000,000
INTEREST RECEIVABLE FROM UNCONSOLIDATED LIMITED PARTNERSHIP
4,403,000 2,418,000
------------ ------------
$264,535,242 $307,272,790
============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
-------------------------------------------
NOTE PAYABLE $ 82,000,000 $ 82,000,000
ACCRUED INTEREST ON NOTE PAYABLE 36,919,412 22,843,403
PARTNERS' CAPITAL (DEFICIT):
General partners (3,836,797) 624,614
Limited partners-
Ordinary Capital Accounts (64,759,988) 10,543,510
Preferred Capital Account 214,212,615 191,261,263
------------ ------------
Total partners' capital 145,615,830 202,429,387
------------ ------------
$264,535,242 $307,272,790
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-56
<PAGE> 88
CHARTER COMMUNICATIONS ENTERTAINMENT, L.P.
STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
EQUITY IN LOSS OF UNCONSOLIDATED LIMITED PARTNERSHIPS $(44,722,548) $(45,968,911) $(34,730,760)
INTEREST EXPENSE (14,076,009) (12,404,598) (10,438,805)
INTEREST INCOME - UNCONSOLIDATED LIMITED PARTNERSHIP 1,985,000 1,918,000 500,000
------------ ------------ ------------
Net loss (56,813,557) (56,455,509) (44,669,565)
PREFERRED RETURN (22,951,352) (20,492,278) (5,081,095)
------------ ------------ ------------
(79,764,909) (76,947,787) (49,750,660)
------------ ------------ ------------
NET LOSS ALLOCATION:
General partners (4,461,411) (4,303,844) (2,782,632)
Limited partners - Preferred Capital Account - - -
------------ ------------ ------------
(4,461,411) (4,303,844) (2,782,632)
------------ ------------ ------------
NET LOSS APPLICABLE TO LIMITED PARTNERS -
ORDINARY CAPITAL ACCOUNTS $(75,303,498) $(72,643,943) $(46,968,028)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-57
<PAGE> 89
CHARTER COMMUNICATIONS ENTERTAINMENT, L.P.
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Limited Partners
-----------------------------
Ordinary Preferred
General Capital Capital
Partners Accounts Account Total
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1995 $ - $ - $ - $ -
Partners' capital contributions 7,711,090 130,155,481 165,687,890 303,554,461
Net loss (2,498,438) (42,171,127) - (44,669,565)
Preference allocation (284,194) (4,796,901) 5,081,095 -
----------- ------------ ------------ ------------
BALANCE, December 31, 1995 4,928,458 83,187,453 170,768,985 258,884,896
Net loss (3,157,670) (53,297,839) - (56,455,509)
Preference allocation (1,146,174) (19,346,104) 20,492,278 -
----------- ------------ ------------ ------------
BALANCE, December 31, 1996 624,614 10,543,510 191,261,263 202,429,387
Net loss (3,177,696) (53,635,861) - (56,813,557)
Preference allocation (1,283,715) (21,667,637) 22,951,352 -
----------- ------------ ------------ ------------
BALANCE, December 31, 1997 $(3,836,797) $(64,759,988) $214,212,615 $145,615,830
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE> 90
CHARTER COMMUNICATIONS ENTERTAINMENT, L.P.
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(56,813,557) $56,455,509) $ 44,669,565)
Adjustments to reconcile net loss to net cash provided by
operating activities- Equity in loss of unconsolidated
limited partnerships 44,722,548 45,968,911 34,730,760
Changes in assets and liabilities-
Interest receivable from unconsolidated limited partnership (1,985,000) (1,918,000) (500,000)
Accrued interest on note payable 14,076,009 12,404,598 10,438,805
------------ ----------- ------------
Net cash provided by operating activities - - -
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in unconsolidated limited partnerships - - (360,554,461)
------------ ----------- ------------
Net cash used in investing activities - - (360,554,461)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
General partners' contributions - - 7,711,090
Limited partners' contributions - - 295,843,371
Issuance of note receivable to unconsolidated limited partnership - - (47,000,000)
Payments on note receivable from unconsolidated limited partnership - - 22,000,000
Proceeds from note payable - - 82,000,000
------------ ----------- ------------
Net cash provided by financing activities - - 360,554,461
------------ ----------- ------------
CASH, beginning and end of year $ - $ - $ -
============ =========== ============
CASH PAID FOR INTEREST $ - $ - $ -
============ =========== ============
CASH PAID FOR TAXES, net of refunds $ - $ - $ -
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE> 91
CHARTER COMMUNICATIONS ENTERTAINMENT, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
In connection with a reorganization under common control, the assets of certain
cable television systems located in Connecticut and Missouri were contributed
from CCA Acquisition Corp. (CAC) and its wholly owned subsidiary, Cencom Cable
Entertainment, Inc. (CCE), respectively, to Charter Communications
Entertainment, L.P. (CCE, L.P. or the "Partnership"). CAC and CCE owned and
operated the systems during the first nine months of 1995. These systems were
contributed to a newly formed partnership, Charter Communications Entertainment
I, L.P. (CCE-I). The Partnership, CAC, CCE and CCE-I are all approximately 85%
owned by Kelso Investment Associates V, L.P., an investment fund, together with
an affiliate (collectively referred to as "Kelso" herein) and certain other
individuals, and approximately 15% by Charter Communications, Inc. (Charter),
manager of cable television systems. This series of transactions has been
accounted for in a manner similar to a pooling of interests. Accordingly, the
financial statements reflect the activity of these systems for the entire year
ended December 31, 1995.
In January 1995, CAC completed the acquisition of certain cable television
systems from Crown Media, Inc. (Crown), a subsidiary of Hallmark Cards,
Incorporated (Hallmark) (the "Crown Transaction"). In September 1995, CCT
Holdings Corp. (CCT Holdings) acquired certain cable television systems from
Gaylord Entertainment Company, Inc. (Gaylord). On September 29, 1995, CAC and
CCT Holdings, an entity affiliated by common ownership with CCA Holdings Corp.
(CCA Holdings), the parent company of CAC, entered into an Asset Exchange
Agreement whereby CAC exchanged a 1% undivided interest in all of its assets for
a 1.22% undivided interest in certain assets to be acquired by CCT Holdings from
an affiliate of Gaylord. Upon execution of the Asset Exchange Agreement, CAC and
CCT Holdings entered into a series of agreements to contribute the assets
acquired under the Crown Transaction to CCE-I and certain assets acquired in the
Gaylord acquisition to Charter Communications Entertainment II, L.P. (CCE-II).
As a result of entering into these agreements, CCA Holdings owns a 55% interest
and CCT Holdings owns a 45% interest in the operations of CCE-I and CCE-II,
respectively. The net loss of CCE-I for the period prior to September 29, 1995,
was allocated entirely to CCA Holdings.
As a result of these transactions, CCE owns a 33% limited partnership interest
in the Partnership, CAC owns a 21% limited partnership interest in the
Partnership and CCT Holdings owns a 44% limited partnership interest in the
Partnership. CAC and CCT Holdings each own a 1% general partnership interest in
the Partnership.
The Partnership will terminate no later than December 31, 2055, as provided in
its partnership agreement (the "Partnership Agreement").
Investment in Unconsolidated Limited Partnerships
The Partnership has a 97.78% limited partnership interest in both CCE-I and
CCE-II. CCE-I is controlled by CAC and CCE-II is controlled by CCT Holdings
through their general partnership interests and provisions within the various
partnership agreements; therefore, the Partnership's investment in these
entities is accounted for using the equity method of accounting. Under this
method, the investments are originally recorded at cost and are subsequently
adjusted to recognize the Partnership's share of net earnings or losses as they
occur and distributions when received.
F-60
<PAGE> 92
Income Taxes
Income taxes are the responsibility of the partners and as such are not provided
in the accompanying financial statements.
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. INVESTMENTS IN UNCONSOLIDATED LIMITED PARTNERSHIPS:
Summary financial information of CCE-I and CCE-II as of December 31, 1997 and
1996, and for the years then ended and for the year ended December 31, 1995, for
CCE-I, and the period from inception (April 20, 1995) to December 31, 1995, for
CCE-II, which is not consolidated with the operating results of the Partnership,
is as follows:
<TABLE>
<CAPTION>
CCE-I
------------------------------
As of December 31
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current assets $ 8,654,394 $ 8,999,959
Noncurrent assets - primarily investment in
cable television properties 629,918,900 657,011,095
------------ ------------
Total assets $638,573,294 $666,011,054
============ ============
Current liabilities $ 50,343,028 $ 28,518,335
Long-term debt 437,295,000 462,120,000
Other long-term liabilities 5,502,274 2,848,479
Partners' capital 145,432,992 172,524,240
------------ ------------
Total liabilities and partners'capital $638,573,294 $666,011,054
============ ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Service revenues $169,324,522 $143,023,261 $ 99,689,410
============ ============ ============
Income (loss) from continuing operations $ 11,619,225 $ 1,106,166 $ (6,946,137)
============ ============ ============
Net loss $(27,091,248) $(35,552,609) $(31,423,151)
============ ============ ============
</TABLE>
As of December 31, 1997, CCE-I provided cable television service to
approximately 350,300 basic subscribers in Connecticut, Illinois, Massachusetts,
Missouri and New Hampshire.
F-61
<PAGE> 93
<TABLE>
<CAPTION>
CCE-II
------------------------------
As of December 31
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Current assets $ 5,482,625 $ 10,904,830
Noncurrent assets - primarily investment in
cable television properties 362,850,452 338,316,421
------------ ------------
Total assets $368,333,077 $349,221,251
============ ============
Current liabilities $ 14,269,423 $ 12,949,304
Long-term debt 228,500,000 194,000,000
Other long-term liabilities 29,888,353 27,949,964
Partners' capital 95,675,301 114,321,983
------------ ------------
Total liabilities and partners' capital $368,333,077 $349,221,251
============ ============
</TABLE>
<TABLE>
<CAPTION>
Period Ended December 31
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Service revenues $ 96,659,228 $ 90,368,332 $ 21,156,209
============ ============ ============
Income from operations $ 1,603,828 $ 5,039,834 $ 983,638
============ ============ ============
Net loss $(18,646,682) $(11,459,982) $ (3,458,535)
============ ============ ============
</TABLE>
As of December 31, 1997, CCE-II provided cable television service to
approximately 173,000 basic subscribers in southern California.
