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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
---------------- --------------------------
Commission File Number 333-77499
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333-77499-01
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CHARTER COMMUNICATIONS HOLDINGS, LLC
------------------------------------
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
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(Exact name of registrants as specified in their charters)
Delaware 43-1843179
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Delaware 43-1843177
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(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)
(Registrants' telephone number, including area code) (314) 965-0555
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
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CHARTER COMMUNICATIONS HOLDINGS, LLC
------------------------------------
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
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FORM 10-Q - FOR THE QUARTER ENDED SEPTEMBER 30, 1999
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INDEX
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<TABLE>
<CAPTION>
Page
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Part I. Financial Information
Item 1. Financial Statements- Charter Communications Holdings, LLC
<S> <C> <C> <C>
a. Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 3
b. Consolidated Statements of Operations - Three Months Ended
September 30, 1999 and 1998 4
c. Consolidated Statements of Operations - Nine Months Ended
September 30, 1999 and 1998 5
d. Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1999 and 1998 6
f. Notes to Consolidated Financial Statements 7
Separate financial statements of Charter Communications
Holdings Capital Corporation have not been presented as this
entity had no operations and substantially no assets or
equity. Accordingly, management has determined that these
financial statements are not material.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Part II. Other Information
Item 1. Legal Proceedings - None 33
Item 2. Change in Securities 33
Item 3. Defaults on Senior Securities - None 33
Item 4. Submission of Matters to a Vote of Security Holders - None 33
Item 5. Other Information - None 33
Item 6. Exhibits and Reports on Form 8-K 33
Signature Page 34
</TABLE>
2
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
------------------------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 434,183 $ 9,573
Accounts receivable, net of allowance
for doubtful accounts of $4,327 and
$1,728, respectively.......................................... 48,470 15,108
Note receivable from parent company............................... 51,458 --
Prepaid expenses and other........................................ 27,374 2,519
------------------- -------------------
Total current assets..................................... 561,485 27,200
------------------- -------------------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment..................................... 2,279,489 716,242
Franchises........................................................ 8,268,021 3,590,054
------------------- -------------------
10,547,510 4,306,296
------------------- -------------------
OTHER ASSETS........................................................... 126,196 2,031
------------------- -------------------
$ 11,235,191 $ 4,335,527
=================== ===================
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.............................. $ -- $ 10,450
Accounts payable.................................................. 40,781 7,439
Accrued expenses.................................................. 341,784 120,147
Payables to manager of cable television
systems -- related party...................................... 8,036 4,334
------------------- -------------------
Total current liabilities................................ 390,601 142,370
------------------- -------------------
LONG-TERM DEBT......................................................... 6,244,632 1,991,756
------------------- -------------------
DEFERRED MANAGEMENT FEES -- RELATED PARTY.............................. 17,004 15,561
------------------- -------------------
OTHER LONG-TERM LIABILITIES............................................ 43,648 38,461
------------------- -------------------
MINORITY INTEREST...................................................... 25,000 --
------------------- -------------------
MEMBER'S EQUITY........................................................ 4,514,306 2,147,379
------------------- -------------------
$ 11,235,191 $ 4,335,527
=================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
----------------------------------
1999 | 1998
SUCCESSOR | PREDECESSOR
|
<S> <C> | <C>
REVENUES............................................................... $ 376,189 | $ 17,403
------------- | -------------
|
|
OPERATING EXPENSES: |
Operating, general and administrative............................. 194,716 | 9,121
Depreciation and amortization..................................... 191,439 | 5,925
Stock option compensation expense................................. 21,094 | --
Corporate expense charges--related party.......................... 7,236 | 871
------------- | -------------
414,485 | 15,917
------------- | -------------
(Loss) income from operations................................. (38,296) | 1,486
-------------- | -------------
OTHER INCOME (EXPENSE): |
Interest expense.................................................. (131,081) | (6,212)
Interest income................................................... 8,241 | 9
Other, net........................................................ (3,017) | 3
-------------- | -------------
(125,857) | (6,200)
-------------- | --------------
Net loss .................................................... $ (164,153) | $ (4,714)
=============== | ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------------
1999 | 1998
SUCCESSOR | PREDECESSOR
--------- | -----------
|
<S> <C> | <C>
REVENUES............................................................... $ 845,182 | $ 32,532
------------- | -------------
|
OPERATING EXPENSES: |
Operating, general and administrative............................. 436,057 | 17,498
Depreciation and amortization..................................... 441,391 | 11,236
Stock option compensation expense................................. 59,288 | --
Corporate expense charges--related party.......................... 18,309 | 1,499
------------- | -------------
955,045 | 30,233
------------- | -------------
(Loss) income from operations................................. (109,863) | 2,299
-------------- | -------------
OTHER INCOME (EXPENSE): |
Interest expense.................................................. (288,750) | (11,831)
Interest income................................................... 18,326 | 23
Other, net........................................................ (177) | 6
-------------- | -------------
(270,601) | (11,802)
-------------- | --------------
Loss before extraordinary item................................ (380,464) | (9,503)
EXTRAORDINARY ITEM - Loss from early |
extinguishment of debt............................................ 7,794 | --
------------- | -------------
|
Net loss .................................................... $ (388,258) | $ (9,503)
============= | ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------------
1999 | 1998
SUCCESSOR | PREDECESSOR
--------- | -----------
CASH FLOWS FROM OPERATING ACTIVITIES: |
<S> <C> | <C>
Net loss.......................................................... $ (388,258) | $ (9,503)
Adjustments to reconcile net loss to net cash |
provided by operating activities: |
Depreciation and amortization................................. 441,391 | 11,236
Stock option compensation expense............................. 59,288 | --
Amortization of non-cash interest expense..................... 66,028 | 802
Loss from early extinguishment of debt........................ 7,794 | --
Changes in assets and liabilities, net of effects from |
acquisitions -- |
Accounts receivable, net...................................... (2,358) | (1,380)
Prepaid expenses and other.................................... (11,665) | (229)
Accounts payable and accrued expenses......................... 76,591 | 15,265
Payables to manager of cable television systems, |
including deferred management fees....................... 17,887 | 1,974
Other operating activities.................................... (1,087) | --
-------------- | -------------
Net cash provided by operating activities................ 265,611 | 18,165
------------- | -------------
CASH FLOWS FROM INVESTING ACTIVITIES: |
Purchases of property, plant and equipment, net................... (385,301) | (6,896)
Note receivable from parent company............................... (51,458) | --
Payments for acquisitions, net of cash acquired................... (2,659,384) | (167,484)
Loan to Marcus Cable Holdings..................................... (1,680,142) | --
Other investing activities........................................ (11,106) | 8
-------------- | -------------
Net cash used in investing activities.................... (4,787,391) | (174,372)
-------------- | ---------------
CASH FLOWS FROM FINANCING ACTIVITIES: |
Borrowings of long-term debt...................................... 6,464,188 | 201,200
Repayments of long-term debt...................................... (2,539,340) | (48,500)
Payments for debt issuance costs.................................. (107,562) | (3,440)
Capital contributions............................................. 1,144,290 | 7,000
Distributions..................................................... (14,786) | --
Other financing activities........................................ (400) | --
-------------- | -------------
Net cash provided by financing activities................ 4,946,390 | 156,260
------------- | -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 424,610 | 53
CASH AND CASH EQUIVALENTS, beginning of period......................... 9,573 | 626
------------- | -------------
CASH AND CASH EQUIVALENTS, end of period............................... $ 434,183 | $ 679
============= | =============
CASH PAID FOR INTEREST................................................. $ 136,626 | $ 9,248
============= | =============
NON CASH TRANSACTIONS: |
Transfer of Marcus Holdings' net assets to the Company............ $ 1,252,370 | $ --
============= | =============
Transfer of Rifkin equity interests to the Company and preferred |
equity retained by former Rifkin owners in the Company........ $ 314,022 | $ --
============= | =============
Preferred equity retained by former Helicon owners in the |
Company....................................................... $ 25,000 | $ --
============= | =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
6
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Charter Communications Holdings, LLC (Charter Holdings) owns and
operates cable television systems currently serving approximately 3.7 million
customers. Charter Holdings offers a full range of traditional cable television
services and has begun to offer digital cable television services, interactive
video programming and high-speed Internet access. Charter Holdings is a
subsidiary of Charter Communications Holding Company, LLC (Charter Holdco),
which is a subsidiary of Charter Communications, Inc. In November 1999, Charter
Communications, Inc. completed an initial public offering of the sale of 195.5
million shares of Class A common stock. Proceeds from the offering were used by
Charter Communications, Inc. to purchase membership units in Charter Holdco,
which is using the funds received from Charter Communications, Inc. for the
acquisition of additional cable television systems.
ORGANIZATION AND BASIS OF PRESENTATION
Charter Holdings was formed in February 1999 as a wholly owned
subsidiary of Charter Investment, Inc. (Charter Investment) (formerly Charter
Communications, Inc.) Charter Investment, through its wholly owned subsidiary,
Charter Communications Properties Holdings, LLC (CCPH), commenced operations
with the acquisition of a cable television system on September 30, 1995.
Effective December 23, 1998, through a series of transactions, Paul G.
Allen acquired approximately 94% of Charter Investment for an aggregate purchase
price of $2.2 billion, excluding $2.0 billion in debt assumed (the "Paul Allen
Transaction"). In conjunction with the Paul Allen Transaction, Charter acquired,
for fair value from unrelated third parties 100% of the interests it did not
already own in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group
(comprised of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications
Long Beach, Inc.), all cable television operating companies, for $2.0 billion,
excluding $1.8 billion in debt assumed. Charter Investment previously managed
and owned minority interests in these companies. These acquisitions were
accounted for using the purchase method of accounting, and accordingly, results
of operations of CharterComm Holdings and CCA Group are included in the
financial statements from the date of acquisition. In February 1999, Charter
Investment transferred all of its cable television operating subsidiaries to a
wholly owned subsidiary of Charter Holdings, Charter Communications Operating,
LLC (Charter Operating). This transfer was accounted for as a reorganization of
entities under common control similar to a pooling of interests.
As a result of the change in ownership of CCPH, CharterComm Holdings
and CCA Group, Charter Holdings has applied push-down accounting in the
preparation of the consolidated financial statements. Accordingly, on December
23, 1998, Charter Holdings increased its member's equity by $2.2 billion to
reflect the amounts paid by Paul G. Allen and Charter Investment. The purchase
price was allocated to assets acquired and liabilities assumed based on their
relative fair values, including amounts assigned to franchises of $3.6 billion.
The allocation of the purchase price is based, in part, on preliminary
information which is subject to adjustment upon obtaining complete appraisal and
valuation information of intangible assets. The valuation information is
expected to be finalized in the fourth quarter of 1999. Management believes that
finalization of the purchase price will not have a material impact on the
results of operations or financial position of Charter Holdings.
On April 23, 1998, Paul G. Allen and a company controlled by Paul G.
Allen, (the "Paul G. Allen Companies") purchased substantially all of the
outstanding partnership interests in Marcus Cable Company, L.L.C. (Marcus Cable)
for $1.4 billion, excluding $1.8 billion in assumed liabilities. The owner of
the remaining partnership interest retained voting control of Marcus Cable. In
February 1999, Marcus Cable Holdings, LLC (Marcus Holdings) was formed and Mr.
Allen's
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interests in Marcus Cable were transferred to Marcus Holdings. On March 31,
1999, Paul G. Allen purchased the remaining partnership interests in Marcus
Cable, including voting control. On April 7, 1999, Marcus Holdings was merged
into Charter Holdings and Marcus Cable was transferred to Charter Holdings. For
financial reporting purposes, the merger was accounted for as an acquisition of
Marcus Cable effective March 31, 1999, the date Paul G. Allen obtained voting
control of Marcus Cable. Accordingly, the results of operations of Marcus Cable
have been included in the financial statements from April 1, 1999. The assets
and liabilities of Marcus Cable have been recorded in the financial statements
using historical carrying values reflected in the accounts of the Paul G. Allen
Companies. Total member's equity increased by $1.3 billion as a result of the
Marcus Cable acquisition. Previously, on April 23, 1998, the Paul G. Allen
Companies recorded the assets acquired and liabilities assumed of Marcus Cable
based on their relative fair values.