3. SUBORDINATED NOTE RECEIVABLE FROM UNCONSOLIDATED LIMITED PARTNERSHIP:
In conjunction with the Gaylord acquisition, the Partnership issued a Promissory
Note (the "CCE-II Note") to CCE-II in the amount of $47.0 million. Immediately
upon closing of the acquisition, CCE-II used proceeds from borrowings under its
revolving credit and term loan facility (the "CCE-II Credit Agreement") to repay
$22.0 million on the CCE-II Note. All principal or interest amounts due under
the CCE-II Note are subordinated with respect to the CCE-II Credit Agreement.
The CCE-II Note matures on March 31, 2005. The CCE-II Note bears interest at an
annual rate equal to the weighted average interest rate payable on the loans
outstanding under the CCE-II Credit Agreement which was 7.82% and 7.66% during
1997 and 1996, respectively. The interest rates ranged from 7.00% to 7.96% and
7.19% to 7.75% at December 31, 1997 and 1996, respectively. At December 31, 1997
and 1996, the principal amount due under the CCE-II Note is included in
Subordinated note receivable from unconsolidated limited partnership and accrued
interest related to the CCE-II Note is included in Interest receivable from
unconsolidated limited partnership on the accompanying balance sheet.
F-62
<PAGE> 94
4. NOTE PAYABLE:
In connection with the Crown Transaction, the Partnership issued a guarantee of
payment to the holder of the HC Crown Note. Accordingly, the debt has been
reflected as a liability of the Partnership in the accompanying financial
statements. The HC Crown Note is also guaranteed by CAC and CCE. The HC Crown
Note is an unsecured obligation. The HC Crown Note is limited in aggregate
principal amount to $82.0 million and has a stated maturity date of December 31,
1999 (the "Stated Maturity Date"). Interes accrues at 13% per annum, compounded
semiannually, but is not due and payable until the Stated Maturity Date. If
principal plus accrued interest is not paid at the Stated Maturity Date, or if
there are any other events of default, the annual rate at which interest accrues
will initially increase to 18% and will increase by an additional 2% on each
successive anniversary of the Stated Maturity Date (up to 26%) until the HC
Crown Note is repaid; in addition, a 3% default rate of interest can, in certain
instances, be in effect simultaneously with the stated rate of interest on the
HC Crown Note. The HC Crown Note is redeemable in whole or in part at the option
of CCA Holdings at any time, without premium or penalty, provided that accrued
interest is paid on the portion of the HC Crown Note so redeemed.
Borrowings under the HC Crown Note are subject to certain financial and
nonfinancial covenants and restrictions, including the maintenance of a ratio of
debt (excluding the HC Crown Note) to adjusted consolidated annualized operating
cash flow, as defined, not to exceed 6.75 to 1 at December 31, 1997. In addition
to the subordination in right of payment provisions contained in the HC Crown
Note, the HC Crown Note is subject to a subordination agreement in favor of
senior bank debt of CCE-I. Pursuant to the subordination agreement,
substantially all rights and remedies under the HC Crown Note, including the
rights to accelerate the maturity upon an event of default (including a payment
of default), are suspended until the obligations under CCE-I's Credit Agreement
(the "CCE-I Credit Agreement") are paid in full.
The HC Crown Note is subordinated to the CCE-I Credit Agreement. Pursuant to the
terms of the CCE-I Credit Agreement, payments on the HC Crown Note are
prohibited until the indefeasible payment in full in cash, and the termination
of commitments to lend under the CCE-I Credit Agreement. The HC Crown Note will
not have the benefit of any distributions from CCE-II until repayment in full of
the CCE-II Credit Agreement and the Gaylord Note.
The obligations owing on the HC Crown Note are guaranteed by CAC, CCE and CCE,
L.P. (collectively referred to as the "Guarantors"). The CCE, L.P. guarantee
cannot be enforced until the repayment in full and termination of the CCE-I
Credit Agreement and the CCE-II Credit Agreement. The CAC and CCE guarantees
cannot be enforced until the repayment in full and termination of the CCE-I
Credit Agreement. The guarantees, by their terms, are limited to the proceeds of
distributions received from CCE-I and income, if any, generated by the
Guarantors. CCA Holdings and the Guarantors are dependent primarily upon
distributions from CCE-I to service the HC Crown Note.
The fair value of the HC Crown Note plus accrued interest, based upon trading
activity, was approximately $118.6 million and $89.5 million at December 31,
1997 and 1996, respectively.
5. PARTNERSHIP INTERESTS:
Under the terms of the Partnership Agreement, the profits and losses for income
tax reporting purposes are allocated among the partners in accordance with their
percentage interests subject to any adjustments required by the Internal Revenue
Code and Treasury Regulations.
For financial reporting purposes, profits and losses, and the preferred return
(described below) are allocated in accordance with the liquidation provisions in
the Partnership Agreement.
F-63
<PAGE> 95
Proceeds from the liquidation of the Partnership shall be distributed as
follows: (i) to the payment of liquidation expenses; (ii) to the payment of
creditors of the Partnership and the establishment of reserves to provide for
contingent liabilities; (iii) to CCT Holdings, equal to the amount of its
Preferred Capital Account; (iv) to each partner to the extent of such positive
balance in the ratio in which its respective ordinary capital account balance
bears to all such ordinary capital account balances and (v) the remaining
balance to the partners in accordance with their percentage interests at the
time of liquidation.
CCT Holdings is entitled to an annual preferred return computed in accordance
with the provisions in the Partnership Agreement.
Pursuant to the Partnership Agreement, while any amounts remain outstanding
under both the HC Crown Note and the Gaylord Note, distributions to the
Partnership by CCE-I will be distributed by the Partnership to CAC and CCE (pro
rata) for use solely to service the HC Crown Note and distributions to the
Partnership by CCE-II will be distributed by the Partnership to CCT Holdings to
service the Gaylord Note. If the Gaylord Note is repaid prior to payment in full
of the HC Crown Note, then all distributions to the Partnership from both CCE-I
and CCE-II will be used to service the HC Crown Note. If the HC Crown Note is
repaid prior to payment in full of the Gaylord Note, then all distributions to
the Partnership from both CCE-I and CCE-II will be used to service the Gaylord
Note.
6. COMMITMENTS AND CONTINGENCIES:
Litigation
CCE-I is a named defendant in a purported class action lawsuit filed on October
20, 1995, on behalf of the Cencom Cable Income Partners, L.P. (CCIP) limited
partners, which was filed in the Chancery Court of New Castle County, Delaware
(the "Action"). The Action named as defendants the general partner of CCIP, the
purchasers of all the systems previously owned by CCIP (which includes CCE-I and
certain other entities managed by Charter), Charter and certain individuals,
including the directors and executive officers of the general partner of CCIP.
On February 15, 1996, the Court of Chancery of the State of Delaware in and for
New Castle County dismissed all of the plaintiff's claims for injunctive relief
(including that which sought to prevent the consummation of the Illinois system
acquisition); the plaintiff's claims for money damages which may have resulted
from the sale by CCIP of its assets (including the Illinois system) remain
pending. Based upon, among other things, the advice of counsel, each of the
defendants to the Action believes the Action to be without merit and is
contesting it vigorously. 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 are legally inadequate and
in January 1997, filed a motion for summary judgment to dismiss all remaining
claims in the Action. In October 1997, the court granted in part and denied in
part defendants motion for summary judgment, the effect of which narrowed the
remaining issues significantly. The plaintiff filed a motion to alter or amend
the court's order which was denied. There can be no assurance, however, that the
plaintiff will not be awarded damages, some or all of which may be payable by
CCE-I, in connection with the Action.
On October 20, 1997, a purported class action was filed in St. Louis County
Circuit Court under the name Gerald Ortbals v. Charter Communications, on behalf
of all persons residing in Missouri who are or were residential subscribers of
CCE-I cable television service, and who have been charged a processing fee for
delinquent payment of their cable bill. The action challenges the legality of
CCE-I's processing fee and seeks declaratory judgment, injunctive relief and
unspecified damages. CCE-I believes th lawsuit to be without merit and intends
to defend the action vigorously. CCE-I is not able, at this early stage, to
project the expenses which will be associated with this action or to predict any
potential outcome or financial impact.
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 financial position or results of operations.
F-64
<PAGE> 96
7. RATE 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 servic 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.
While management believes that CCE-I and CCE-II have 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 CCE-I and CCE-II are unable
to justify their rates through a benchmark or 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 CCE-I and CCE-II in the event certain of their
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 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 CCE-I and CCE-II. 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 financial position or results of operations of the Partnership.
8. INCOME TAXES:
The book value of the Partnership's net assets is less than its tax reporting
basis by $11,196,317 and $4,912,673 as of December 31, 1997 and 1996,
respectively.
9. SIGNIFICANT NONCASH TRANSACTIONS:
The Partnership engaged in the following significant noncash financing
transactions during 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Preference allocation - Preferred Capital Account
(see Note 5) $22,951,352 $20,492,278 $5,081,095
</TABLE>
F-65
<PAGE> 97
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Entertainment I, L.P.:
We have audited the accompanying consolidated balance sheets of Charter
Communications Entertainment I, L.P. (a Delaware limited partnership) and
subsidiary 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 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
Entertainment I, L.P. and subsidiary 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-66
<PAGE> 98
CHARTER COMMUNICATIONS ENTERTAINMENT I, L.P.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,595,272 $ 2,934,939
Accounts receivable, net of allowance for doubtful accounts of $454,097
and $371,166, respectively 5,305,049 5,465,750
Prepaid expenses and other 754,073 490,443
Net assets of discontinued operation - 108,827
------------------ ------------------
Total current assets 8,654,394 8,999,959
------------------ ------------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment, net 204,645,667 206,351,379
Franchise costs, net of accumulated amortization of $87,601,155 and
$51,761,758, respectively 414,800,499 439,232,345
------------------ ------------------
619,446,166 645,583,724
------------------ ------------------
OTHER ASSETS, net 10,472,734 9,667,356
------------------ ------------------
NET NONCURRENT ASSETS OF DISCONTINUED OPERATION - 1,760,015
------------------ ------------------
$ 638,573,294 $ 666,011,054
================== ==================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 25,625,000 $ 5,880,000
Accounts payable and accrued expenses 23,309,250 18,517,774
Subscriber deposits 452,642 473,601
Payables to manager of cable television systems 956,136 2,245,009
Other current liabilities - 1,401,951
------------------ ------------------
Total current liabilities 50,343,028 28,518,335
------------------ ------------------
DEFERRED REVENUE 1,465,287 708,339
------------------ ------------------
LONG-TERM DEBT, less current maturities 437,295,000 462,120,000
------------------ ------------------
DEFERRED MANAGEMENT FEES 4,036,987 2,140,140
------------------ ------------------
PARTNERS' CAPITAL:
General Partner 1,059,942 1,862,703
Limited Partners-
Ordinary Capital Accounts 25,453,638 65,818,135
Preferred Capital Account 118,919,412 104,843,402
------------------ ------------------
Total partners' capital 145,432,992 172,524,240
------------------ ------------------
$ 638,573,294 $ 666,011,054
================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-67
<PAGE> 99
CHARTER COMMUNICATIONS ENTERTAINMENT I, L.P.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
SERVICE REVENUE $ 169,324,522 $ 143,023,261 $ 99,689,410
------------------ ------------------ ------------------
EXPENSES:
Operating costs $ 66,935,944 59,869,348 41,800,111
General and administrative 16,164,658 11,255,985 7,142,567
Depreciation and amortization 67,903,882 65,757,387 51,193,702
Management and financial advisory service fees -
related parties 6,700,813 5,034,375 6,499,167
------------------ ------------------ ------------------
157,705,297 141,917,095 106,635,547
------------------ ------------------ ------------------
Income (loss) from continuing operations 11,619,225 1,106,166 (6,946,137)
------------------ ------------------ ------------------
OTHER INCOME (EXPENSE):
Interest income 57,030 164,476 503,585
Interest expense (38,923,760) (34,249,422) (25,022,221)
Other, net 156,257 (1,058,271) 41,622
------------------ ------------------ ------------------
(38,710,473) (35,143,217) (24,477,014)
------------------ ------------------ ------------------
Net loss from continuing operations (27,091,248) (34,037,051) (31,423,151)
LOSS FROM DISCONTINUED OPERATION - (1,515,558) -
------------------ ------------------ ------------------
Net loss (27,091,248) (35,552,609) (31,423,151)
PREFERRED RETURN (14,076,010) (12,404,597) (3,020,613)
------------------ ------------------ ------------------
Net loss applicable to partners' capital accounts (41,167,258) (47,957,206) (34,443,764)
------------------ ------------------ ------------------
NET LOSS ALLOCATION:
General Partner (802,761) (935,166) (124,031)
Limited Partners - Preferred Capital Account - - -
------------------ ------------------ ------------------
(802,761) (935,166) (124,031)
------------------ ------------------ ------------------
LOSS APPLICABLE TO LIMITED PARTNERS -
ORDINARY CAPITAL ACCOUNTS $ (40,364,497) $ (47,022,040) $ (34,319,733)
================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-68
<PAGE> 100
CHARTER COMMUNICATIONS ENTERTAINMENT I, L.P.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Limited Partners
---------------------------------------
Ordinary Preferred
General Capital Capital
Partner Accounts Account Total
--------------- -------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 $ - $ - $ - $ -
Capital contributions 2,921,900 147,159,908 89,418,192 239,500,000
Allocation of net loss (65,129) (31,358,022) - (31,423,151)
Allocation of preferred return (58,902) (2,961,711) 3,020,613 -
-------------- ------------------ ------------------ ------------------
BALANCE, December 31, 1995 2,797,869 112,840,175 92,438,805 208,076,849
Allocation of net loss (693,276) (34,859,333) - (35,552,609)
Allocation of preferred return (241,890) (12,162,707) 12,404,597 -
-------------- ------------------ ------------------ ------------------
BALANCE, December 31, 1996 1,862,703 65,818,135 104,843,402 172,524,240
Allocation of net loss (528,279) (26,562,969) - (27,091,248)
Allocation of preferred return (274,482) (13,801,528) 14,076,010 -
-------------- ------------------ ------------------ ------------------
BALANCE, December 31, 1997 $ 1,059,942 $ 25,453,638 $ 118,919,412 $ 145,432,992
============== ================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-69
<PAGE> 101
CHARTER COMMUNICATIONS ENTERTAINMENT I, L.P.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (27,091,248) $ (35,552,609) $ (31,423,151)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 67,903,882 65,757,387 51,193,702
Amortization of debt issuance costs 1,193,634 - -
(Gain) loss on sale of property, plant and
equipment (156,257) 1,256,945 -
Loss from discontinued operation - 1,515,558 -
Changes in assets and liabilities, net of
effects from acquisitions-
Accounts receivable, net 160,701 (1,748,468) (1,387,654)
Prepaid expenses and other (263,630) 279,406 (250,428)
Accounts payable and accrued expenses 4,791,476 4,056,629 4,249,587
Subscriber deposits (20,959) (257,062) (11,303)
Payables to manager of cable television
systems, including deferred management fees 607,974 462,620 3,922,529
Other current liabilities (1,401,951) 1,401,951 -
Deferred revenue 525,790 (144,748) 780,612
------------------ ------------------ ------------------
Net cash provided by operating activities 46,249,412 37,027,609 27,073,894
------------------ ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (40,724,243) (33,898,020) (22,023,524)
Proceeds from sale of property, plant and equipment 260,924 986,359 -
Payments for acquisitions, net of cash acquired - (122,017,267) (579,179,458)
Other investing activities (763,362) (820,829) (1,652,067)
------------------ ------------------ ------------------
Net cash used in investing activities (41,226,681) (155,749,757) (602,855,049)
------------------ ------------------ ------------------
</TABLE>
(Continued on the following page)
F-70
<PAGE> 102
CHARTER COMMUNICATIONS ENTERTAINMENT I, L.P.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Continued)
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt issuance costs $ (282,398) $ (2,773,844) $ (7,287,914)
Borrowings under revolving credit and term loan facility 22,900,000 120,500,000 356,000,000
Payments of revolving credit and term loan facility (27,980,000) (7,500,000) (1,000,000)
Limited Partners' contributions - - 236,578,100
General Partner's contribution - - 2,921,900
------------------ ------------------ ------------------
Net cash provided by (used in) financing
activities (5,362,398) 110,226,156 587,212,086
------------------ ------------------ ------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (339,667) (8,495,992) 11,430,931
CASH AND CASH EQUIVALENTS, beginning of year 2,934,939 11,430,931 -
------------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS, end of year $ 2,595,272 $ 2,934,939 $ 11,430,931
================== ================== ==================
CASH PAID FOR INTEREST $ 34,980,126 $ 33,921,715 $ 22,907,403
================== ================== ==================
CASH PAID FOR TAXES, net of refunds $ - $ - $ -
================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-71
<PAGE> 103
CHARTER COMMUNICATIONS ENTERTAINMENT I, L.P.
AND SUBSIDIARY
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation and Organization
The accompanying consolidated financial statements include the accounts of
Cable Advertising of St. Louis, L.L.P. (CASTL), a wholly owned subsidiary of
Charter Communications Entertainment I, L.P.(the "Partnership"). The
Partnership was formed for the purpose of acquiring and operating existing
cable television systems and commenced operations in January 1995 with the
assignment of its general and limited partnership interests. The Partnership
will terminate no later than December 31, 2055, as provided in its partnership
agreement (the "Partnership Agreement").
CCA Acquisition Corp. (CAC), the General Partner, holds a 1.22% interest in the
Partnership. CAC is a wholly owned subsidiary of CCA Holdings Corp. (CCA
Holdings). Charter Communications Entertainment, L.P. (CCE) and CCT Holdings
Corp. (CCT Holdings) hold limited partnership interests in the Partnership of
97.78% and 1%, respectively. CCT Holdings and CCA Holdings hold partnership
interests in CCE of 45% and 55%, respectively. CCA Holdings and CCT Holdings
are each approximately 85% owned by Kelso Investment Associates V, L.P., an
investment fund, together with an affiliate (collectively referred to as
"Kelso" herein) and certain other individuals and approximately 15% by Charter
Communications, Inc. (Charter), manager of the Partnership's cable television
systems (see Note 9).
As of December 31, 1997, the Partnership provided cable television service to
approximately 350,300 basic subscribers in Connecticut, Illinois,
Massachusetts, Missouri and New Hampshire.
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 residence 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-72
<PAGE> 104
During 1997, the Partnership shortened the estimated useful lives of certain
property, plant and equipment for depreciation purposes. As a result, an
additional $4,631,000 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 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.
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 asset 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 at 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 income over the life of the contracts. Franchise fees collected
from cable subscribers and paid to local franchises are reported as Service
revenues.
Other Income (Expense)
Other, net includes gain and loss on disposition of property, plant and
equipment and other miscellaneous income and expense items, which are not
directly related to the Partnership's primary business. A loss of $1,256,945
was recognized on the sale of two buildings for the year ended December 31,
1996.
Interest Rate Hedge Agreements
The Partnership manages fluctuations in interest rates by using interest rate
hedge agreements, as required by its debt agreement. 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.