The consolidated financial statements of Charter Holdings include the
accounts of Charter Operating and CCPH, the accounts of CharterComm Holdings and
CCA Group and their subsidiaries since December 23, 1998 (date acquired by
Charter Investment), and the accounts of Marcus Cable since March 31, 1999, and
are collectively referred to as the "Company" herein. All subsidiaries are,
directly or indirectly, wholly owned by Charter Holdings. All material
intercompany transactions and balances have been eliminated.
As a result of the Paul Allen Transaction and the application of
push-down accounting, the financial information of the Company in the
accompanying financial statements and notes thereto as of December 31, 1998, and
September 30, 1999, and for the Successor Period (January 1, 1999 through
September 30, 1999) is presented on a different cost basis than the financial
information of the Company for the Predecessor Period (January 1, 1998 through
September 30, 1998) and therefore, such information is not comparable.
Pursuant to a membership interests purchase agreement, as amended,
Vulcan Cable III, Inc. a company controlled by Paul G. Allen, contributed $500
million on August 10, 1999 to Charter Holdco, contributed an additional $180.7
million in certain equity interests acquired in connection with the acquisition
of Rifkin Acquisitions Partners, L.L.L.P. and Interlink Communications Partners,
LLLP (collectively, "Rifkin") in September 1999 and contributed $644.3 million
in September 1999 to Charter Holdco. All funds and equity interests were
contributed by Charter Holdco to Charter Holdings. In addition, certain Rifkin
sellers received $133.3 million of the purchase price in the form of preferred
equity in Charter Holdco.
2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS:
The accompanying consolidated financial statements are unaudited;
however, in the opinion of management, such statements include all adjustments
necessary for a fair presentation of the results for the periods presented. The
interim consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto as of and for the period
ended December 31, 1998, included in the form S-4 Registration Statement of
Charter Holdings. Interim results are not necessarily indicative of results for
a full year.
The accompanying unaudited consolidated financial statements of the
Company have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted.
3. ACQUISITIONS:
In addition to the Paul Allen Transaction and the acquisitions by
Charter Investment of CharterComm Holdings, CCA Group and Marcus Holdings, the
Company acquired cable television systems for an aggregate purchase price, net
of cash acquired, of $291,800 in 1998, and completed the sale of certain cable
television systems for an aggregate sales price of $405,000 in 1998, all prior
to December 24, 1998. Through September 30, 1999, the Company has acquired cable
television systems in seven separate transactions for an aggregate purchase
price, net of cash, acquired of $2.7 billion, excluding debt assumed of $354
million. In connection with two of the acquisitions, Charter Holdco issued
equity interests totaling $133.3 million and a subsidiary of Charter Holdings
issued preferred equity interests totaling $25 million to the sellers. Charter
Holdco contributed the acquired net assets to Charter Holdings increasing
member's equity by $133.3 million. The $25 million preferred equity interest is
classified as minority interest on the Company's consolidated balance sheet. The
purchase price was allocated to assets acquired and liabilities assumed based on
their relative fair values, including amounts
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assigned to franchises of $2.9 billion. The allocation of the purchase prices
for these acquisitions are based, in part, on preliminary information, which is
subject to adjustment upon obtaining complete valuation information. Management
believes that finalization of the purchase prices will not have a material
impact on the consolidated results of operations or financial position of the
Company.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of acquisition. The
purchase prices were allocated to tangible and intangible assets based on
estimated fair values at the acquisition dates.
Pro forma operating results as though the acquisitions discussed above,
including the Paul Allen Transaction and the acquisition of Marcus Holdings, and
the refinancing discussed herein, had occurred on January 1, 1998, with
adjustments to give effect to amortization of franchises, interest expense and
certain other adjustments are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------
1999 1998
---- ----
<S> <C> <C>
Revenues............................................................................. $ 1,264,090 $ 1,154,204
Loss from operations................................................................. (111,400) (144,408)
Net loss............................................................................. (512,967) (560,444)
</TABLE>
The pro forma information has been presented for comparative purposes
and 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.
4. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Charter Holdings:
Credit Agreements (including CCPH, CCA
Group and CharterComm Holdings)............................................. $ -- $ 1,726,500
Senior Secured Discount Debentures............................................. -- 109,152
11.250% Senior Notes........................................................... -- 125,000
8.250% Senior Notes............................................................ 600,000 --
8.625% Senior Notes............................................................ 1,500,000 --
9.920% Senior Discount Notes................................................... 1,475,000 --
Charter Operating Credit Facilities............................................... 2,850,000 --
Renaissance:
10.0% Senior Discount Notes.................................................... 114,413 --
Rifkin:
11.125% Senior Subordinated Notes.............................................. 125,000 --
Note payable to former owner................................................... 3,000 --
Helicon:
11.0% Senior Secured Notes..................................................... 115,000 --
-------------- --------------
6,782,413 1,960,652
Current maturities............................................................. -- (10,450)
Unamortized net (discount) premium............................................. (537,781) 41,554
-------------- --------------
$ 6,244,632 $ 1,991,756
============== ==============
</TABLE>
In March 1999, the Company extinguished substantially all existing
long-term debt, excluding borrowings of the Company under its credit agreements,
and refinanced substantially all existing credit agreements at various
subsidiaries with a new credit agreement entered into by Charter Operating (the
"Charter Operating Credit Facilities"). The excess of the
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amount paid over the carrying value of the Company's long-term debt was recorded
as an extraordinary item-loss on early extinguishment of debt in the
accompanying consolidated statement of operations.
CHARTER HOLDINGS NOTES
In March 1999, the Company issued $600.0 million 8.250% Senior Notes
due 2007 (the "8.250% Senior Notes") for net proceeds of $598.4 million, $1.5
billion 8.625% Senior Notes due 2009 (the "8.625% Senior Notes") for net
proceeds of $1,495.4 million, and $1,475.0 million 9.920% Senior Discount Notes
due 2011 (the "9.920% Senior Discount Notes") for net proceeds of $905.6
million, (collectively with the 8.250% Senior Notes and the 8.625% Senior Notes,
referred to as the "Charter Holdings Notes").
The 8.250% Senior Notes are not redeemable prior to maturity. Interest
is payable semiannually in arrears on April 1 and October 1, beginning October
1, 1999 until maturity.
The 8.625% Senior Notes are redeemable at the option of the Company at
amounts decreasing from 104.313% to 100% of par value beginning on April 1,
2004, plus accrued and unpaid interest, to the date of redemption. At any time
prior to April 1, 2002, the Company may redeem up to 35% of the aggregate
principal amount of the 8.625% Senior Notes at a redemption price of 108.625% of
the principal amount under certain conditions. Interest is payable semi-annually
in arrears on April 1 and October 1, beginning October 1, 1999 until maturity.
The 9.920% Senior Discount Notes are redeemable at the option of the
Company at amounts decreasing from 104.960% to 100% of accreted value beginning
April 1, 2004. At any time prior to April 1, 2002, the Company may redeem up to
35% of the aggregate principal amount of the 9.920% Senior Discount Notes at a
redemption price of 109.920% of the accreted value under certain conditions. No
interest will be payable until April 1, 2004. Thereafter, interest is payable
semi-annually in arrears on April 1 and October 1 beginning April 1, 2004 until
maturity. The discount on the 9.920% Senior Discount Notes is being accreted
using the effective interest method at a rate of 9.920% per year. The
unamortized discount was $520.9 million at September 30, 1999.
The Charter Holdings Notes rank equally with current and future
unsecured and unsubordinated indebtedness (including trade payables of the
Company). The Company is required to make an offer to repurchase all of the
Charter Holdings Notes, at a price equal to 101% of the aggregate principal or
101% of the accreted value, together with accrued and unpaid interest, upon a
Change of Control of the Company, as defined.
RENAISSANCE NOTES
In connection with the acquisition of Renaissance Media Group LLC
(Renaissance) during the second quarter of 1999, the Company assumed $163,175
principal amount of senior discount notes due April 2008 (the "Renaissance
Notes"). As a result of the change in control of Renaissance, the Company was
required to make an offer to repurchase the Renaissance Notes at 101% of their
accreted value plus accrued interest. In May 1999, the Company made an offer to
repurchase the Renaissance Notes pursuant to this requirement, and the holders
of the Renaissance Notes tendered an amount representing 30% of the total
outstanding principal amount for repurchase.
As of September 30, 1999, $114.4 million aggregate principal amount of
Renaissance Notes with an accreted value of $83.8 million remains outstanding.
Interest on the Renaissance Notes shall be paid semi-annually at a rate of 10%
per annum beginning on October 15, 2003.
The Renaissance Notes are redeemable at the option of the Company, in
whole or in part, at any time on or after April 15, 2003, initially at 105% of
their principal amount at maturity, plus accrued interest, declining to 100% of
the principal amount at maturity, plus accrued interest, on or after April 15,
2006. In addition, at any time prior to April 15, 2001, the Company may redeem
up to 35% of the original principal amount at maturity with the proceeds of one
or more sales of membership units at 110% of their accreted value plus accrued
interest on the redemption date, provided that after any such redemption, at
least $106 million aggregate principal amount at maturity remains outstanding.
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HELICON NOTES
The Company acquired Helicon I. L.P. and affiliates in July 1999. As of
September 30, 1999, Helicon had outstanding $115.0 million in principal amount
of 11% senior secured notes due 2003 (the "Helicon Notes"). On November 1, 1999,
the Company redeemed all of the Helicon Notes at a purchase price equal to 103%
of their principal amount, plus accrued interest, for $124.8 million using
borrowings from the Charter Operating Credit Facilities. Accordingly, the
Helicon Notes have been classified as long-term debt in the accompanying
consolidated balance sheet as of September 30, 1999.
RIFKIN NOTES
The Company acquired Rifkin in September 1999. As of September 30,
1999, Rifkin had outstanding $125.0 million in principal amount of 111/8% senior
subordinated notes due 2006 (the "Rifkin Notes"). Interest on the Rifkin
subordinated notes is payable semi-annually on January 15 and July 15 of each
year. In September 1999, the Company commenced an offer to repurchase any and
all of the outstanding Rifkin Notes, together with a $3.0 million promissory
note payable to Monroe Rifkin, for cash at a premium over the principal amounts.
In conjunction with this tender offer, the Company sought and obtained the
consent of a majority in principal amount of the note holders of the outstanding
Rifkin Notes to proposed amendments to the indenture governing the Rifkin Notes,
which eliminated substantially all of the restrictive covenants. In November
1999, the Company repurchased the Rifkin Notes with a total outstanding
principal amount of $124.1 million for a total of $140.6 million, including a
consent fee of $30 per $1000 to the holders who delivered timely consents to
amending the indenture, and repurchased the promissory note issued to Monroe
Rifkin for $3.4 million. These notes were paid using borrowings from the Charter
Operating Credit Facilities. Accordingly, the Rifkin Notes and note payable to
Monroe Rifkin have been classified as long-term debt in the accompanying
consolidated balance sheet as of September 30, 1999.
CHARTER OPERATING CREDIT AGREEMENT
The Charter Operating Credit Facilities provides for two term
facilities, one with a principal amount of $1.0 billion that matures September
2008 (Term A), and the other with the principal amount of $1.85 billion that
matures March 2009 (Term B). The Charter Operating Credit Facilities also
provides for a $1.25 billion revolving credit facility with a maturity date of
September 2008. Amounts under the Charter Operating Credit Facilities bear
interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of
up to 2.75% (7.53% as of September 30, 1999). A quarterly commitment fee of
between 0.25% and 0.375% per annum is payable on the unborrowed balance of Term
A and the revolving credit facility.
The indentures governing the debt agreements require the Company and/or
its subsidiaries to comply with various financial and other covenants, including
the maintenance of certain operating and financial ratios. These debt
instruments also contain substantial limitations on, or prohibitions of
distributions, additional indebtedness, liens, asset sales and certain other
items. As a result of limitations and prohibitions of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, the parent company.
Based upon outstanding indebtedness at September 30, 1999, the
amortization of term loans, scheduled reductions in available borrowings of the
revolving credit facility, and the maturity dates for all senior and
subordinated notes, aggregate future principal payments on the total borrowings
under all debt agreements at September 30, 1999, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000................................................ $ --
2001................................................ --
2002................................................ 88,875
2003................................................ 156,000
2004................................................ 168,500
Thereafter.......................................... 6,369,038
--------------
$ 6,782,413
==============
</TABLE>
11
<PAGE> 12
5. RELATED-PARTY TRANSACTIONS:
The Company is charged a management fee equal to 3.5% percent of gross
revenues payable quarterly. To the extent management fees charged to the Company
are greater (less) than the corporate expenses incurred by Charter Investment,
the Company records a distribution to (capital contribution from) parent. For
the three and nine months ended September 30, 1999, the Company recorded a
distribution of $5,069 and $14,786, respectively. As of September 30, 1999,
management fees currently payable of $12,210 are included in payables to manager
of cable television systems -- related party.
In the second quarter of 1999, Charter Holdings loaned $50 million to
Charter Holdco. The promissory note bears interest at 7.5% compounded annually.
For the three and nine months ended September 30, 1999, Charter Holdings
recognized $1.0 million and $1.5 million of interest income pertaining to this
promissory note.
6. STOCK OPTION PLAN
In accordance with an employment agreement between the President and
Chief Executive Officer of Charter Communications, Inc. and a related option
agreement with the President and Chief Executive Officer, an option to purchase
3% of the equity value of Charter Holdco, or 7,044,121 membership interests, was
issued to the President and Chief Executive Officer. The option vests over a
four year period from the date of grant and expires ten years from the date of
grant.
In February 1999, the Company adopted an option plan providing for the
grant of options to purchase up to an aggregate of 10% of the equity value of
the Company. The plan was assumed by Charter Holdco. The option plan provides
for grants of options to employees, officers and directors of Charter Holdco and
its affiliates and consultants who provide services to Charter Holdco. Options
granted vest over five years from the grant date commencing 15 months after the
date of grant. Options not exercised accumulate and are exercisable, in whole or
in part, in any subsequent period, but not later than ten years from the date of
grant.
Membership units received upon exercise of the options will be
automatically exchanged for shares of Class A common stock of Charter
Communications, Inc. on a one-for-one basis.
Options outstanding as of November 12, 1999, are as follows:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
---------------------------------------------------------------- -----------
REMAINING NUMBER
NUMBER OF EXERCISE TOTAL CONTRACT LIFE OF
OPTIONS PRICE DOLLARS (IN YEARS) OPTIONS
------- ----- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Outstanding as of
January 1, 1999.................... 7,044,127 $ 20.00 $ 140,882,540 9.2 (1) 1,761,032
Granted:
February 9, 1999................... 9,050,881 20.00 181,017,620 130,000
April 5, 1999...................... 443,200 20.73 9,187,536 --
November 8, 1999................... 4,600,000 19.00 87,400,000 --
Cancelled............................. (378,400) 20.00-20.73 (7,595,886) --
--------------- ----------- ----------------- ----- -----------
Outstanding as of
November 12, 1999.................. 20,759,808 $ 19.79 (1) $ 410,891,810 9.4 (1) 1,891,032
=============== ========= ================= ===== ===========
</TABLE>
- ---------------------------
(1) Weighted average
The Company follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" to account for the option plans.
Stock option compensation expense of $21.1 and $59.3 million for the three and
nine months ended September 30, 1999, respectively, has been recorded in the
financial statements since the exercise prices were
12
<PAGE> 13
less than the estimated fair values of the underlying membership interests on
the date of grant. Estimated fair values were determined by the Company using
the valuation inherent in the Paul Allen Transaction and valuations of public
companies in the cable television industry adjusted for factors specific to the
Company. Compensation expense is being accrued over the vesting period of each
grant that varies from four to five years. As of September 30, 1999, deferred
compensation remaining to be recognized in future periods totaled $104 million.
No stock option compensation expense will be recorded for the November 8, 1999
options since the exercise price is equal to the estimated fair value of the
underlying membership interests on the date of grant. Since the membership units
are exchangeable into Class A common stock of Charter Communications, Inc. on a
one-for-one basis, the estimated fair value was equal to the initial offering
price of Class A common stock.
7. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--An
Amendment of FASB Statement No. 133" has delayed the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. We have not yet quantified
the impact of adopting SFAS No. 133 on our consolidated financial statements nor
have we determined the timing or method of our adoption of SFAS No. 133.
However, SFAS No. 133 could increase volatility in earnings (losses).
8. SUBSEQUENT EVENT:
In October 1999, the Company acquired cable television systems from
InterMedia in a transaction for an aggregate purchase price of $904 million plus
adjustments and exchanged company-operated cable television systems serving
approximately 144,000 customers. At the closing, Charter Holdings retained a
cable television system serving approximately 30,000 customers for which Charter
Holdings was unable to obtain the necessary regulatory approvals. If the
necessary regulatory approvals cannot be obtained for the transfer of this
system by March 20, 2000 and Charter Holdings is unable to transfer to
InterMedia satisfactory replacement systems before April 1, 2000, Charter
Holdings must pay InterMedia $88.2 million. In addition, if Charter Holdings
transfers cash or property other than the retained system to InterMedia, in
certain circumstances, Charter Holdings must indemnify InterMedia 50% of all
taxes and related costs incurred or arising out of any claim that InterMedia
suffered tax losses to which it would not have been subject if Charter Holdings
had transferred the retained system. The exchange of cable television systems
will be recorded at the fair value of the systems exchanged.
13
<PAGE> 14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to the "Certain Trends and Uncertainties" section
below in this Management's Discussion and Analysis for a discussion of important
factors that could cause actual results to differ from expectations and
non-historical information contained herein.
GENERAL
Charter Communications Holdings, LLC (Charter Holdings) owns and
operates cable television systems currently serving approximately 3.7 million
customers. Charter Holdings offers a full range of traditional cable television
services and has begun to offer digital cable television services, interactive
video programming and high-speed Internet access. Charter Holdings is a
subsidiary of Charter Communications Holding Company, LLC (Charter Holdco),
which is a subsidiary of Charter Communications, Inc. In November 1999, Charter
Communications, Inc. completed an initial public offering for the sale of 195.5
million shares of Class A common stock. Proceeds from the offering were used by
Charter Communications, Inc. to purchase membership units in Charter Holdco,
which is using the funds received from Charter Communications, Inc. for the
acquisition of additional cable television systems.
INTRODUCTION
We do not believe that the historical financial condition and results
of operations are accurate indicators of future results because of recent
significant events, including:
(1) the acquisition by Mr. Allen of CCA Group, Charter
Communications Properties Holdings, LLC and CharterComm
Holdings LLC, referred to together with their subsidiaries as
the Charter companies;
(2) the merger of Marcus Cable Holdings, LLC with and into Charter
Holdings;
(3) the recent acquisitions of Charter Holdings and its direct and
indirect subsidiaries;
(4) the refinancing of the previous credit facilities of the
Charter companies; and
(5) the purchase of publicly held notes that had been issued by
several of the direct and indirect subsidiaries of Charter
Holdings and Marcus Holdings.
Provided below is a discussion of our organizational history consisting of:
(1) the operation and development of the Charter companies prior
to the acquisition by Mr. Allen, together with the acquisition
of the Charter companies by Mr. Allen;
(2) the merger of Marcus Holdings with and into Charter Holdings;
(3) the recent acquisitions of Charter Holdings and its direct and
indirect subsidiaries; and
(4) the formation of Charter Communications, Inc.
ORGANIZATIONAL HISTORY
Prior to the acquisition of the Charter companies by Mr. Allen on
December 23, 1998, and the merger of Marcus Holdings with and into Charter
Holdings effective March 31, 1999, the cable television systems of the Charter
and Marcus companies were operated under four groups of companies. Three of
these groups were comprised of companies that were managed by Charter
Investment, Inc. prior to the acquisition of the Charter companies by Mr. Allen
and the fourth group was comprised of companies that were subsidiaries of Marcus
Holdings. Charter started managing Marcus Holdings in October 1998.
14
<PAGE> 15
The following is an explanation of how:
(1) Charter Communications Properties Holdings; the operating
companies that formerly comprised CCA Group and CharterComm
Holdings; and the Marcus companies became wholly owned
subsidiaries of Charter Operating;
(2) Charter Operating became a wholly owned subsidiary of Charter
Holdings;
(3) Charter Holdings became a wholly owned subsidiary of Charter
Holdco; and
(4) Charter Holdco became a wholly owned subsidiary of Charter
Investment, Inc.
THE CHARTER COMPANIES
Prior to Charter Investment, Inc. acquiring the remaining interests
that it did not previously own in two of the three groups of Charter companies,
namely CCA Group and CharterComm Holdings, as described below, the operating
subsidiaries of the three groups of Charter companies were parties to separate
management agreements with Charter Investment, Inc. pursuant to which Charter
Investment, Inc. provided management and consulting services.
Prior to our acquisition by Mr. Allen, the Charter companies were as follows:
(1) Charter Communications Properties Holdings, LLC
Charter Communications Properties Holdings was a wholly owned
subsidiary of Charter Investment, Inc. The primary subsidiary of
Charter Communications Properties Holdings, which owned the cable
television systems, was Charter Communications Properties, LLC. In
connection with Mr. Allen's acquisition on December 23, 1998, Charter
Communications Properties Holdings was merged out of existence. Charter
Communications Properties Holdings became a direct, wholly owned
subsidiary of Charter Investment, Inc. In May 1998, Charter
Communications Properties Holdings acquired certain cable television
systems from Sonic Communications, Inc. for a total purchase price, net
of cash acquired, of $228.4 million, including $60.9 million of assumed
debt.
(2) CCA Group
The controlling interests in CCA Group were held by affiliates
of Kelso & Co. Charter Investment, Inc. had only a minority interest.
Effective December 23, 1998, prior to Mr. Allen's acquisition, the
remaining interests it did not previously own in CCA Group were
acquired by Charter Investment, Inc. from the Kelso affiliates.
Consequently, the companies comprising CCA Group became wholly owned
subsidiaries of Charter Investment, Inc.
CCA Group consisted of the following three sister companies:
(a) CCT Holdings, LLC,
(b) CCA Holdings, LLC, and
(c) Charter Communications Long Beach, LLC.
The cable television systems were owned by the various
subsidiaries of these three sister companies. The financial statements
for these three sister companies historically were combined and the
term "CCA Group" was assigned to these combined entities. In connection
with Mr. Allen's acquisition on December 23, 1998, the three sister
companies and some of the non-operating subsidiaries were merged out of
existence, leaving certain of the operating subsidiaries owning all of
the cable television systems under this former group. These operating
subsidiaries became indirect, wholly owned subsidiaries of Charter
Investment, Inc.
15
<PAGE> 16
(3) CharterComm Holdings, LLC
The controlling interests in CharterComm Holdings were held by
affiliates of Charterhouse Group International Inc. Charter Investment,
Inc. had only a minority interest. Effective December 23, 1998, prior
to Mr. Allen's acquisition, the remaining interests it did not
previously own in CharterComm Holdings were acquired by Charter
Investment, Inc. from the Charterhouse affiliates. Consequently,
CharterComm Holdings became a wholly owned subsidiary of Charter
Investment, Inc.
The cable television systems were owned by the various
subsidiaries of CharterComm Holdings. In connection with Mr. Allen's
acquisition on December 23, 1998, some of the non-operating
subsidiaries were merged out of existence, leaving certain of the
operating subsidiaries owning all of the cable television systems under
this former group. CharterComm Holdings was merged out of existence.
Charter Communications, LLC became a direct, wholly owned subsidiary of
Charter Investment, Inc.