F-73
<PAGE> 105
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.
The Partnership's participation in interest hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. The interest rate hedge agreements have been designed for hedging
purposes and are not held or issued for speculative purposes.
Income Taxes
Income taxes are the responsibility of the partners and are not provided for in
the accompanying financial statements, except for income taxes imposed by the
state of Illinois. The state income tax benefit generated by partnership
losses for the years ended December 31, 1996 and 1997, was offset by a
valuation allowance of an equal amount.
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.
Reclassifications
Certain reclassifications have been made to prior years' financial statements
to conform with current year presentation.
2. PARTNERSHIP INTERESTS:
Under the terms of the Partnership Agreement, the profits and losses for income
tax reporting purposes are allocated among the partners in accordance with
their percentage interests subject to any adjustments required by the Internal
Revenue Code and Treasury Regulations.
For financial reporting purposes, profits and losses, and the preferred return
(described below) are allocated in accordance with the liquidation provisions
in the Partnership Agreement.
Proceeds from the liquidation of the Partnership shall be distributed as
follows: (i) to the payment of liquidation expenses; (ii) to the payment of
creditors of the Partnership and the establishment of reserves to provide for
contingent liabilities; (iii) to CCE, equal to the amount of its Preferred
Capital Account; (iv) to each partner to the extent of such positive balance in
the ratio in which its respective ordinary capital account balance bears to all
such ordinary capital account balances; and (v) the remaining balance to the
partners in accordance with their percentage interests at the time of
liquidation.
The Partnership Agreement provides for, among other things, distributions to
the respective partners in proportion to their respective partnership
interests, and the creation of a preferred capital account and preferred
distributions related thereto. CCE is entitled to an annual preferred return
computed in accordance with the provisions in the Partnership Agreement. The
effect of these provisions is to direct the proceeds of distributions from the
Partnership to CCE for repayment of the HC Crown Note (as defined herein).
Furthermore, the Credit Agreement (as defined herein) establishes limitations
on distributions.
F-74
<PAGE> 106
3. ACQUISITIONS:
In 1995, the Partnership acquired cable television systems in two separate
transactions for an aggregate purchase price, net of cash acquired, of
approximately $579.2 million. The excess of the cost of properties acquired
over the amounts assigned to net tangible assets at the date of acquisition was
$391.7 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 $122.0 million. The excess of the cost of properties acquired
over the amounts assigned to net tangible assets at the date of acquisition was
$100.2 million and is included in Franchise costs.
These 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 respective dates of acquisition.
The following are unaudited pro forma operating results for the 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,
1996
-------------
<S> <C>
(Unaudited)
Service revenues $151,548,000
Income from operations 1,769,000
Net loss (38,654,000)
</TABLE>
4. 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 $ 215,261,554 $ 186,885,508
Land, buildings and leasehold improvements 14,186,428 17,135,488
Premium subscription units 32,833,036 27,097,454
Vehicles and equipment 16,569,801 14,784,041
Construction-in-progress 172,851 3,243,405
------------------- ------------------
279,023,670 249,145,896
Less- Accumulated depreciation (74,378,003) (42,794,517
------------------- ------------------
$ 204,645,667 $ 206,351,379
=================== ==================
</TABLE>
F-75
<PAGE> 107
5. 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 $2,872,754 and $1,656,817 $ 7,471,402 $ 8,404,941
Note receivable 2,100,000 -
Organizational expenses, net of accumulated
amortization of $920,899 and $574,589 661,090 965,489
Brokerage commissions, net of accumulated
amortization of $76,341 and $13,459 240,242 296,926
---------------- --------------
$ 10,472,734 $ 9,667,356
================ ==============
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Capital expenditures $ 941,285 $ 3,482,531
Accrued salaries and related benefits 1,688,276 1,283,024
Accounts payable 2,963,548 1,763,895
Programming costs 3,106,929 2,726,803
Franchise fees 3,659,032 3,187,335
Accrued interest 5,338,313 2,442,525
Other 5,611,867 3,631,661
---------------- ----------------
$ 23,309,250 $ 18,517,774
================ ================
</TABLE>
7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Credit Agreement:
Term loans $ 274,120,000 $ 280,000,000
Fund loans 85,000,000 85,000,000
Revolving credit facility 103,800,000 103,000,000
------------------ ------------------
462,920,000 468,000,000
Less- Current maturities (25,625,000) (5,880,000)
------------------ ------------------
$ 437,295,000 $ 462,120,000
================== ==================
</TABLE>
The Partnership maintains a credit agreement (the "Credit Agreement"), which
terminates in June 2004, with a consortium of banks for borrowings up to $505.0
million, consisting of a revolving credit facility of $140.0 million, term
loans totaling $280.0 million and fund loans totaling $85.0 million. The debt
bears interest, at the Partnership's option, at rates based upon the Base Rate,
as defined in the Credit Agreement, LIBOR, or prevailing bid rates of
certificates of deposit plus the applicable margin based upon the Partnership's
leverage ratio at the time of the borrowings. The variable interest rates
ranged from 7.63% to 8.50% and 7.63% to 8.38% at December 31, 1997 and 1996,
respectively.
F-76
<PAGE> 108
Borrowings under the Credit Agreement are collateralized by the assets of the
Partnership. In addition, CAC, CCE and CCT Holdings have pledged their
partnership interests as additional security.
Borrowings under the 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 6.0 to 1
at December 31, 1997. A quarterly commitment fee of 0.375% per annum is
payable on the unused portion of the Credit Agreement.
Commencing September 30, 1997, and at the end of each calendar quarter
thereafter, available borrowings under the revolving credit facility shall be
reduced on an annual basis by 9.0% in 1998, 12.0% in 1999, 12.3% in 2000, 16.5%
in 2001 and 20.3% in 2002.
In addition to the foregoing, effective April 30, 1999, and on each April 30th
thereafter, the Partnership is required to make a repayment of principal of the
outstanding term loans and fund loans (pro rata) in an amount equal to 75% of
Annual Excess Cash Flow, as defined in the Credit Agreement, for the preceding
year if the leverage ratio is greater than 5.5 to 1, or 50% of Annual Excess
Cash Flow if the leverage ratio is less than 5.5 to 1.
Based upon outstanding indebtedness at December 31, 1997, the amortization of
term and fund loans and scheduled reductions in available borrowings described
above, aggregate future principal payments on the Credit Agreement at December
31, 1997, are as follows:
<TABLE>
<CAPTION>
Total
Amount
------------------
<S> <C>
1998 $ 25,625,000
1999 34,025,000
2000 48,440,000
2001 70,150,000
2002 85,900,000
Thereafter 198,780,000
------------------
$ 462,920,000
==================
</TABLE>
8. 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
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Debt
----
Credit Agreement $462,920,000 $ - $462,920,000
Interest Rate Hedge Agreements
------------------------------
Swaps - 230,000,000 (499,883)
Caps - 120,000,000 891
Collars - 120,000,000 (229,282)
</TABLE>
F-77
<PAGE> 109
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
Carrying Notional Fair
Value Amount Value
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Debt
- ----
Credit Agreement $468,000,000 $ - $468,000,000
Interest Rate Hedge Agreements
- ------------------------------
Swaps - 150,000,000 1,005,654
Caps - 100,000,000 28,111
</TABLE>
As the Credit Agreement bears interest at current market rates, its carrying
amount approximates fair market value at December 31, 1997 and 1996.
The weighted average interest pay rates for interest rate swap agreements were
7.78% and 7.61% at December 31, 1997 and 1996, respectively. The weighted
average interest rate for interest rate cap agreements was 8.49% at December
31, 1997 and 1996. The weighted average interest rates for interest rate
collar agreements were 9.04% and 7.53% 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 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.
9. RELATED-PARTY TRANSACTIONS:
Charter provides management services to the Partnership under the terms of a
contract which provides for annual base fees equal to $4,845,000 as of December
31, 1997 and 1996, respectively, per annum plus an annual bonus equal to 30% of
the excess, if any, of operating cash flow (as defined in the management
agreement) over the projected operating cash flow for the year. Payment of the
additional fee is prohibited until termination of the Credit Agreement due to
restrictions provided within the Credit Agreement. Deferred management fees
bear interest at 8% per annum. The additional fees for the years ended
December 31, 1997, 1996 and 1995, totaled approximately $1,897,000, $1,137,000
and $1,003,000, respectively. In addition, the Partnership receives financial
advisory services from an affiliate of Kelso under terms of a contract which
provides for fees equal to $552,500 at December 31, 1997 and 1996,
respectively, per annum. These agreements were amended during 1996 and 1995 in
conjunction with each acquisition of cable television systems to increase the
annual base fees for Charter and Kelso. Expenses recognized by the Partnership
under these contracts during 1997, 1996 and 1995 were $6,700,813, $5,034,375
and $6,499,167, respectively. Management and financial advisory service fees
currently payable of $1,211,250 and $1,181,300 are included in Payables to
manager of cable television systems at December 31, 1997 and 1996,
respectively.
F-78
<PAGE> 110
The Partnership pays certain acquisition advisory fees to an affiliate of Kelso
and Charter, which typically equal approximately 1% of the total purchase price
paid for cable television systems acquired. Total acquisition fees paid to the
affiliate of Kelso in 1997, 1996 and 1995 were $-0-, $1,140,000 and $5,250,000,
respectively. Total acquisition fees paid to Charter in 1997, 1996 and 1995
were $-0-, $1,140,000 and $950,000, 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 approximately $1,451,500, $1,401,300 and $840,000, respectively,
relating to insurance allocations.
Beginning in 1996, the Partnership and other entities managed by Charter
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 affiliated entities. The cost of billing 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 approximately $466,300 and $340,600,
respectively, relating to these services.