In February 1999, Charter Holdings was formed as a wholly owned
subsidiary of Charter Investment, Inc., and Charter Operating was formed as a
wholly owned subsidiary of Charter Holdings. All of Charter Investment, Inc.'s
direct interests in the entities described above were transferred to Charter
Operating. All of the prior management agreements were terminated and a new
management agreement was entered into between Charter Investment, Inc. and
Charter Operating.
In May 1999, Charter Holdco was formed as a wholly owned subsidiary of
Charter Investment, Inc. All of Charter Investment, Inc.'s interests in Charter
Holdings were transferred to Charter Holdco.
The acquisition by Mr. Allen became effective on December 23, 1998,
through a series of transactions in which Mr. Allen acquired approximately 94%
of the equity interests of Charter Investment, Inc. for an aggregate purchase
price of $2.2 billion, excluding $2.0 billion in assumed debt. Charter
Communications Properties Holdings, the operating companies that formerly
comprised CCA Group and CharterComm Holdings were contributed to Charter
Operating subsequent to Mr. Allen's acquisition. Charter Communications
Properties Holdings is deemed to be our predecessor. Consequently, the
contribution of Charter Communications Properties Holdings was accounted for as
a reorganization under common control. Accordingly, Charter Holdings results of
operations for periods prior to and including December 23, 1998 include the
accounts of Charter Communications Properties Holdings. The contributions of the
operating companies that formerly comprised CCA Group and CharterComm Holdings
were accounted for in accordance with purchase accounting. Accordingly, Charter
Holdings results of operations for periods after December 23, 1998 include the
accounts of Charter Communications Properties Holdings, CCA Group and
CharterComm Holdings.
MARCUS COMPANIES
In April 1998, Mr. Allen acquired approximately 99% of the non-voting
economic interests in Marcus Cable, and agreed to acquire the remaining
interests. The owner of the remaining partnership interests retained voting
control of Marcus Cable. In October 1998, Marcus Cable entered into a management
consulting agreement with Charter Investment, Inc., pursuant to which Charter
Investment, Inc. provided management and consulting services to Marcus Cable and
its subsidiaries which own cable television systems. This agreement placed the
Marcus cable television systems under common management with the cable
television systems of the Charter companies acquired by Mr. Allen in December
1998.
In March 1999, all of Mr. Allen's interests in Marcus Cable were
transferred to Marcus Holdings, a then newly formed company. Later in March
1999, Mr. Allen acquired the remaining interests in Marcus Cable, including
voting control, which interests were transferred to Marcus Holdings. In April
1999, Mr. Allen merged Marcus Holdings into Charter Holdings, and the operating
subsidiaries of Marcus Holdings and all of the cable television systems they
owned came under the ownership of Charter Holdings and, in turn, Charter
Operating. For financial reporting purposes, the merger of Marcus Holdings with
and into Charter Holdings was accounted for as an acquisition of Marcus Holdings
effective March 31, 1999, and accordingly, the results of operations of Marcus
Holdings have been included in the consoldiated financial statements of Charter
Holdco since that date.
16
<PAGE> 17
ACQUISITIONS
In the second, third and fourth quarters of 1999, direct or indirect
subsidiaries of Charter Holdings acquired Renaissance Media Group LLC, American
Cable Entertainment, LLC, cable television systems of Greater Media Cablevision,
Inc., Helicon Partners I, L.P. and affiliates, Vista Broadband Communications,
L.L.C., a cable television system of Cable Satellite of South Miami, Inc.,
Rifkin Acquisition Partners, L.L.L.P. and InterLink Communications, LLLP
(collectively "Rifkin"), and cable television systems of InterMedia Capital
Partners IV, L.P., InterMedia Partners and affiliates for a total purchase price
of approximately $4.3 billion which included assumed debt of $354 million. These
acquisitions were funded through excess cash from the issuance by Charter
Holdings of senior notes, borrowings under the Charter Operating credit
facilities, capital contributions to Charter Holdings by Mr. Allen and the
assumption of the outstanding Renaissance, Helicon and Rifkin notes.
As part of the transaction with InterMedia, we agreed to "swap" some of
our non-strategic cable television systems located in Indiana, Montana, Utah and
northern Kentucky, representing 144,000 basic customers. The InterMedia systems
serve approximately 412,000 customers in Georgia, North Carolina, South Carolina
and Tennessee. We have transferred 114,000 subscribers to InterMedia in
connection with this swap. Subscribers totaling 30,000 are yet to be transferred
pending the necessary regulatory approvals. If the necessary regulatory
approvals cannot be obtained for the transfer of this system by March 20, 2000
and we are unable to transfer to InterMedia satisfactory replacement systems
before April 1, 2000, we must pay InterMedia $88.2 million. In addition, if we
transfer cash or property other than the retained system to InterMedia, in
certain circumstances, we must indemnify InterMedia 50% of all taxes and related
costs incurred or arising out of any claim that InterMedia suffered tax losses
to which it would not have been subject if we had transferred the retained
system. The exchange of cable television systems will be recorded at the fair
value of the systems exchanged.
Certain Rifkin sellers received $133.3 million of the purchase
price in the form of preferred equity of Charter Holdco. Under the Helicon
purchase agreement, $25 million of the purchase price was paid in the form of
preferred limited liability company interests in a subsidiary of Charter
Holdings.
<TABLE>
<CAPTION>
PURCHASE BASIC SUBSCRIBERS
ACQUISITION PRICE AS OF
ACQUISITION DATE (IN MILLIONS) SEPTEMBER 30, 1999
- ----------- ---- ------------- ------------------
<S> <C> <C> <C>
Renaissance ...................... 4/99 $ 459 132,300
American Cable ................... 5/99 240 69,600
Greater Media systems ............ 6/99 500 174,300
Helicon ......................... 7/99 550 172,000
Vista ......................... 7/99 126 27,500
Cable Satellite................... 8/89 22 9,100
Rifkin ....................... 9/99 1,460 464,500
InterMedia systems................ 10/99 904+ 405,200
systems swap (141,900)(a)
------------
263,300
------------ ------------
Total.................... $ 4,261 1,312,600
============ ============
</TABLE>
(a) Represents the number of basic customers served by cable television
systems that we agreed to transfer to InterMedia. This number includes
30,000 basic customers served by an Indiana cable television system
that we did not transfer at the time of the InterMedia closing because
necessary regulatory approvals were still pending.
OVERVIEW
Approximately 86% of our historical revenues for the nine months ended
September 30, 1999, are attributable to monthly subscription fees charged to
customers for our basic, expanded basic and premium cable television programming
services, equipment rental and ancillary services provided by our cable
television systems. In addition, we derive other revenues from installation and
reconnection fees charged to customers to commence or reinstate service,
pay-per-view programming, where users are charged a fee for individual programs
requested, advertising revenues and commissions related to the sale of
merchandise by home shopping services. We have generated increased revenues in
each of the past
17
<PAGE> 18
eight fiscal quarters, primarily through internal customer growth, basic and
expanded tier rate increases and acquisitions as well as innovative marketing,
such as our MVP package of premium services. The MVP package entitles customers
to receive a substantial discount on bundled premium services of HBO, Showtime,
Cinemax and The Movie Channel. The MVP package has increased premium revenue by
3.4% and premium cash flow by 5.5% in the initial nine months of this program.
We are beginning to offer our customers several other services, which are
expected to contribute to our revenues in the future. One of these services is
digital cable, which provides subscribers with additional programming options.
We are also offering high speed Internet access to the World Wide Web through
cable modems. Cable modems can be attached to personal computers so that users
can send and receive data over cable systems. Our television based Internet
access allows us to offer the services provided by WorldGate Communications,
Inc., which offers users TV-based e-mail and other Internet access.
Our expenses primarily consist of operating costs, general and
administrative expenses, depreciation and amortization expense and management
fees/corporate expense charges. Operating costs primarily include programming
costs, cable service related expenses, marketing and advertising costs,
franchise fees and expenses related to customer billings. Programming costs
account for approximately 44% of our operating costs for the nine months ended
September 30, 1999. Programming costs have increased in recent years and are
expected to continue to increase due to additional programming being provided to
customers, increased cost to produce or purchase cable programming, inflation
and other factors affecting the cable television industry. In each year we have
operated, our costs to acquire programming have exceeded customary inflationary
increases. A significant factor with respect to increased programming costs is
the rate increases and surcharges imposed by national and regional sports
networks directly tied to escalating costs to acquire programming for
professional sports packages in a competitive market. We have benefited in the
past from our membership in an industry cooperative that provides members with
volume discounts from programming networks. We believe our membership has
minimized increases in our programming costs relative to what the increases
would otherwise have been. We also believe that we should derive additional
discounts from programming networks due to our increased size. Finally, we were
able to negotiate favorable terms with premium networks in conjunction with the
premium packages, which minimized the impact on margins and provided substantial
volume incentives to grow the premium category. Although we believe that we will
be able to pass future increases in programming costs through to customers,
there can be no assurance that we will be able to do so.
General and administrative expenses primarily include accounting and
administrative personnel and professional fees. Depreciation and amortization
expense relates to the depreciation of our tangible assets and the amortization
of our franchise costs. Management fees/corporate expense charges are fees paid
to or charges from Charter Investment, Inc. for corporate management and
consulting services. Charter Holdings records actual corporate expense charges
incurred by Charter Investment, Inc. on behalf of Charter Holdings. Prior to the
acquisition of us by Mr. Allen, the CCA Group and CharterComm Holdings recorded
management fees payable to Charter Investment, Inc. equal to 3.0% to 5.0% of
gross revenues plus certain expenses. In October 1998, Charter Investment, Inc.
began managing the cable operations of Marcus Holdings under a management
agreement, which was terminated in February 1999 and replaced by a master
management fee arrangement. The Charter Operating credit facilities limit
management fees to 3.5% of gross revenues.
In connection with the initial public offering by Charter
Communications, Inc., on November 9, 1999, the existing management agreement
between Charter Investment, Inc. and Charter Operating was assigned to Charter
Communications, Inc. and Charter Communications, Inc. entered into a new
management agreement with Charter Holdco. This management agreement is
substantially similar to the existing management agreement with Charter
Operating except that Charter Communications, Inc. is only entitled to receive
reimbursement of its expenses as consideration for its providing management
services.
We have had a history of net losses and expect to continue to report
net losses for the foreseeable future. The principal reasons for our prior and
anticipated net losses include depreciation and amortization expenses associated
with our acquisitions, capital expenditures related to construction and
upgrading of our systems, and interest costs on borrowed money. We cannot
predict what impact, if any, continued losses will have on our ability to
finance our operations in the future.
18
<PAGE> 19
RESULTS OF OPERATIONS
The following discusses the results of operations for:
(1) Charter Holdings, comprised of Charter Communications
Properties Holdings, for the nine months ended September 30,
1998, and
(2) Charter Holdings comprised of the following for the nine
months ended September 30, 1999:
- Charter Communications Properties Holdings, CCA Group and
CharterComm Holdings for the entire period.
- Marcus Holdings for the period from March 31, 1999 (the date
Mr. Allen acquired voting control) through September
30, 1999.
- Renaissance Media Group LLC for the period from May 1, 1999
(the acquisition date) through September 30, 1999.
- American Cable Entertainment, LLC for the period from May 8,
1999 (the acquisition date) through September 30, 1999.
- Cable television systems of Greater Media Cablevision, Inc.
for the period from July 1, 1999 (the acquisition date)
through September 30, 1999.
- Helicon Partners I, L.P. and affiliates for the period from
July 31, 1999 (the acquisition date) through September 30,
1999.
- Vista Broadband Communications, L.L.C. for the period from
July 31, 1999 (the acquisition date) through September 30,
1999.
- Cable television system of Cable Satellite of South Miami,
Inc. for the period from July 31, 1999 (the acquisition
date) through September 30, 1999.
- No operating results are included for the InterMedia systems
as they were acquired on October 1, 1999.
The following table sets forth the percentages of revenues that items
in the unaudited statements of operations constitute for the indicated periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
------------------------------------------------------------------
1999 1998
---------------------------- ------------------------------
(DOLLARS IN THOUSANDS)
SUCCESSOR PREDECESSOR
--------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Revenues ................................... $ 376,189 100.0% $ 17,403 100.0%
------------ ------- -------------- --------
Operating expenses:
Operating, general and
administrative...................... 194,716 51.8 9,121 52.4
Depreciation and amortization........... 191,439 50.9 5,925 34.0
Stock option compensation
expense............................. 21,094 5.6 -- --
Management fees/corporate
expense charges..................... 7,236 1.9 871 5.0
-------------- --------- -------------- -----------
Total operating expenses................ 414,485 110.2 15,917 91.4
-------------- --------- -------------- -----------
Income (loss) from operations................ (38,296) (10.2) 1,486 8.6
Interest income.............................. 8,241 2.2 9 0.1
Interest expense............................. (131,081) (34.8) (6,212) (19.0)
Other income ............................... (3,017) (0.8) 3 --
-------------- --------- -------------- -----------
Net loss............................ $ (164,153) (43.6)% $(4,714) (10.3)%
============== ========= ============== ===========
</TABLE>
19
<PAGE> 20
PERIOD FROM JULY 1, 1999 THROUGH SEPTEMBER 30, 1999
COMPARED TO PERIOD FROM JULY 1, 1998 THROUGH SEPTEMBER 30, 1998
REVENUES. Revenues increased by $358.8 million, from $17.4 million for
the period from July 1, 1998 through September 30, 1998 to $376.2 million for
the period from July 1, 1999 through September 30, 1999. The increase in
revenues primarily resulted from the acquisitions of CCA Group and CharterComm
Holdings, Marcus Holdings and other recent acquisitions. Additional revenues
from these entities included for the period ended September 30, 1999 were $151.0
million, $133.0 million and $74.6 million, respectively.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $185.6 million, from $9.1 million for the
period from July 1, 1998 through September 30, 1998 to $194.7 million for the
period from July 1, 1999 through September 30, 1999. This increase was due
primarily to the acquisitions of the CCA Group and CharterComm Holdings, Marcus
Holdings and other recent acquisitions. Additional operating, general and
administrative expenses from these entities included for the period from July 1,
1999 through September 30, 1999 were $76.2 million, $70.9 million and $39.2
million, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $185.5 million, from $5.9 million for the period from July 1, 1998
through September 30, 1998 to $191.4 million for the period from July 1, 1999
through September 30, 1999. There was a significant increase in amortization
expense resulting from the acquisitions of the CCA Group and CharterComm
Holdings, Marcus Holdings and other recent acquisitions. Additional depreciation
and amortization expense from these entities included for the period ended
September 30, 1999 were $78.9 million, $68.3 million and $38.7 million,
respectively.
STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense
for the period from July 1, 1999 through September 30, 1999 was $21.1 million
due to the granting of options to employees in December 1998, February 1999 and
April 1999. The exercise prices of the options are less than the estimated fair
values of the underlying membership units on the date of grant, resulting in
compensation expense accrued over the vesting period of each grant that varies
from four to five years.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $6.4 million, from $0.9 million for the period from
July 1, 1998 through September 30, 1998 to $7.2 million for the period from July
1, 1999 through September 30, 1999. The increase from the period from July 1,
1998 through September 30, 1998 compared to the period from July 1, 1999 through
September 30, 1999 was the result of the acquisitions of CCA Group and
CharterComm Holdings, Marcus Holdings and other recent acquisitions.
INTEREST INCOME. Interest income increased by $8.2 million from $9,000
for the period from July 1, 1998 to September 30, 1998 to $8.2 million for the
period from July 1, 1999 to September 30, 1999. The increase was primarily due
to investing excess cash that resulted from required credit facilities
drawdowns.
INTEREST EXPENSE. Interest expense increased by $124.9 million, from
$6.2 million for the period from July 1, 1998 through September 30, 1998 to
$131.1 million for the period from July 1, 1999 through September 30, 1999. This
increase resulted primarily from interest on the notes and credit facilities
used to finance the acquisitions of CCA Group and CharterComm Holdings, Sonic,
Marcus Holdings and other recent acquisitions.
NET LOSS. Net loss increased by $159.4 million, from $4.7 million for
the period from July 1, 1998 through September 30, 1998 to $164.2 million for
the period from July 1, 1999 through September 30, 1999. The increase in
revenues that resulted from the acquisitions of CCA Group, CharterComm Holdings,
and Marcus Holdings was not sufficient to offset the operating expenses
associated with the acquired systems and loss from early extinguishment of debt.
20
<PAGE> 21
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1999 1998
----------------------- -----------------------
(DOLLARS IN THOUSANDS)
SUCCESSOR PREDECESSOR
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Revenues ............................ $ 845,182 100.0% $ 32,532 100.0%
--------- -------- --------- -------
Operating expenses:
Operating, general and
administrative ............. 436,057 51.6 17,498 53.8
Depreciation and amortization... 441,391 52.2 11,236 34.5
Stock option compensation
expense .................... 59,288 7.0 -- --
Management fees/corporate
expense charges ............ 18,309 2.2 1,499 4.6
--------- ------- --------- -------
Total operating expenses.... 955,045 113.0 30,233 92.9
--------- ------- --------- -------
(Loss) income from operations ....... (109,863) (13.0) 2,299 7.1
Interest income ..................... 18,326 2.2 23 0.1
Interest expense .................... (288,750) (34.2) (11,831) (36.4)
Other (expense) income .............. (177) -- 6 --
--------- ------- --------- -------
Loss before extraordinary item ...... (380,464) (45.0) (9,503) (29.2)
Extraordinary item-loss from
early extinguishment of debt.... 7,794 0.9 -- --
--------- ------- --------- -------
Net loss ................... $(388,258) (45.9)% $ (9,503) (29.2)%
========= ======= ========= =======
</TABLE>
PERIOD FROM JANUARY 1, 1999 THROUGH SEPTEMBER 30, 1999
COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH SEPTEMBER 30, 1998
REVENUES. Revenues increased by $812.7 million, from $32.5 million for
the first nine months of 1998 to $845.2 million for the first nine months of
1999. The increase in revenues primarily resulted from the acquisitions of CCA
Group and CharterComm Holdings, Sonic, Marcus Holdings and other recent
acquisitions. Additional revenues from these entities included for the period
ended September 30, 1999 were $439.3 million, $26.2 million, $261.2 million and
$90.7 million, respectively.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $418.6 million, from $17.5 million for the
period from January 1, 1998 through September 30, 1998 to $436.1 million for the
period from January 1, 1999 through September 30, 1999. This increase was due
primarily to the acquisitions of the CCA Group and CharterComm Holdings, Sonic,
Marcus Holdings and other recent acquisitions. Additional operating, general and
administrative expenses from these entities included for the period from January
1, 1999 through September 30, 1999 were $221.1 million, $13.7 million, $140.4
million and $46.8 million, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $430.2 million, from $11.2 million for the period from January 1,
1998 through September 30, 1998 to $441.4 million for the period from January 1,
1999 through September 30, 1999. There was a significant increase in
amortization expense resulting from the acquisitions of the CCA Group and
CharterComm Holdings, Sonic, Marcus Holdings and other recent acquisitions.
Additional depreciation and amortization expense from these entities included
for the period ended September 30, 1999 were $244.0 million, $5.3 million,
$133.9 million and $47.3 million, respectively.
STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense
for the period from January 1, 1999 through September 30, 1999 was $59.3 million
due to the granting of options to employees in December 1998, February 1999 and
April 1999. The exercise prices of the options are less than the estimated fair
values of the underlying membership units on the date of grant, resulting in
compensation expense accrued over the vesting period of each grant that varies
from four to five years.
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<PAGE> 22
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $16.8 million, from $1.5 million for the period
from January 1, 1998 through September 30, 1998 to $18.3 million for the period
from January 1, 1999 through September 30, 1999. The increase from the period
from January 1, 1998 through September 30, 1998 compared to the period from
January 1, 1999 through September 30, 1999 was the result of the acquisitions of
CCA Group and CharterComm Holdings, Sonic, Marcus Holdings and other recent
acquisitions.
INTEREST INCOME. Interest income increased by $18.3 million from
$23,000 for the period from January 1, 1998 to September 30, 1998 to $18.3
million for the period from January 1, 1999 to September 30, 1999. The increase
was primarily due to investing excess cash that resulted from required credit
facilities drawdowns.
INTEREST EXPENSE. Interest expense increased by $276.9 million, from
$11.8 million for the period from January 1, 1998 through September 30, 1998 to
$288.8 million for the period from January 1, 1999 through September 30, 1999.
This increase resulted primarily from interest on the notes and credit
facilities used to finance the acquisitions of CCA Group and CharterComm
Holdings, Marcus Holdings and other recent acquisitions.
NET LOSS. Net loss increased by $378.8 million, from $9.5 million for
the period from January 1, 1998 through September 30, 1998 to $388.3 million for
the period from January 1, 1999 through September 30, 1999. The increase in
revenues that resulted from the acquisitions of CCA Group, CharterComm Holdings,
Sonic and Marcus Holdings was not sufficient to offset the operating expenses
associated with the acquired systems and loss from early extinguishment of debt.
OUTLOOK
Our business strategy emphasizes the increase of our operating cash
flow by increasing our customer base and the amount of cash flow per customer.
We believe that there are significant advantages in increasing the size and
scope of our operations, including:
- improved economies of scale in management, marketing, customer
service, billing and other administrative functions;
- reduced costs for our cable television systems and our
infrastructure in general;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
We seek to "cluster" cable television systems in suburban and ex-urban
areas surrounding selected metropolitan markets. We believe that such
"clustering" offers significant opportunities to increase operating efficiencies
and to improve operating margins and cash flow by spreading fixed costs over an
expanding subscriber base. In addition, we believe that by concentrating
"clusters" in markets, we will be able to generate higher growth in revenues and
operating cash flow. Through strategic acquisitions and "swaps" of cable
television systems, we seek to enlarge the coverage of our current areas of
operations, and, if feasible, develop "clusters" in new geographic areas within
existing regions. Swapping of cable television systems allows us to trade
systems that do not coincide with our operating strategy while gaining systems
that meet our objectives. Several significant swaps have been announced. These
swaps have demonstrated the industry's trend to cluster operations. To date,
Charter Holdings has participated in one swap in connection with the InterMedia
transaction. We are currently negotiating other possible swap transactions.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant cash to fund acquisitions, capital
expenditures, debt service costs and ongoing operations. We have historically
funded and expect to fund future liquidity and capital requirements through cash
flows from operations, equity contributions, borrowings under our credit
facilities and debt and equity financings.
Our historical cash flows from operating activities for the three and
nine months ended September 30, 1999 were $96 and $266 million, respectively.
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<PAGE> 23
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We make
capital expenditures primarily to upgrade, rebuild and expand our cable
television systems, as well as for system maintenance, the development of new
products and services, and converters. Converters are set-top devices added in
front of a subscriber's television receiver to change the frequency of the cable
television signals to a suitable channel. The television receiver is then able
to tune and to allow access to premium service.
Upgrading our cable television systems will enable us to offer new
products and services, including digital television, additional channels and
tiers, expanded pay-per-view options, high-speed Internet access and interactive
services.
Capital expenditures for the fourth quarter of 1999 is expected to be
approximately $215 million and will be funded from cash flows from operations
and credit facilities borrowings. For the nine months ended September 30, 1999,
we made capital expenditures, excluding the acquisition of cable television
systems, of $385 million. The majority of the capital expenditures related to
rebuilding existing cable television systems.