The Partnership maintains a regional office. The regional office performs
certain operational services on behalf of the Partnership and other affiliated
entities. The cost of these services is allocated to the Partnership and
affiliated entities based on their number of subscribers. Management considers
this allocation to be reasonable for the operations of the Partnership. During
1997, 1996 and 1995, the Partnership expensed approximately $861,100, $799,400
and $512,000, respectively, relating to these services.
10. COMMITMENTS AND CONTINGENCIES:
Leases
The Partnership leases certain facilities and equipment under noncancelable
operating leases. Rent expense incurred under these leases during 1997, 1996
and 1995 was $431,800, $617,600 and $533,000, respectively.
Future minimum lease payments are as follows:
1998 $494,700
1999 292,200
2000 182,600
2001 130,000
2002 61,800
Thereafter 287,700
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 for pole attachments during 1997, 1996 and 1995 was
$1,914,400, $1,773,100 and $1,363,000, respectively.
F-79
<PAGE> 111
Litigation
CCE-I is a named defendant in a purported class action lawsuit filed on October
20, 1995, on behalf of the Cencom Cable Income Partners, L.P. (CCIP) limited
partners, which was filed in the Chancery Court of New Castle County, Delaware
(the "Action"). The Action named as defendants the general partner of CCIP,
the purchasers of all the systems previously owned by CCIP (which includes
CCE-I and certain other entities managed by Charter), Charter and certain
individuals, including the directors and executive officers of the general
partner of CCIP. On February 15, 1996, the Court of Chancery of the State of
Delaware in and for New Castle County dismissed all of the plaintiff's claims
for injunctive relief (including that which sought to prevent the consummation
of the Illinois system acquisition); the plaintiff's claims for money damages
which may have resulted from the sale by CCIP of its assets (including the
Illinois system) remain pending. Based upon, among other things, the advice of
counsel, each of the defendants to the Action believes the Action to be without
merit and is contesting it vigorously. 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 are
legally inadequate and in January 1997, filed a motion for summary judgment to
dismiss all remaining claims in the Action. In October 1997, the court granted
in part and denied in part defendants motion for summary judgment, the effect
of which narrowed the remaining issues significantly. The plaintiff filed a
motion to alter or amend the court's order which was denied. There can be no
assurance, however, that the plaintiff will not be awarded damages, some or all
of which may be payable by CCE-I, in connection with the Action.
On October 20, 1997, a purported class action was filed in St. Louis County
Circuit Court under the name Gerald Ortbals v. Charter Communications, on
behalf of all persons residing in Missouri who are or were residential
subscribers of CCE-I cable television service, and who have been charged a
processing fee for delinquent payment of their cable bill. The action
challenges the legality of CCE-I's processing fee and seeks declaratory
judgment, injunctive relief and unspecified damages. CCE-I believes the
lawsuit to be without merit and intends to defend the action vigorously. CCE-I
is not able, at this early stage, to project the expenses which will be
associated with this action or to predict any potential outcome or financial
impact.
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 financial position or results of operations.
11. 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-80
<PAGE> 112
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 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 or results of operations of the
Partnership.
12. INCOME TAXES:
The book value of the Partnership's net assets exceeds its tax reporting basis
by $225,588,897 and $259,152,860 as of December 31, 1997 and 1996,
respectively.
13. DISCONTINUED OPERATION:
The Partnership sold its radio operation maintained by its former subsidiary,
Charter Communications Radio St. Louis, LLC. The Partnership recorded the
proceeds from the sale in the form of a note receivable from the purchasers of
$2.1 million.
The net losses of this operation prior to December 31, 1996, are included in
the consolidated statement of operations under "Loss from discontinued
operation." Revenues from such operation were $1,532,572 for 1996. The
noncurrent net assets of this operation were comprised primarily of property,
plant and equipment, license fees and other deferred costs. No material gain
or loss was incurred in connection with the disposition of these net assets.
14. 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 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
$308,000, $269,900 and $177,000 to the 401(k) Plan, respectively.
F-81
<PAGE> 113
In 1996, certain Partnership employees became participants in the 1996 Charter
Communications/Kelso & Company 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
affiliates of Kelso and managed by Charter. The obligation and related
expenses of the Appreciation Rights Plan are the responsibility of and have
been recorded (pro rata) at CCA Holdings and CCT Holdings.
15. SIGNIFICANT NONCASH TRANSACTIONS:
The Partnership engaged in the following significant noncash transactions:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Preference allocation - Preferred Capital
Account (see Note 2) $14,076,010 $12,404,597 $3,020,612
Issuance of note receivable for sale of
radio operation (see Note 13) 2,100,000 - -
</TABLE>
F-82
<PAGE> 114
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Entertainment II, L.P.:
We have audited the accompanying balance sheets of Charter Communications
Entertainment II, L.P. (a Delaware limited partnership) as of December 31, 1997
and 1996, and the related statements of operations, partners' capital and cash
flows for the years ended December 31, 1997 and 1996, and for the period from
inception (April 20, 1995) to December 31, 1995. These 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
Entertainment II, L.P. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996,
and for the period from inception (April 20, 1995) to December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 6, 1998
F-83
<PAGE> 115
CHARTER COMMUNICATIONS ENTERTAINMENT II, L.P.
BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,609,844 $ 6,050,650
Accounts receivable, net of allowance for
doubtful accounts of $256,812 and $325,137 2,765,370 3,486,418
Prepaid expenses and other 1,107,411 1,367,762
------------------ ------------------
Total current assets 5,482,625 10,904,830
------------------ ------------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment, net 126,399,822 119,701,617
Franchise costs, net of accumulated
amortization of $39,334,921 and $19,628,548 209,420,415 215,279,033
------------------ ------------------
335,820,237 334,980,650
------------------ ------------------
NOTE RECEIVABLE 25,000,000 -
------------------ ------------------
OTHER ASSETS, net 2,030,215 3,335,771
------------------ ------------------
$ 368,333,077 $ 349,221,251
================== ==================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 13,235,447 $ 11,588,865
Subscriber deposits 394,052 418,500
Payables to manager of cable television systems 639,924 941,939
------------------ ------------------
Total current liabilities 14,269,423 12,949,304
------------------ ------------------
DEFERRED REVENUE 324,548 383,070
------------------ ------------------
LONG-TERM DEBT 228,500,000 194,000,000
------------------ ------------------
SUBORDINATED NOTE PAYABLE TO LIMITED PARTNER 29,403,000 27,418,000
------------------ ------------------
DEFERRED MANAGEMENT FEES 160,805 148,894
------------------ ------------------
PARTNERS' CAPITAL:
General Partner - -
Limited Partners-
Ordinary Capital Accounts - -
Preferred Capital Account 95,675,301 114,321,983
------------------ ------------------
Total partners' capital 95,675,301 114,321,983
------------------ ------------------
$ 368,333,077 $ 349,221,251
================== ==================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-84
<PAGE> 116
CHARTER COMMUNICATIONS ENTERTAINMENT II, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996,
AND FOR THE PERIOD FROM INCEPTION (APRIL 20, 1995) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
SERVICE REVENUES $ 96,659,228 $ 90,368,332 $ 21,156,209
----------------- ----------------- -----------------
EXPENSES:
Operating costs 45,037,729 42,972,828 9,904,836
General and administrative 8,040,370 7,039,142 1,816,167
Depreciation and amortization 38,326,496 31,716,528 7,441,568
Management and financial advisory service fees 3,650,805 3,600,000 1,010,000
----------------- ----------------- -----------------
95,055,400 85,328,498 20,172,571
----------------- ----------------- -----------------
Income from operations 1,603,828 5,039,834 983,638
----------------- ----------------- -----------------
OTHER INCOME (EXPENSE):
Interest income 1,701,134 172,008 98,185
Interest expense (21,966,941) (16,742,021) (4,540,358)
Other, net 15,297 70,197 -
----------------- ----------------- -----------------
(20,250,510) (16,499,816) (4,442,173)
----------------- ----------------- -----------------
Net loss (18,646,682) (11,459,982) (3,458,535)
PREFERRED RETURN - - (1,680,890)
----------------- ----------------- -----------------
Net loss applicable to partners' capital accounts (18,646,682) (11,459,982) (5,139,425)
----------------- ----------------- -----------------
NET LOSS ALLOCATION:
General Partner - - (1,292,405)
Limited Partners - Preferred Capital Account (18,646,682) (11,459,982) (2,270,286)
----------------- ----------------- -----------------
(18,646,682) (11,459,982) (3,562,691)
----------------- ----------------- -----------------
NET LOSS APPLICABLE TO LIMITED PARTNERS -
ORDINARY CAPITAL ACCOUNTS $ - $ - $ (1,576,734)
================= ================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
F-85
<PAGE> 117
CHARTER COMMUNICATIONS ENTERTAINMENT II, L.P.