For the period from January 1, 2000 to December 31, 2002, we plan to
spend approximately $3.1 billion for capital expenditures, approximately $1.7
billion of which will be used to upgrade and rebuild our systems to bandwidth
capacity of 550 megahertz or greater and add two-way capability, so that we may
offer advanced services. The remaining $1.4 billion will be used for extensions
of systems, development of new products and services, converters and system
maintenance. Capital expenditures for 2000, 2001 and 2002 are expected to be
approximately $0.9 billion, $1.1 billion and $1.1 billion, respectively. We
currently expect to finance approximately 80% of the anticipated capital
expenditures with cash generated from operations and approximately 20% with
additional borrowings under credit facilities. We cannot assure you that these
amounts will be sufficient to accomplish our planned system upgrade, expansion
and maintenance. This could adversely affect our ability to offer new products
and services and compete effectively, and could adversely affect our growth,
financial condition and results of operations.
FINANCING ACTIVITIES
CHARTER HOLDINGS NOTES. On March 17, 1999, Charter Holdings issued $3.6
billion principal amount of senior notes. The net proceeds of approximately
$2.99 billion, combined with the borrowings under Charter Operating's credit
facilities, were used to consummate tender offers for publicly held debt of
several of our subsidiaries, as described below, refinance borrowings under our
previous credit facilities and for working capital purposes and to finance a
number of recent acquisitions.
Semi-annual interest payments with respect to the 8.250% notes and the
8.625% notes will be approximately $89.4 million, commencing with the first
payment on October 1, 1999. No interest on the 9.920% notes will be payable
prior to April 1, 2004. Thereafter, semi-annual interest payments on the three
series of senior notes will be approximately $162.6 million in the aggregate,
commencing on October 1, 2004. Charter Holdings and its wholly owned subsidiary,
Charter Communications Holdings Capital Corporation, in September 1999,
completed an offer to exchange the senior notes they issued in March 1999 for
senior notes with substantially similar terms, except that the new notes are
registered and are not subject to restrictions on transfer. With the exception
of $120,000 principal amount of the 8.625% notes, all of the Charter Holdings
notes were exchanged for new notes. As of September 30, 1999, $2.1 billion was
outstanding under the 8.250% and 8.625% notes, and the accreted value of the
9.920% notes was $954.1 million.
Concurrently with the issuance of the Charter Holdings notes, we
refinanced substantially all of our previous credit facilities and Marcus Cable
Operating Company, L.L.C.'s credit facilities with new credit facilities entered
into by Charter Operating. In February and March 1999, we commenced cash tender
offers to purchase the 14% senior discount notes issued by Charter
Communications Southeast Holdings, LLC, the 11.25% senior notes issued by
Charter Communications Southeast, LLC, the 13.50% senior subordinated discount
notes issued by Marcus Cable Operating Company, L.L.C., and the 14.25% senior
discount notes issued by Marcus Cable. All notes, except for $1.1 million in
principal amount, were paid off for an aggregate amount of $1.0 billion. The
remaining notes ($1.1 million) were repaid in September 1999.
CHARTER OPERATING CREDIT FACILITIES. Charter Operating's credit
facilities provide for two term facilities, one with a principal amount of $1.0
billion that matures in September 2008 (Term A), and the other with the
principal amount of $1.85
23
<PAGE> 24
billion that matures in March 2009 (Term B). Our credit facilities also provide
for a $1.25 billion revolving credit facility with a maturity date of September
2008. As of September 30, 1999, approximately $2.85 billion was outstanding and
$1.25 billion was available for borrowing under Charter Operating's credit
facilities. In addition, an uncommitted incremental term facility of up to $500
million with terms similar to the terms of Charter Operating's credit facilities
is permitted under these credit facilities, but will be conditioned on receipt
of additional new commitments from existing and new lenders. The Company
borrowed $520 million under the revolving credit facility on October 1, 1999 to
complete the acquisition of the InterMedia systems. In addition, the Company
borrowed approximately $269 million in the aggregate under the revolving credit
facility to retire the Rifkin Notes and the Helicon Notes during October 1999
and November 1999, respectively.
Amounts under Charter Operating's credit facilities bear interest at a
base rate or a Eurodollar rate, plus a margin up to 2.75%. A quarterly
commitment fee of between 0.25% and 0.375% per annum is payable on the
unborrowed balance of Term A and the revolving credit facility. The weighted
average interest rate for outstanding debt on September 30, 1999 was 7.6%.
Furthermore, Charter Operating has entered into interest rate protection
agreements to reduce the impact of changes in interest rates on our debt
outstanding under its credit facilities.
RENAISSANCE NOTES. We acquired Renaissance in April 1999. The
Renaissance 10% senior discount notes due April 2008 had a $163.2 million
principal amount at maturity outstanding and $100.0 million accreted value upon
issuance. The Renaissance notes do not require the payment of interest until
April 15, 2003. From and after April 15, 2003, the Renaissance notes bear
interest, payable semi-annually in cash, on each April 15 and October 15,
commencing October 15, 2003. The Renaissance notes are due on April 15, 2008.
Due to the change of control of Renaissance, an offer to repurchase the
Renaissance notes was made at 101% of their accreted value, plus accrued and
unpaid interest, on June 28, 1999. Of the $163.2 million face amount of
Renaissance notes outstanding, $48.8 million were repurchased. As of September
30, 1999, the accreted value of the Renaissance notes that remain outstanding
was approximately $83.8 million.
HELICON NOTES. We acquired Helicon in July 1999. As of September 30,
1999, Helicon had outstanding $115.0 million in principal amount of 11% senior
secured notes due 2003. On November 1, 1999, we redeemed all of the Helicon
notes at a purchase price equal to 103% of their principal amount, plus accrued
interest, for $124.8 million.
RIFKIN NOTES. We acquired Rifkin in September 1999. As of September 30,
1999, Rifkin had outstanding $125.0 million in principal amount of 111/8% senior
subordinated notes due 2006. Interest on the Rifkin subordinated notes is
payable semi-annually on January 15 and July 15 of each year. In November 1999,
we commenced an offer to repurchase any and all of the outstanding Rifkin notes,
together with a $3.0 million promissory note payable, for cash at a premium over
the principal amounts. In conjunction with this tender offer, we sought and
obtained the consent of a majority in principal amount of the holders of the
outstanding Rifkin notes to proposed amendments to the indenture governing the
Rifkin notes, which eliminated substantially all of the restrictive covenants.
We repurchased notes with a total outstanding principal amount of $124.1 million
for a total of $140.6 million, including a consent fee of $30 per $1000 to the
note holders who delivered timely consents to amending the indenture. We
repurchased the promissory note for $3.4 million.
ACQUISITIONS
In the second, third and fourth quarters of 1999, we acquired the
Renaissance, American Cable, Greater Media, Helicon, Vista, Cable Satellite,
Rifkin and InterMedia cable television systems. The total purchase price for
these acquisitions was $4.3 billion, including $354 million of assumed debt. We
financed the cash portion of the purchase prices for these acquisitions through
excess cash from the issuance of the Charter Holdings senior notes, borrowings
under the Charter Operating credit facilities, capital contributions by Mr.
Allen through Vulcan Cable III Inc., and, in the case of InterMedia, through a
swap of cable television systems valued at $331.8 million and a commitment to
transfer additional cable television systems valued at $88.2 million. The cash
portion of InterMedia acquisition was financed through $520 million of
borrowings under the Charter Operating revolving credit facility with the
remainder coming from available cash.
In August 1999, Vulcan Cable III Inc. contributed to Charter Holdings
$500 million in cash and, in September 1999, an additional $825 million, of
which approximately $644.3 million was in cash and approximately $180.7 million
was in the form of equity interests acquired by Vulcan Cable III Inc. in
connection with the Rifkin acquisition. In connection with two of these
acquisitions, Charter Holdco issued equity interests totaling $133.3 million and
a subsidiary of Charter Holdings issued preferred equity interests totaling $25
million to the sellers.
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<PAGE> 25
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and
uncertainties that could materially impact our business, results of operations
and financial condition.
SUBSTANTIAL LEVERAGE. As of September 30, 1999, our total debt was
approximately $6.2 billion and our total member's equity was approximately $4.5
billion. We anticipate incurring substantial additional debt in the future to
fund the expansion, maintenance and the upgrade of our systems.
Our ability to make payments on our debt and to fund our planned
capital expenditures for upgrading our cable television systems and our ongoing
operations will depend on our ability to generate cash and secure financing in
the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. There can be no assurance that our business will generate
sufficient cash flow from operations, or that future borrowings will be
available to us under our existing credit facilities, new facilities or from
other sources of financing in an amount sufficient to enable us to repay our
debt, to grow our business or to fund our other liquidity and capital needs.
VARIABLE INTEREST RATES. A significant portion of our debt bears
interest at variable rates that are linked to short-term interest rates. In
addition, a significant portion of our assumed debt or debt we expect to arrange
in connection with our pending acquisitions will bear interest at variable
rates. If interest rates rise, our costs relative to those obligations will also
rise. See later discussion in "Interest Rate Risk".
RESTRICTIVE COVENANTS. Our debt and credit facilities contain a number
of significant covenants that, among other things, restrict the ability of our
subsidiaries to:
- pay dividends;
- pledge assets;
- dispose of assets or merge;
- incur additional debt;
- issue equity;
- repurchase or redeem equity interests and debt;
- create liens; and
- make certain investments or acquisitions.
In addition, the Charter Operating credit facilities require us to
maintain specified financial ratios and meet financial tests. The ability to
comply with these provisions may be affected by events beyond our control. The
breach of any of these covenants will result in a default under the applicable
debt agreement or instrument, which could trigger acceleration of the debt. Any
default under our credit facilities or the indentures governing outstanding debt
securities may adversely affect our growth, our financial condition and our
results of operations.
IMPORTANCE OF GROWTH STRATEGY AND RELATED RISKS. We expect that a
substantial portion of any of our future growth will be achieved through
revenues from additional services and the acquisition of additional cable
television systems. We cannot assure you that we will be able to offer new
services successfully to our customers or that those new services will generate
revenues. In addition, the acquisition of additional cable television systems
may not have a positive net impact on our operating results. Acquisitions
involve a number of special risks, including diversion of management's
attention, failure to retain key acquired personnel, risks associated with
unanticipated events or liabilities and difficulties in assimilation of the
operations of the acquired companies, some or all of which could have a material
adverse effect on our business, results of operations and financial condition.
If we are unable to grow our cash flow sufficiently, we may be unable to fulfill
our obligations or obtain alternative financing.
MANAGEMENT OF GROWTH. As a result of the acquisition of the Charter
companies by Paul G. Allen, our merger with Marcus Holdings and our recent
acquisitions, we have experienced and will continue to experience rapid growth
that has placed and is expected to continue to place a significant strain on our
management, operations and other resources. Our future success will depend in
part on our ability to successfully integrate the operations acquired and to
attract and retain qualified personnel. Historically, acquired entities have had
minimal employee benefit related costs and all benefit plans
25
<PAGE> 26
have been terminated with acquired employees transferring to our 401(k) plan. No
significant severance cost is expected in conjunction with the recent
acquisitions. The failure to retain or obtain needed personnel or to implement
management, operating or financial systems necessary to successfully integrate
acquired operations or otherwise manage growth when and as needed could have a
material adverse effect on our business, results of operations and financial
condition.
In connection with our recent acquisitions, we have formed
multi-disciplinary teams to formulate plans for establishing customer service
centers, identifying property, plant and equipment requirements and possible
reduction of headends. Headends are the control centers of a cable television
system, where incoming signals are amplified, converted, processed and combined
for transmission to customers. These teams also determine market position and
how to attract "talented" personnel. Our goals include rapid transition in
achieving performance objectives and implementing "best practice" procedures.
REGULATION AND LEGISLATION. Cable television systems are extensively
regulated at the federal, state, and local level. These regulations have
increased the administrative and operational expenses of cable television
systems and affected the development of cable competition. Rate regulation of
cable television systems has been in place since passage of the Cable Television
Consumer Protection and Competition Act of 1992, although the scope of this
regulation recently was sharply contracted. Since March 31, 1999, rate
regulation exists only with respect to the lowest level of basic cable service
and associated equipment. Basic cable service is the service that cable
customers receive for a threshold fee. This service usually includes local
television stations, some distant signals and perhaps one or more non-broadcast
services. This change affords cable operators much greater pricing flexibility,
although Congress could revisit this issue if confronted with substantial rate
increases.