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996,
AND FOR THE PERIOD FROM INCEPTION (APRIL 20, 1995) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
Limited Partners
----------------------------------------
Ordinary Preferred
General Capital Capital
Partner Accounts Account Total
--------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
BALANCE, at inception $ - $ - $ - $ -
Capital contributions 1,292,405 1,576,734 126,371,361 129,240,500
Allocation of net loss (535,247) (653,002) (2,270,286) (3,458,535)
Allocation of preferred return (757,158) (923,732) 1,680,890 -
-------------- ------------------ ------------------ ------------------
BALANCE, December 31, 1995 - - 125,781,965 125,781,965
Allocation of net loss - - (11,459,982) (11,459,982)
-------------- ------------------ ------------------ ------------------
BALANCE, December 31, 1996 - - 114,321,983 114,321,983
Allocation of net loss - - (18,646,682) (18,646,682)
-------------- ------------------ ------------------ ------------------
BALANCE, December 31, 1997 $ - $ - $ 95,675,301 $ 95,675,301
============== ================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
F-86
<PAGE> 118
CHARTER COMMUNICATIONS ENTERTAINMENT II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996,
AND FOR THE PERIOD FROM INCEPTION (APRIL 20, 1995) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (18,646,682) $ (11,459,982) $ (3,458,535)
Adjustments to reconcile net loss to net cash provided
by operating activities-
Depreciation and amortization 38,326,496 31,716,528 7,441,568
Amortization of debt issuance costs 3,286,204 - -
Changes in assets and liabilities, net of effects from
acquisition-
Accounts receivable, net 721,048 355,860 (1,442,510)
Prepaid expenses and other (32,874) (63,278) (549,005)
Accounts payable and accrued expenses 1,646,582 (437,065) 4,400,371
Subscriber deposits (24,448) (25,839) (5,972)
Payables to manager of cable television systems,
including deferred management fees (290,104) (20,934) 1,111,767
Deferred revenue (58,522) (91,390) (8,179)
Accrued interest on subordinated note payable to
Limited Partner 1,985,000 1,918,000 500,000
----------------- ----------------- -------------------
Net cash provided by operating activities 26,912,700 21,891,900 7,989,505
----------------- ----------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (38,345,780) (22,174,686) (4,876,992)
Payment for Gaylord Entertainment, Inc. acquisition - - (340,939,879)
Issuance of note receivable (25,000,000) - -
Other investing activities (464,503) (111,586) (323,558)
----------------- ----------------- -------------------
Net cash used in investing activities (63,810,283) (22,286,272) (346,140,429)
----------------- ----------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit and term loan facility 39,600,000 6,500,000 193,100,000
Payments of revolving credit and term loan facility (5,100,000) (5,600,000) -
Proceeds from subordinated note payable to Limited
Partner - - 47,000,000
Payment of subordinated note payable to Limited Partner - - (22,000,000)
Limited Partners' capital contributions - - 127,948,095
General Partner's capital contribution - - 1,292,405
Payments of debt issuance costs (2,043,223) (352,083) (3,292,471)
----------------- ----------------- -------------------
Net cash provided by financing activities 32,456,777 547,917 344,048,029
----------------- ----------------- -------------------
</TABLE>
(Continued on following page)
F-87
<PAGE> 119
CHARTER COMMUNICATIONS ENTERTAINMENT II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996,
AND FOR THE PERIOD FROM INCEPTION (APRIL 20, 1995) TO DECEMBER 31, 1995
(Continued)
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ------------------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ (4,440,806) $ 153,545 $ 5,897,105
CASH AND CASH EQUIVALENTS, beginning of period 6,050,650 5,897,105 -
----------------- ---------------- ------------------
CASH AND CASH EQUIVALENTS, end of period $ 1,609,844 $ 6,050,650 $ 5,897,105
================= ================ ==================
CASH PAID FOR INTEREST $ 21,209,780 $ 17,511,868 $ 298,839
================= ================ ==================
CASH PAID FOR TAXES, net of refunds $ - $ - $ -
================= ================ ==================
</TABLE>
The accompanying notes are an integral part of these statements.
F-88
<PAGE> 120
CHARTER COMMUNICATIONS ENTERTAINMENT II, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
Charter Communications Entertainment II, L.P. (the "Partnership") was formed on
April 20, 1995, for the purpose of acquiring and operating existing cable
television systems. The Partnership commenced operations effective September
30, 1995, through the acquisition of certain cable television systems in
southern California. The Partnership will terminate no later than December 31,
2055, as provided in its partnership agreement (the "Partnership Agreement").
CCT Holdings Corp. (CCT Holdings) holds a 1% General Partner interest in the
Partnership. Charter Communications Entertainment, L.P. (CCE) and CCA
Acquisition Corp. (CAC) hold limited partnership interests of 97.78% and 1.22%,
respectively, in the Partnership. CCT Holdings and CAC hold partnership
interests of 45% and 55%, respectively, in CCE. CAC is a wholly owned
subsidiary of CCA Holdings Corp. (CCA Holdings). CCA Holdings and CCT Holdings
are each approximately 85% owned by Kelso Investment Associates V, L.P., an
investment fund, together with an affiliate (collectively referred to as
"Kelso" herein) and certain other individuals and approximately 15% by Charter
Communications, Inc. (Charter), manager of the cable television systems (see
Note 10).
As of December 31, 1997, the Partnership provided cable television service to
approximately 173,000 basic subscribers in southern California.
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 residence 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
life of the related asset 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
During 1997, the Partnership shortened the estimated useful lives of certain
property, plant and equipment for depreciation purposes. As a result, an
additional $3,346,000 of depreciation was recorded during 1997.
F-89
<PAGE> 121
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 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.
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 asset 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 income 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 Partnership manages fluctuations in interest rates by using interest rate
hedge agreements, as required by its debt agreements. The interest rate swaps
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.
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 collars are entered into by the Partnership to reduce the impact
of rising interest rates on floating rate debt.
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.
Income Taxes
Income taxes are the responsibility of the partners and as such are not
provided for in the accompanying financial statements.
F-90
<PAGE> 122
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.
Reclassifications
Certain reclassifications have been made to prior years' financial statements
to conform with current year presentation.
2. PARTNERSHIP INTERESTS:
Under the terms of the Partnership Agreement, the profits and losses for income
tax reporting purposes are allocated among the partners in accordance with
their percentage interests subject to any adjustments required by the Internal
Revenue Code and Treasury Regulations.
For financial reporting purposes, profits and losses, and the preferred return
(described below) are allocated in accordance with the liquidation provisions
in the Partnership Agreement.
Proceeds from the liquidation of the Partnership shall be distributed as
follows: (i) to the payment of liquidation expenses; (ii) to the payment of
creditors of the Partnership and the establishment of reserves to provide for
contingent liabilities; (iii) to CCE, equal to the amount of its Preferred
Capital Account; (iv) to each partner to the extent of such positive balance in
the ratio in which its respective ordinary capital account balance bears to all
such positive ordinary capital account balances; and (v) the remaining balance
to the partners in accordance with their percentage interests at the time of
liquidation.
The Partnership Agreement provides for, among other things, distributions to
the respective partners in proportion to their respective partnership
interests, and the creation of a preferred capital account and preferred
distributions related thereto. The effect of these provisions is to direct the
proceeds of distributions from the Partnership to CCE for repayment of the
Gaylord Note (as defined herein). Furthermore, the Credit Agreement (as
defined herein) establishes limitations on distributions.
CCE is entitled to an annual preferred return computed in accordance with the
provisions in the Partnership Agreement. The 1997 preferred return was
approximately $26,883,000. Cumulative preferred returns totaling approximately
$55,690,000 have not been reflected in CCE's capital account as of December 31,
1997, since the General Partner's capital account and Limited Partners'
ordinary capital account have been reduced to $-0-.
3. NOTE RECEIVABLE:
In May 1997, the Partnership made a $25.0 million investment (the "Long Beach
Investment") in Long Beach Acquisition Corp. (LBAC), in connection with the
acquisition of LBAC by Charter Communications Long Beach, Inc. (CC-LB), an
affiliate of the Partnership. LBAC owns cable television systems serving
communities in Long Beach, California. The Long Beach Investment was in the
form of a note receivable convertible into up to 27.5% of the stock of LBAC.
The note receivable matures September 2006 and bears interest at 10% per annum,
payable quarterly. In connection with the Long Beach Investment, the
Partnership and LBAC became jointly and severally liable under the
Partnership's credit facility, which was increased by approximately $140.0
million and CCE-II borrowed $25.0 million under the Partnership's credit
facility to make the Long Beach Investment.
F-91
<PAGE> 123
4. ACQUISITION:
Effective September 30, 1995, the General Partner acquired the assets of
certain cable television systems from an affiliate of Gaylord Entertainment
Company, Inc. (Gaylord) for an aggregate purchase price of approximately $340.9
million, which included cable television systems in southern California. The
excess of the cost of properties acquired over the amounts assigned to net
tangible assets at the date of acquisition was $235.6 million and is included
in Franchise costs. These systems were transferred to the Partnership.
The acquisition was 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 date of acquisition.
5. 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 $ 124,064,609 $ 106,032,328
Land, buildings and leasehold improvements 998,170 347,979
Premium subscription units 32,040,772 26,886,074
Vehicles and equipment 6,299,085 5,187,541
------------------ ------------------
163,402,636 138,453,921
Less- Accumulated depreciation (37,002,814) (18,752,304)
------------------ ------------------
$ 126,399,822 $ 119,701,617
================== ==================
</TABLE>
6. 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 $169,103
and $533,049 $ 1,868,524 $ 3,111,505
Organizational expenses, net of accumulated
amortization of $522,836 and $218,991 161,691 224,266
-------------- --------------
$ 2,030,215 $ 3,335,771
============== ==============
</TABLE>
F-92
<PAGE> 124
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Accrued salaries and related benefits $ 1,327,076 $ 1,208,099
Accounts payable 1,669,088 1,511,336
Accrued interest 1,798,315 1,053,672
Programming costs 1,994,923 1,882,896
Capital expenditures 2,056,330 1,582,391
Franchise fees 2,242,078 2,176,770
Other 2,147,637 2,173,701
---------------- ----------------
$ 13,235,447 $ 11,588,865
================ ================
</TABLE>
8. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Credit Agreement:
Term loans $ 105,000,000 $ 120,000,000
Revolving credit facility 123,500,000 74,000,000
------------------ ------------------
228,500,000 194,000,000
Less- Current maturities - -
------------------ ------------------
$ 228,500,000 $ 194,000,000
================== ==================
</TABLE>
The Partnership maintains a credit agreement (the "Credit Agreement"), which
terminates in September 2004, with a consortium of banks for borrowings up to
$375.0 million, consisting of a revolving credit facility of $185.0 million,
and two term loans totaling $190.0 million. In 1997, the Credit Agreement was
amended to reflect the impact of the Long Beach Investment. The amended
agreement is structured as a joint credit facility between the Partnership and
LBAC whereby each party is jointly and severally liable for the debt. At
December 31, 1997, LBAC had $93.0 million of indebtedness outstanding under the
Credit Agreement. The debt bears interest, at the Partnership's option, at
rates based upon the prime rate of NationsBank of Texas, N.A. (the
Administrative Agent bank), the Federal Funds Effective Rate or Eurodollar
rates plus the applicable margin based upon the Partnership's leverage ratio at
the time of the borrowings. The applicable spread is based on the ratio of
debt to annualized operating cash flow. The variable interest rates ranged
from 7.00% to 7.96% and 7.19% to 7.75% at December 31, 1997 and 1996,
respectively.