Cable television operators also face significant regulation of their
channel capacity. They currently can be required to devote substantial capacity
to the carriage of programming that they would not carry voluntarily, including
certain local broadcast signals, local public, educational and government access
users, and unaffiliated commercial leased access programmers. This carriage
burden could increase in the future, particularly if the Federal Communications
Commission were to require cable television systems to carry both the analog and
digital versions of local broadcast signals or if it were to allow unaffiliated
Internet service providers seeking direct cable access to invoke commercial
leased access rights originally devised for video programmers. The Federal
Communications Commission is currently conducting proceedings in which it is
considering both of these channel usage possibilities.
There is also uncertainty whether local franchising authorities, the
Federal Communications Commission, or the U.S. Congress will impose obligations
on cable operators to provide unaffiliated Internet service providers with
access to cable plant on non-discriminatory terms. If they were to do so, and
the obligations were found to be lawful, it could complicate our operations in
general, and our Internet operations in particular, from a technical and
marketing standpoint. These access obligations could adversely impact our
profitability and discourage system upgrades and the introduction of new
products and services.
INTEREST RATE RISK
The use of interest rate risk management instruments, such as interest
rate exchange agreements, interest rate cap agreements and interest rate collar
agreements, is required under the terms of Charter Operating's credit
facilities. Our policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, we agree to exchange,
at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed-upon notional principal amount.
Interest rate cap agreements are used to lock in a maximum interest rate should
variable rates rise, but enable us to otherwise pay lower market rates. Collars
limit our exposure to and benefits from interest rate fluctuations on variable
rate debt to within a certain range of rates.
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<PAGE> 27
The table set forth below summarizes the fair values and contract terms
of financial instruments subject to interest rate risk maintained by us as of
December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE FAIR VALUE AT
---------------------- DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
---- ---- ---- ---- ---- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT
Fixed Rate........... -- -- -- -- -- $ 271,799 $ 271,799 $ 271,799
Average Interest Rate -- -- -- -- -- 13.5% 13.5%
Variable Rate........ $ 10,450 $ 21,495 $ 42,700 $113,588 $157,250 $1,381,038 $1,726,521 $1,726,521
Average Interest Rate 6.0% 6.1% 6.3% 6.5% 7.2% 7.6% 7.2%
INTEREST RATE
INSTRUMENTS
Variable to Fixed Swaps $130,000 $255,000 $180,000 $320,000 $370,000 $ 250,000 $1,505,000 $ (28,977)
Average Pay Rate.. 4.9% 6.0% 5.8% 5.5% 5.6% 5.6% 5.6%
Average Receive Rate 5.0% 5.0% 5.2% 5.2% 5.4% 5.4% 5.2%
Caps ................ $ 15,000 -- -- -- -- -- $ 15,000 --
Average Cap Rate.. 8.5% -- -- -- -- -- 8.5%
Collar............... -- $195,000 $ 85,000 $ 30,000 -- -- $ 310,000 $ (4,174)
Average Cap Rate.. -- 7.0% 6.5% 6.5% -- -- 6.8%
Average Floor Rate -- 5.0% 5.1% 5.2% -- -- 5.0%
</TABLE>
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the proceeds (costs) to settle the outstanding contracts. Interest
rates on variable debt are estimated using the average implied forward London
Interbank Offering Rate (LIBOR) rates for the year of maturity based on the
yield curve in effect at December 31, 1998. While swaps, caps and collars
represent an integral part of our interest rate risk management program, their
incremental effect on interest expense for the years ended December 31, 1998,
1997, and 1996 was not significant.
In March 1999, substantially all existing long-term debt, excluding
borrowings of our previous credit facilities, was extinguished, and all previous
credit facilities were refinanced with the Charter Operating credit facilities.
The following table sets forth the fair values and contract terms of the
long-term debt maintained by us as of September 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE FAIR VALUE AT
---------------------- SEPTEMBER 30,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1999
---- ---- ---- ---- ---- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT
Fixed Rate........... -- -- -- -- $115,000 $ 3,817,413 $3,932,413 $3,206,520
Average Interest Rate -- -- -- -- 11% 9.2% 9.2%
Variable Rate........ -- -- -- $88,875 $156,000 $ 2,605,125 $2,850,000 $2,850,000
Average Interest Rate -- -- -- 6.7% 6.8% 7.0% 7.0%
</TABLE>
Interest rates on variable debt are estimated using the average implied
forward LIBOR rates for the year of maturity based on the yield curve in effect
at September 30, 1999.
YEAR 2000 ISSUES
GENERAL. Many existing computer systems and applications, and other
control devices and embedded computer chips use only two digits, rather than
four, to identify a year in the date field, failing to consider the impact of
the upcoming change in the century. Computer chips are the physical structure
upon which integrated circuits are fabricated as components of systems, such as
telephone systems, computers and memory systems. As a result, such systems,
applications, devices, and chips could create erroneous results or might fail
altogether unless corrected to properly interpret data related to the year 2000
and beyond. These errors and failures may result, not only from a date
recognition problem in the particular part of a system failing, but may also
result as systems, applications, devices and chips receive erroneous or
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<PAGE> 28
improper data from third-parties suffering from the year 2000 problem. In
addition, two interacting systems, applications, devices or chips, each of which
has individually been fixed so that it will properly handle the year 2000
problem, could nonetheless result in a failure because their method of dealing
with the problem is not compatible.
These problems are expected to increase in frequency and severity as
the year 2000 approaches. This issue impacts our owned or licensed computer
systems and equipment used in connection with internal operations, including:
- information processing and financial reporting systems;
- customer billing systems;
- customer service systems;
- telecommunication transmission and reception systems; and
- facility systems.
THIRD PARTIES. We also rely directly and indirectly, in the regular
course of business, on the proper operation and compatibility of third party
systems. The year 2000 problem could cause these systems to fail, err, or become
incompatible with our systems.
If we or a significant third party on which we rely fails to become
year 2000 ready, or if the year 2000 problem causes our systems to become
internally incompatible or incompatible with such third party systems, our
business could suffer from material disruptions, including the inability to
process transactions, send invoices, accept customer orders or provide customers
with our cable services. We could also face similar disruptions if the year 2000
problem causes general widespread problems or an economic crisis. We cannot now
estimate the extent of these potential disruptions.
STATE OF READINESS. We are addressing the year 2000 problem with
respect to our internal operations in three stages:
(1) conducting an inventory and evaluation of our systems,
components, and other significant infrastructure to identify
those elements that we reasonably believe could be expected to be
affected by the year 2000 problems. This initiative has been
completed;
(2) remediating or replacing equipment that, based upon such
inventory and evaluation, we believe may fail to operate properly
in the year 2000. This stage is substantially complete; and
(3) testing of the remediation and replacement conducted in stage
two. This stage is substantially complete.
Much of our assessment efforts in stage one have involved, and depend
on, inquiries to third party service providers, suppliers and vendors of various
parts or components of our systems. We have obtained certifications from third
party service providers, suppliers and vendors as to the readiness of mission
critical elements and we are in the process of obtaining certifications of
readiness as to non-mission critical elements. Certain of these third parties
that have certified the readiness of their products will not certify their
interoperability within our fully integrated systems. We cannot assure you that
these technologies of third parties, on which we rely, will be year 2000 ready
or timely converted into year 2000 compliant systems compatible with our
systems. Moreover, because a full test of our systems, on an integrated basis,
would require a complete shut down of our operations, it is not practicable to
conduct such testing. However, we have utilized a third party, in cooperation
with other cable operators, to test a "mock-up" of our major billing and plant
components, including pay-per-view systems, as an integrated system. We are
utilizing another third party to also conduct comprehensive testing on our
advertising related scheduling and billing systems. In addition, we have
evaluated the potential impact of third party failure and integration failure on
our systems in developing our contingency plans.
RISKS AND REASONABLY LIKELY WORST CASE SCENARIOS. The failure to
correct a material year 2000 problem could result in system failures leading to
a disruption in, or failure of certain normal business activities or operations,
for example, a failure of our major billing systems and plant components such as
our pay-per-view systems. Such failures could materially and adversely affect
our results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
we are unable to determine at this time whether the consequences of year 2000
failures will have a material impact on our results of operations, liquidity or
financial condition. However, the year 2000 taskforce has significantly
28
<PAGE> 29
reduced our level of uncertainty about the year 2000 problem and, in particular,
about the year 2000 compliance and readiness of our material vendors.
CONTINGENCY AND BUSINESS CONTINUATION PLAN. The year 2000 plan calls
for suitable contingency planning for our at-risk business functions. We
normally make contingency plans in order to avoid interrupted service providing
video, voice and data products to our customers. We have distributed detailed
guidelines outlining remedial actions for the failure of any component of our
systems which is critical to the transport of our signal. This includes a
communications plan for informing key personnel across the country in the event
of such a failure to accelerate remediation actions throughout the company.
COST. We continue to incur costs directly related to addressing the
year 2000 problem. We have redeployed internal resources and have selectively
engaged outside vendors to meet the goals of our year 2000 program. We currently
estimate the total cost of our year 2000 remediation programs to be
approximately $7.5 million, primarily all of which has been expended to date.
OPTIONS
In accordance with an employment agreement between Charter Investment,
Inc. and Jerald L. Kent, the President and Chief Executive Officer of Charter
Investment, Inc. and a related option agreement between Charter Holdco and Mr.
Kent, an option to purchase 3% of the equity value of all cable television
systems managed by Charter Investment, Inc. on the date of the grant, or
7,044,127 membership units, were issued to Mr. Kent. The option vests over a
four-year period from the date of grant and expires in December 2008.
In February 1999, Charter Holdings adopted an option plan, which was
assumed by Charter Holdco in May 1999, providing for the grant of options to
purchase up to 25,009,798 Charter Holdco membership units. The option plan
provides for grants of options to employees and consultants of Charter Holdco
and its affiliates. Options granted will be fully vested after five years from
the date of grant. Options not exercised accumulate and are exercisable, in
whole or in part, in any subsequent period, but not later than ten years from
the date of grant.
Membership units received upon exercise of options are automatically
exchanged for shares of Class A common stock of Charter Communications, Inc. on
a one-for-one basis.
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
--------------------------------------------------------------- -----------
REMAINING NUMBER
NUMBER OF EXERCISE TOTAL CONTRACT LIFE OF
OPTIONS PRICE DOLLARS (IN YEARS) OPTIONS
------- ----- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Outstanding as of
January 1, 1999(1)................ 7,044,127 $ 20.00 $ 140,882,540 9.2(3) 1,761,032
Granted:
February 9, 1999(2)............... 9,050,881 20.00 181,017,620 130,000
April 5, 1999(2).................. 443,200 20.73 9,187,536 --
November 8, 1999(2)............... 4,600,000 19.00 87,400,000 --
Cancelled.............................. (378,400) 20.00-20.73 (7,595,886) --
----------- ------------- ------------- -------- ---------
Outstanding as of
November 12, 1999................. 20,759,808 $ 19.79(3) $ 410,891,810 9.4(3) 1,891,032
=========== ============= ============= ======== =========
</TABLE>
- ---------------------------
(1) Granted to Jerald L. Kent pursuant to his employment agreement and
related option agreement.
(2) Granted pursuant to the option plan.
(3) Weighted average.
We follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" to account for the option plans. We recorded stock
option compensation expense of $21.1 and $59.3 million for the three and nine
months ended September 30, 1999, respectively in the financial statements since
the exercise prices are less than the estimated fair values of the underlying
membership units on the date of grant. The estimated fair value was determined
29
<PAGE> 30
using the valuation inherent in Mr. Allen's acquisition of Charter and
valuations of public companies in the cable television industry adjusted for
factors specific to us. Compensation expense is accrued over the vesting period
of each grant that varies from four to five years. As of September 30, 1999,
deferred compensation remaining to be recognized in future periods totaled $104
million. No stock option compensation expense will be recorded for the November
8, 1999, options since the exercise price is equal to the estimated fair values
of the underlying membership interests on the date of grant. Since the
membership units are exchangeable into Class A common stock of Charter
Communications, Inc. on a one-for-one basis, estimated fair values were equal to
the initial offering price of Class A common stock.
SUPPLEMENTAL ANALYSIS OF QUARTERLY OPERATING RESULTS
The following tables set forth certain operating results and statistics
for the three months ended September 30, 1999 compared to the three months ended
September 30, 1998. The following dollar amounts are in thousands.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------------------
CHARTER
CHARTER MANAGED
SYSTEMS ACQUIRED SYSTEMS AS OF MARCUS
ON OR BEFORE 7/1/98 7/1/98 (A) SUBTOTAL HOLDINGS TOTAL
------------------- ---------- -------- -------- -----
(PREDECESSOR)
<S> <C> <C> <C> <C> <C>
Revenues $ 17,403 $ 136,148 $ 153,551 $ 117,575 $ 271,126
Operating, general and
administrative expenses 9,121 69,712 78,833 63,467 142,300
-------- ---------- ---------- ---------- ----------
Adjusted EBITDA (b) $8,282 $ 66,436 $ 74,718 $ 54,108 $ 132,306
======== ========== ========== ========== ==========
Adjusted EBITDA margin (c) 47.6% 48.8% 48.7% 46.0% 47.5%
Operating Data, at end of period
Homes passed (d) 269,000 1,870,000 2,139,000 1,755,000 3,894,000
Basic subscribers (e) 165,000 1,079,000 1,244,000 1,069,000 2,313,000
Basic penetration (f) 61.3% 57.7% 58.2% 60.9% 59.4%
Premium subscribers (g) 89,000 768,000 857,000 436,000 1,293,000
Monthly revenue per subscriber (h) $ 35.16 $ 42.06 $ 41.14 $ 36.66 $ 39.07
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------------------
CHARTER SYSTEMS CHARTER
ACQUIRED ON MANAGED ACQUISITIONS
OR BEFORE SYSTEMS AS MARCUS AFTER CHARTER
7/1/98 OF 7/1/98 (A) SUBTOTAL HOLDINGS TOTAL 7/1/98 HOLDINGS
------ ------------- -------- -------- ------ ------ --------
(PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 18,931 $ 149,682 $ 168,613 $ 133,010 $ 301,623 $ 74,566 $ 376,189
Operating, general and
administrative expenses 9,841 75,635 85,476 70,858 156,334 38,382 194,716
-------- --------- ---------- ---------- ---------- --------- ----------
Adjusted EBITDA (b) $ 9,090 $ 74,047 $ 83,137 $ 62,152 $ 145,289 $ 36,184 $ 181,473
======== ========= ========== ========== ========== ========= ==========
Adjusted EBITDA margin (c) 48.0% 49.5% 49.3% 46.7% 48.2% 48.5% 48.2%
Operating Data, at end of period
Homes passed (d) 275,000 1,891,000 2,166,000 1,851,000 4,017,000 810,000 4,827,000
Basic subscribers (e) 168,000 1,125,000 1,293,000 1,085,000 2,378,000 584,000 2,962,000
Basic penetration (f) 61.1% 59.5% 59.7% 58.6% 59.2% 72.1% 61.4%
Premium subscribers (g) 97,000 866,000 963,000 517,000 1,480,000 324,000 1,804,000
Monthly revenue per subscriber (h) $ 37.56 $ 43.94 $ 43.11 $ 40.86 $ 42.09 $ 43.35 $ 42.34
</TABLE>
- ---------------------------
(a) CCA Group and CharterComm Holdings cable television systems.
30
<PAGE> 31
(b) Adjusted EBITDA represents income before interest expense, income taxes,
depreciation and amortization, management fees, and stock option
compensation expense, and other income (expense). Adjusted EBITDA is
presented because it is a widely accepted financial indicator of a cable
company's ability to service its indebtedness. However, Adjusted EBITDA
should not be considered as an alternative to income from operations or to
cash flows from operating, investing or financing activities, as determined
in accordance with generally accepted accounting principles. Adjusted
EBITDA should not be construed as an indication of a company's operating
performance or as a measure of liquidity. In addition, because Adjusted
EBITDA is not calculated identically by all companies, the presentation
here may not be comparable to other similarly titled measures of other
companies. Management's discretionary use of funds depicted by Adjusted
EBITDA may be limited by working capital, debt service and capital
expenditure requirements and by restrictions related to legal requirements,
commitments and uncertainties.
(c) Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of
revenues.
(d) Homes passed are the number of living units, such as single residence
homes, apartments and condominium unites, passed by the cable television
distribution network in a given cable television system service area.
(e) Basic subscribers are subscribers who receive basic cable service.
(f) Basic penetration represents basic customers as a percentage of homes
passed.
(g) Premium subscribers represents premium units as a percentage of basic
customers.
(h) Monthly revenue per subscriber represents revenues divided by the number of
months in period divided by the number of basic subscribers at period end.
RESULTS OF OPERATIONS - SUPPLEMENTAL ANALYSIS FOR THE QUARTER ENDED SEPTEMBER
30, 1999 VERSUS THE QUARTER ENDED SEPTEMBER 30, 1998 (FOR THE SYSTEMS OPERATED
ON OR BEFORE JULY 1, 1998)
The following discussion is provided to show the results of operations on a
comparable basis for only those systems managed by Charter Investment, Inc.
during the three months ended September 30, 1999 versus the three months ended
September 30, 1998. Specifically, this analysis excludes systems acquired by the
Company after July 1, 1998. Further, this analysis excludes the Marcus systems
as Charter Investment, Inc. did not begin to manage these systems until October
1998.
Revenues increased by $15.1 million or 9.8% when comparing the revenues for the
quarter ended September 30, 1999 to the results for the comparable systems for
the quarter ended September 30, 1998. This increase is due to a net gain of
approximately 49,000 or 3.9% basic subscribers between quarters and retail rate
increases implemented in certain of the Company's systems. In addition, the
Company has increased its ratio of premium subscriptions to basic subscribers
from .70 to 1.00 to .75 to 1.00 as a result of marketing multiple premium
subscriptions in a packaged format at a discounted retail rate.
Operating, general and administrative expenses increased approximately $6.6
million or 8.4% when comparing the operating expenses for the quarter ended
September 30, 1999 to the results for the comparable systems for the quarter
ended September 30, 1998. 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
Company believes that the growth in programming expense is consistent with
industry-wide increases.
The Company experienced growth in adjusted EBITDA, as defined, of approximately
$8.4 million or 11.3% when comparing adjusted EBITDA for the quarter ended
September 30, 1999 to the results for the comparable systems for the quarter
ended September 30, 1999. Adjusted EBITDA margin increased from 48.7% to 49.3%
when comparing the similar periods, primarily as a result of the increase in
revenues.
31
<PAGE> 32
NEW PRODUCTS AND SERVICES
We offer our customers a full array of traditional cable television
services and programming and we have begun to offer new and advanced high
bandwidth services such as high-speed Internet access. We plan to continually
enhance and upgrade these services, including adding new programming and other
telecommunications services, and will continue to position cable television as
an essential service.
A variety of emerging technologies and the rapid growth of Internet
usage have presented us with substantial opportunities to provide new or
expanded products and services to our customers and to expand our sources of
revenue. The desire for such new technologies and the use of the Internet by
businesses in particular have triggered a significant increase in our market
penetration. As a result, we are in the process of introducing a variety of new
or expanded products and services beyond the traditional offerings of analog
television programming for the benefit of both our residential and commercial
customers. These new products and services in the following:
- Digital television and its related enhancements;
- High-speed Internet access via cable modems;
- Internet access through television access service; and
- Dial-up Internet access.
Information is not presented for September 30, 1998 as this information is not
meaningful due to the start-up nature of the operations of these new products
and services at September 30, 1998.
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- -----------
<S> <C> <C>
DIGITAL TELEVISION
Homes Passed 897,578 728,090
Digital Customers 28,615 10,929
Digital Penetration 3.2% 1.5%
CABLE MODEM-BASED INTERNET ACCESS
Homes Passed 1,932,487 1,730,978
Commercial Customers 252 162
Residential Customers 19,175 13,467
Penetration 1.0% 0.8%
TV-BASED INTERNET ACCESS
Homes Passed 460,277 414,695
Customers 6,196 4,296
Penetration 1.3% 1.0%
DIAL-UP INTERNET ACCESS
Homes Passed 656,534 357,286
Customers 2,476 2,107
Penetration 0.4% 0.6%
</TABLE>
ACCOUNTING STANDARD NOT YET IMPLEMENTED
SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--An
Amendment of FASB Statement No. 133" has delayed the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. We have not yet quantified
the impact of adopting SFAS No. 133 on our consolidated financial statements nor
have we determined the timing or method of our adoption of SFAS No. 133.
However, SFAS No. 133 could increase volatility in earnings (losses).
32
<PAGE> 33
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See disclosure under Interest Rate Risk.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Change in Securities
The issuers of the original Charter Holdings notes exchanged these
notes for new Charter Holdings notes with substantially similar terms
except that the new Charter Holdings notes are registered under the
Securities Act and, therefore, do not bear legends restricting their
transfer.
Item 3. Defaults on Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule (supplied for the information of the
Commission)
(b) Reports on Form 8-K
On October 18, 1999, the Registrants filed a current report on Form
8-K related to the acquisition of cable television systems from
InterMedia Partners Southeast and its affiliates on October 1,
1999, reported in Part I, Item 2 thereof, as follows:
(a) Charter Holdings through certain of its subsidiaries,
acquired certain equity interests and assets of cable
television systems serving approximately 405,000 customers
in exchange for cash of approximately $904 million and
cable television systems serving approximately 142,000
customers.
On September 29, 1999, the Registrants filed a current report on
Form 8-K related to the acquisition of Rifkin Acquisition
Partners, L.L.L.P. and InterLink Communications Partners, LLLP on
September 14, 1999 reported in Part I, Item 2 thereof, as follows:
(a) Charter Communications Operating, LLC, a wholly owned
subsidiary of Charter Holdings completed its acquisition
of Rifkin for an aggregate purchase price of $1.46
billion, consisting of $1.2 billion in cash, $133.3
million in equity interests of Charter Holdco, parent of
Charter Holdings, and $125.0 million in assumed debt.
Pursuant to Article 3 of Regulation S-X, unaudited pro forma financial
information related to the these acquisitions was not required to be
filed.
33
<PAGE> 34
CHARTER COMMUNICATIONS HOLDINGS, LLC
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
FOR QUARTER ENDED SEPTEMBER 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTER COMMUNICATIONS HOLDINGS, LLC, co-
registrant and CHARTER COMMUNICATIONS
HOLDINGS CAPITAL CORPORATION, its wholly owned
subsidiary and co-registrant
Dated November 15, 1999 By: /s/ Kent D. Kalkwarf
-----------------------------------------
Name: Kent D. Kalkwarf
Title: Senior Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
34
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001085475
<NAME> CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 434,183
<SECURITIES> 0
<RECEIVABLES> 104,255
<ALLOWANCES> 4,327
<INVENTORY> 0
<CURRENT-ASSETS> 561,485
<PP&E> 2,520,147
<DEPRECIATION> 240,658
<TOTAL-ASSETS> 11,235,191
<CURRENT-LIABILITIES> 390,601
<BONDS> 6,244,632
0
0
<COMMON> 0
<OTHER-SE> 4,514,306
<TOTAL-LIABILITY-AND-EQUITY> 11,235,191
<SALES> 845,182
<TOTAL-REVENUES> 845,182
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 955,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 288,750
<INCOME-PRETAX> 380,464
<INCOME-TAX> 0
<INCOME-CONTINUING> 380,464
<DISCONTINUED> 0
<EXTRAORDINARY> 7,794
<CHANGES> 0
<NET-INCOME> 388,258
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