Borrowings under the Credit Agreement are collateralized by the assets of the
Partnership. In addition, CCT Holdings, CCE and CAC have pledged their
partnership interests as additional security.
Borrowings under the 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 6.0 to 1
at December 31, 1997. A quarterly commitment fee of 0.375% per annum is
payable on the unused portion of the Credit Agreement.
F-93
<PAGE> 125
Commencing June 30, 1998, and at the end of each calendar quarter thereafter,
available borrowings under the revolving credit facility shall be reduced on an
annual basis by 7.0% in 1998, 9.0% in 1999, 9.5% in 2000, 12.0% in 2001 and
16.0% in 2002 for the revolving credit facility.
Based upon outstanding indebtedness at December 31, 1997, and the amortization
of term loans and scheduled reductions in available borrowings described above,
aggregate future principal payments on the Credit Agreement at December 31,
1997, are as follows:
<TABLE>
<CAPTION>
Total
Year Amount
---- ------------------
<S> <C>
1998 $ -
1999 6,975,000
2000 20,215,000
2001 24,950,000
2002 31,250,000
Thereafter 145,110,000
------------------
$ 228,500,000
==================
</TABLE>
9. 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
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Debt
- ----
Credit Agreement $228,500,000 $ - $228,500,000
Interest Rate Hedge Agreements
- ------------------------------
Swaps - 175,000,000 (714,512)
Collars - 70,000,000 (208,075)
<CAPTION>
1996
----------------------------------------------------------------
Carrying Notional Fair
Value Amount Value
-------------------- -------------------- --------------------
Debt
- ----
<S> <C> <C> <C>
Credit Agreement $194,000,000 $ - $194,000,000
Interest Rate Hedge Agreements
- ------------------------------
Swaps - 100,000,000 253,074
</TABLE>
F-94
<PAGE> 126
As the Credit Agreement bears interest at current market rates, its carrying
amount approximates fair market value at December 31, 1997 and 1996.
The weighted average interest pay rates for interest rate swap agreements were
7.88% and 7.45% at December 31, 1997 and 1996, respectively. The weighted
average interest rates for interest rate collar agreements were 8.93% and 7.53%
for the cap and floor components, respectively, at December 31, 1997.
The notional amounts of the 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 interest rate hedge agreements. The
amounts exchanged are determined by reference to the notional amount and the
other terms of the contracts. Notional amounts of interest rate hedge
agreements as of December 31, 1997, represent hedges of the debt for both the
Partnership and LBAC (see Note 8).
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.
10. RELATED-PARTY TRANSACTIONS:
Charter provides management services to the Partnership under terms of a
contract which provides for annual base fees equal to $3,200,000, per annum
plus an additional fee equal to 30% of the excess, if any, of operating cash
flow (as defined in the management agreement) over the projected operating cash
flow for the year. Payment of the additional fee is prohibited until
termination of the Credit Agreement due to restrictions provided within the
Credit Agreement. Deferred management fees bear interest at 8% per annum. For
the year ended December 31, 1997, operating cash flows was not in excess of
projected operating cash flow, and thus, no additional fee was recognized. The
additional fees (including interest) for the years ended December 31, 1997, 1996
and the period from inception to December 31, 1995, totaled approximately
$12,000, $118,000 and $31,000, respectively. In addition, the Partnership
receives financial advisory services from an affiliate of Kelso under terms of
a contract which provides for fees equal to $400,000 per annum. Expenses
recognized by the Partnership under these contracts during 1997, 1996 and the
period from inception to December 31, 1995, were $3,650,805, $3,600,000 and
$1,010,000, respectively. Management and financial advisory service fees
currently payable of $800,000 and $900,000 are included in Payables to manager
of cable television systems at December 31, 1997 and 1996.
The Partnership pays certain acquisition advisory fees to an affiliate of
Kelso, which typically equal approximately 1% of the total purchase price paid
for cable television systems acquired. Total acquisition fees paid to the
affiliate of Kelso in 1995 were $2.0 million. Charter received $3.0 million in
equity interests in CCT Holdings in conjunction with the Gaylord acquisition.
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 the period from
inception to December 31, 1995, the Partnership expensed approximately
$190,000, $664,000 and $173,000, respectively, relating to insurance
allocations. Effective December 31, 1996, the Partnership began directly
paying claims and premiums related to its medical and dental coverage and
self-insurance programs. As a result, the Partnership is no longer allocated
charges for medical and dental claims.
F-95
<PAGE> 127
In conjunction with the Gaylord acquisition described in Note 4, the
Partnership executed a promissory note to CCE in the amount of $47.0 million.
Immediately upon closing of the Gaylord acquisition, the Partnership used
proceeds from borrowings under the Credit Agreement to repay $22.0 million on
the promissory note. All principal and interest amounts due under this note
are subordinated with respect to the Credit Agreement set forth in Note 8. The
note matures on March 31, 2005. The note bears interest at an annual rate
equal to the weighted average interest rate payable on the loans outstanding
under the Credit Agreement. Principal and interest amounts due under this note
are included in Subordinated Note Payable to Limited Partner on the
accompanying balance sheets.
Beginning in 1996, the Partnership and other entities managed by Charter
employed the services of Charter's National Data Center (the "National Data
Center"). The National Data Center performs certain subscriber billing
services and provider computer network, hardware and software support for the
Partnership and other entities managed by Charter. The cost of billing
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 approximately $257,000 and $125,000,
respectively, relating to these services.
11. COMMITMENTS AND CONTINGENCIES:
Leases
The Partnership leases certain facilities and equipment under noncancelable
operating leases. Rent expense incurred under these leases during 1997, 1996
and the period from inception to December 31, 1995, was approximately
$1,143,075, $1,086,000 and $287,000, respectively.
Future minimum lease payments are as follows:
1998 $1,158,100
1999 1,140,000
2000 1,114,800
2001 1,010,000
2002 292,700
Thereafter 850,600
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 for pole attachments during 1997, 1996 and the period
from inception to December 31, 1995, were approximately $628,000, $557,000 and
$115,000, respectively.
Litigation
The Partnership is 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 financial position or results of operations.
12. RATE 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.
F-96
<PAGE> 128
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.
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 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 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 financial position and results of operations of the
Partnership.
13. INCOME TAXES:
The book value of the Partnership's net assets exceeds its tax reporting basis
by $29,343,001 and $21,547,291 as of December 31, 1997 and 1996, respectively.
14. 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 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 the period from inception to December
31, 1995, the Partnership contributed approximately $159,000, $165,000 and
$34,000, respectively, to the Plan.
In 1996, certain Partnership employees became participants in the 1996 Charter
Communications/ Kelso & Company 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
affiliates of Kelso and managed by Charter. The obligation and related
expenses of the Appreciation Rights Plan are the responsibility of and have
been recorded (pro rata) at CCA Holdings and CCT Holdings.
F-97
<PAGE> 129
15. SIGNIFICANT NONCASH TRANSACTION:
The Partnership engaged in the following significant noncash financing
transaction:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Preference allocation - Preferred Capital
Account (see Note 2) $ - $ - $1,680,890
</TABLE>
F-98
<PAGE> 130
EXHIBIT INDEX
CCA HOLDINGS CORP.
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Description Pages
- ------- ------------------------------------------------------------------------------------- ------------
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of CCA Holdings Corp., filed as
Exhibit 3.1 to the Registration Statement on Form S-4, File No. 333-26853, and
incorporated herein by reference..................................................... N/A
3.2 Amended and Restated By-laws of CCA Holdings Corp., filed as Exhibit 3.2 to the
Registration Statement on Form S-4, File No. 333-26853, and incorporated herein by
reference............................................................................ N/A
3.3 Certificate of Incorporation of CCA Acquisition Corp., filed as Exhibit 3.3 to the
Registration Statement on Form S-4, File No. 333-26853, and incorporated herein by
reference............................................................................ N/A
3.4 Amended and Restated By-laws of CCA Acquisition Corp., filed as Exhibit 3.4 to the
Registration Statement on Form S-4, File No. 333-26853, and incorporated herein by
reference............................................................................ N/A
3.5 Certificate of Incorporation of Cencom Cable Entertainment, Inc., filed as Exhibit
3.5 to the Registration Statement on Form S-4, File No. 333-26853, and incorporated
herein by reference.................................................................. N/A
3.6 Amended and Restated By-laws of Cencom Cable Entertainment, Inc., filed as Exhibit
3.6 to the Registration Statement on Form S-4, File No. 333-26853, and incorporated
herein by reference.................................................................. N/A
3.7 Certificate of Limited Partnership of Charter Communications Entertainment, L.P. ,
filed as Exhibit 3.7 to the Registration Statement on Form S-4, File No. 333-26853,
and incorporated herein by reference................................................. N/A
3.8 Amendment to Certificate of Limited Partnership of Charter Communications
Entertainment, L.P. , filed as Exhibit 3.8 to the Registration Statement on Form
S-4, File No. 333-26853, and incorporated herein by reference........................ N/A
3.9 Agreement of Limited Partnership of Charter Communications Entertainment, L.P. ,
filed as Exhibit 3.9 to the Registration Statement on Form S-4, File No. 333-26853,
and incorporated herein by reference................................................. N/A
4.1 Indenture, dated February 13, 1997, between CCA Holdings Corp. and Harris Trust and
Savings Bank, as Trustee, filed as Exhibit 4.1 to the Registration Statement on Form
S-4, File No. 333-26853, and incorporated herein by reference........................ N/A
4.2 Second Amended and Restated Guaranty, dated February 13, 1997, issued by CCA
Acquisition Corp., filed as Exhibit 4.2 to the Registration Statement on Form S-4,
File No. 333-26853, and incorporated herein by reference............................. N/A
4.3 Second Amended and Restated Guaranty, dated February 13, 1997, issued by Cencom
Cable Entertainment, Inc., filed as Exhibit 4.3 to the Registration Statement on
Form S-4, File No. 333-26853, and incorporated herein by reference................... N/A
4.4 Second Amended and Restated Guaranty, dated February 13, 1997, issued by Charter
Communications Entertainment, L.P., filed as Exhibit 4.4 to the Registration
Statement on Form S-4, File No. 333-26853, and incorporated herein by reference...... N/A
4.5 Second Amended and Restated Subordination Agreement between Harris Trust and Savings
Bank, as Trustee, CCA Holdings Corp. and Toronto Dominion (Texas), Inc., as
Administrative Agent, dated February 13, 1997, filed as Exhibit 4.5 to the
Registration Statement on Form S-4, File No. 333-26853, and incorporated herein by
reference............................................................................ N/A
</TABLE>
E-1
<PAGE> 131
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Description Pages
- ------- ------------------------------------------------------------------------------------- ------------
<S> <C> <C>
10.1 Amended and Restated Loan Agreement dated as of September 29, 1995 (the "CCE-I Loan
Agreement") among Charter Communications Entertainment I, L.P., as Borrower, Toronto
Dominion (Texas), Inc. and Chemical Bank, as Documentation Agents, Toronto Dominion
(Texas), Inc., Chemical Bank, CIBC Inc., Credit Lyonnais Cayman Island Branch and
Nationsbank, N.A. (Carolinas), as Managing Agents, Banque Paribas and Union Bank, as
Co-Agents, the Signatory Banks thereto, and Toronto Dominion (Texas), Inc., as
Administrative Agent, filed as Exhibit 10.1 to the Registration Statement on Form
S-4, File No. 333-26853, and incorporated herein by reference........................ N/A
10.2 First Amendment to the CCE-I Loan Agreement dated as of October 31, 1995, filed as
Exhibit 10.2 to the Registration Statement on Form S-4, File No. 333-26853, and
incorporated herein by reference..................................................... N/A
10.3 Second Amendment to the CCE-I Loan Agreement dated January 16, 1996, filed as
Exhibit 10.3 to the Registration Statement on Form S-4, File No. 333-26853, and
incorporated herein by reference..................................................... N/A
10.4 Third Amendment to the CCE-I Loan Agreement dated as of March 29, 1966, filed as
Exhibit 10.4 to the Registration Statement on Form S-4, File No. 333-26853, and
incorporated herein by reference..................................................... N/A
10.5 Fourth Amendment to the CCE-I Loan Agreement dated as of May 24, 1996, filed as
Exhibit 10.5 to the Registration Statement on Form S-4, File No. 333-26853, and
incorporated herein by reference..................................................... N/A
10.6 Fifth Amendment to the CCE-I Loan Agreement dated as of November 29, 1996, filed as
Exhibit 10.6 to the Registration Statement on Form S-4, File No. 333-26853, and
incorporated herein by reference..................................................... N/A
10.7 Sixth Amendment to the CCE-I Loan Agreement dated as of February 7, 1997, filed as
Exhibit 10.7 to the Registration Statement on Form S-4, File No. 333-26853, and
incorporated herein by reference..................................................... N/A
10.8 Amended and Restated Shareholders' Agreement dated as of November 15, 1996 between
Kelso & Company, L.P., Charter Communications, Inc. and HC Crown Corp., filed as
Exhibit 10.8 to the Registration Statement on Form S-4, File No. 333-26853, and
incorporated herein by reference..................................................... N/A
10.9 Amended and Restated Management Agreement dated as of September 29, 1995 between
Charter Communications Entertainment I, L.P. and Charter Communications, Inc., filed
as Exhibit 10.9 to the Registration Statement on Form S-4, File No. 333-26853, and
incorporated herein by reference..................................................... N/A
10.10 Amendment Number One to Amended and Restated Management Agreement dated as of
October 31, 1995 between Charter Communications Entertainment I, L.P. and Charter
Communications, Inc., filed as Exhibit 10.10 to the Registration Statement on Form
S-4, File No. 333-26853, and incorporated herein by reference........................ N/A
10.11 Amendment Number Two to Amended and Restated Management Agreement dated as of March
29, 1996 between Charter Communications Entertainment I, L.P. and Charter
Communications, Inc., filed as Exhibit 10.11 to the Registration Statement on Form
S-4, File No. 333-26853, and incorporated herein by reference........................ N/A
10.12 Amendment Number Three to Amended and Restated management Agreement dated as of
November 29, 1996 between Charter Communications Entertainment I, L.P. and Charter
Communications, Inc., filed as Exhibit 10.12 to the Registration Statement on Form
S-4, File No. 333-26853, and incorporated herein by reference........................ N/A
</TABLE>
E-2
<PAGE> 132
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Description Pages
- ------- ------------------------------------------------------------------------------------- ------------
<S> <C> <C>
10.13 Certificate of Limited Partnership of Charter Communications Entertainment I, L.P.,
filed as Exhibit 10.13 to the Registration Statement on Form S-4, File No.
333-26853, and incorporated herein by reference...................................... N/A
10.14 Amendment to the Certificate of Limited Partnership of Charter Communications
Entertainment I, L.P., filed as Exhibit 10.14 to the Registration Statement on Form
S-4, File No. 333-26853, and incorporated herein by reference........................ N/A
10.15 Agreement of Limited Partnership of Charter Communications Entertainment I, L.P.,
filed as Exhibit 10.15 to the Registration Statement on Form S-4, File No.
333-26853, and incorporated herein by reference...................................... N/A
10.16 Certificate of Limited Partnership of Charter Communications Entertainment II, L.P.,
filed as Exhibit 10.16 to the Registration Statement on Form S-4, File No.
333-26853, and incorporated herein by reference...................................... N/A
10.17 Agreement of Limited Partnership of Charter Communications Entertainment II, L.P.,
filed as Exhibit 10.17 to the Registration Statement on Form S-4, File No.
333-26853, and incorporated herein by reference...................................... N/A
10.18 Contingent Payment Agreement dated as of September 29, 1995 among Charter
Communications Entertainment, L.P., CCT Holdings Corp. and Cencom Cable Television,
Inc., filed as Exhibit 10.18 to the Registration Statement on Form S-4, File No.
333-26853, and incorporated herein by reference...................................... N/A
10.19 Amended and Restated Stockholders' Agreement dated as of September 29, 1995 among
CCA Holdings Corp., Kelso Investment Associates V, L.P., Kelso Equity Partners V,
L.P. and Charter Communications, Inc., filed as Exhibit 10.19 to the Registration
Statement on Form S-4, File No. 333-26853, and incorporated herein by reference...... N/A
10.20 Registration Rights Agreement dated as of January 18, 1995 (the "Registration Rights
Agreement") among CCA Holdings Corp., Kelso Investment Associates V, L.P., Kelso
Equity Partners V, L.P. and Charter Communications, Inc., filed as Exhibit 10.20 to
the Registration Statement on Form S-4, File No. 333-26853, and incorporated herein
by reference......................................................................... N/A
10.21 Amendment Number One to the Registration Rights Agreement dated as of September 29,
1995, filed as Exhibit 10.21 to the Registration Statement on Form S-4, File No.
333-26853, and incorporated herein by reference...................................... N/A
*12.2 CCA Holdings Corp. and subsidiaries, Ratio of Earnings to Fixed Charges Calculation..
21.1 List of Subsidiaries of Registrants, filed as Exhibit 21.1 to the Registration
Statement on Form S-4, File No. 333-26853, and incorporated herein by reference...... N/A
*27.1 Financial Data Schedule for CCA Holdings Corp........................................
</TABLE>
*Filed herewith.
E-3
<PAGE> 1
EXHIBIT 12.2
CCA HOLDINGS CORP.
RATIO OF EARNINGS TO FIXED CHARGES CALCULATION
(In Thousands, Except Ratios)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings
Net loss(2) (41,441) (46,814) (41,862)
Fixed Charges 53,035 46,846 35,626
------- ------ ------
Earnings 11,594 32 (6,236)
======= ====== ======
Fixed Charges
Interest Expense 51,784 45,646 34,813
Interest Element of Rentals 35 192 165
Amortization of debt costs 1,216 1,008 648
------- ------ ------
Total Fixed Charges 53,035 46,846 35,626
======= ====== ======
</TABLE>
Ratio of Earnings to Fixed Charges(1)
(1) Earnings for the year ended December 31, 1997, 1996 and 1995 were
insufficient to cover fixed charges by $41,441, $46,814 and $41,862 ,
respectively. As a result of such deficiencies, the ratios are not
presented above.
(2) Net loss excludes equity in loss of unconsolidated limited partnerships
and minority in loss of subsidiary.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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
<EXCHANGE-RATE> 1
<CASH> 2,595,272
<SECURITIES> 0
<RECEIVABLES> 5,305,049
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,654,394
<PP&E> 279,023,670
<DEPRECIATION> (74,378,003)
<TOTAL-ASSETS> 706,387,435
<CURRENT-LIABILITIES> 50,989,601
<BONDS> 556,214,412
0
0
<COMMON> 0
<OTHER-SE> (39,901,141)
<TOTAL-LIABILITY-AND-EQUITY> 706,387,435
<SALES> 169,324,522
<TOTAL-REVENUES> 169,324,522
<CGS> 0
<TOTAL-COSTS> 157,979,343
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (52,999,769)
<INCOME-PRETAX> (39,505,916)
<INCOME-TAX> 0
<INCOME-CONTINUING> (39,505,916)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,505,916)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
