<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 10, 1999
REGISTRATION NO. 333-77499
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 5 TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
CHARTER COMMUNICATIONS HOLDINGS, LLC
AND
CHARTER COMMUNICATIONS HOLDINGS
CAPITAL CORPORATION
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
<TABLE>
<S> <C> <C>
DELAWARE 4841 43-1843179
DELAWARE 4841 43-1843177
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (FEDERAL EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
12444 POWERSCOURT DRIVE
ST. LOUIS, MISSOURI 63131
(314) 965-0555
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF REGISTRANTS'
PRINCIPAL EXECUTIVE OFFICES)
CURTIS S. SHAW, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
12444 POWERSCOURT DRIVE
ST. LOUIS, MISSOURI 63131
(314) 965-0555
(NAME, ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
DANIEL G. BERGSTEIN, ESQ. ALVIN G. SEGEL, ESQ.
THOMAS R. POLLOCK, ESQ. IRELL & MANELLA LLP
PATRICIA M. CARROLL, ESQ. 1800 AVENUE OF THE STARS, SUITE 900
PAUL, HASTINGS, JANOFSKY & WALKER LLP LOS ANGELES, CALIFORNIA 90067-4276
399 PARK AVENUE (310) 277-1010
NEW YORK, NEW YORK 10022
(212) 318-6000
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED OFFER TO THE PUBLIC EXCHANGE
OFFER: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION, DATED AUGUST 10, 1999
$3,575,000,000
OFFER TO EXCHANGE
8.250% SENIOR NOTES DUE 2007,
8.625% SENIOR NOTES DUE 2009 AND 9.920% SENIOR DISCOUNT NOTES DUE 2011
FOR ANY AND ALL OUTSTANDING
8.250% SENIOR NOTES DUE 2007,
8.625% SENIOR NOTES DUE 2009 AND 9.920% SENIOR DISCOUNT NOTES DUE 2011,
RESPECTIVELY, OF
CHARTER COMMUNICATIONS HOLDINGS, LLC
and
CHARTER COMMUNICATIONS HOLDINGS
CAPITAL CORPORATION
-------------------------
- This exchange offer expires at 5:00 p.m., New York City time, on
, 1999, unless extended.
- No public market exists for the original notes or the new notes. We do
not intend to list the new notes on any securities exchange or to seek
approval for quotation through any automated quotation system.
-------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR ORIGINAL NOTES IN THE
EXCHANGE OFFER AND BY PURCHASERS OF THE NOTES FROM PERSONS ELIGIBLE TO USE THIS
PROSPECTUS FOR RESALES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state in which the offer or sale would be unlawful.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-b OF THE NEW HAMPSHIRE UNIFORM
SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-b IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION
MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE
PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE
PROVISIONS OF THIS PARAGRAPH.
The date of this prospectus is , 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 18
Forward-Looking Statements.................................. 30
Use of Proceeds............................................. 31
Capitalization.............................................. 36
Unaudited Pro Forma Financial Statements.................... 34
Unaudited Selected Historical Combined Financial and
Operating Data............................................ 54
Selected Historical Financial Data.......................... 56
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 57
The Exchange Offer.......................................... 78
Business.................................................... 87
Regulation and Legislation.................................. 115
Management.................................................. 122
Principal Equity Holders.................................... 131
Certain Relationships and Related Transactions.............. 132
Description of Certain Indebtedness......................... 143
Description of Notes........................................ 148
Material United States Federal Income Tax Considerations.... 193
Plan of Distribution........................................ 201
Experts..................................................... 202
Legal Matters............................................... 202
Index to Financial Statements............................... F-1
</TABLE>
i
<PAGE> 4
SUMMARY
The following summary contains a general discussion of our business, the
exchange offer and summary financial information. It likely does not contain all
the information that is important to you in making a decision to tender original
notes in exchange for new notes. For a more complete understanding of the
exchange offer, we encourage you to read this entire prospectus and other
documents to which we refer.
OUR BUSINESS
We offer a full range of traditional cable television services and have
begun to offer digital cable television services to customers in some of our
systems. Digital television employs technology that uses discrete levels,
usually 0 and 1, to represent characters or numbers. We have also started to
introduce a number of other new products and services, including interactive
video programming and high-speed Internet access, and are exploring
opportunities in telephony. The introduction of these new services represents an
important step toward the realization of our "wired world" vision, where cable's
ability to transmit voice, video and data at high speeds will enable it to serve
as the primary platform for the delivery of new services to the home and
workplace. We are accelerating the upgrade of our systems to more quickly
provide these new services. As of March 31, 1999, we served approximately 2.3
million cable television service customers in 22 states.
We have grown rapidly over the past five years. During this period, our
management team has successfully completed 26 acquisitions, including six
acquisitions closed in 1999. In addition, we have entered into agreements to
acquire additional cable systems with approximately 729,000 customers. We have
also expanded our customer base through significant internal growth. In 1998,
our internal customer growth, without giving effect to the cable systems we
acquired in that year, was 4.8%, more than twice the national industry average
of 1.7%. In 1997, our internal customer growth, without giving effect to the
cable systems we acquired in that year, was 3.5%, significantly higher than the
national industry average of 2.0%.
Our principal executive offices are located at 12444 Powerscourt Drive, St.
Louis, Missouri 63131. Our telephone number is (314)965-0555 and our web site is
located at www.chartercom.com. The information on our web site is not part of
this prospectus.
BUSINESS STRATEGY
Our objective is to increase our operating cash flow by increasing our
customer base and the amount of cash flow per customer. To achieve this
objective, we are pursuing the following strategies:
- rapidly integrate acquired cable systems and apply our core operating
strategies to raise the financial and operating performance of these
acquired systems;
- expand the array of services we offer to our customers through the
implementation of our "wired world" vision;
- upgrade the bandwidth capacity of our systems to 550 megahertz or greater
to enable greater channel capacity and add two-way capability to
facilitate interactive communication. Bandwidth is a measure of the
information-carrying capacity of a communication channel. It is the range
of usable frequencies that can be carried by a cable television
1
<PAGE> 5
system. Channel capacity is the number of channels that can be
simultaneously carried on the cable system and is generally defined in
terms of the number of analog channels. Two-way capability is the ability
to have bandwidth available for upstream or two-way communication;
- maximize customer satisfaction by providing reliable, high-quality
service offerings, superior customer service and attractive programming
choices at reasonable rates;
- employ innovative marketing programs tailored to local customer
preferences to generate additional sales;
- emphasize local management autonomy to better serve our customers and
centralized financial controls, while providing support from regional and
corporate offices; and
- improve the geographic clustering of our cable systems by selectively
trading or acquiring systems to increase operating efficiencies and
improve operating margins. Clusters are areas where owned cable systems
are within the same geographic proximity to other cable systems.
RECENT EVENTS
We have completed, and are in the process of completing, the acquisitions
described below. Certain of these acquisitions were originally acquisitions of
Charter Investment. Charter Investment subsequently assigned those acquisitions
to us. Charter Investment and other affiliates are making other acquisitions.
There is no present intention on their part to assign these other acquisitions
to us.
RECENT ACQUISITIONS
In the second and third quarters of 1999, we completed six transactions in
which we acquired cable systems serving a total of approximately 582,000
customers. The total purchase price for these acquisitions was approximately
$1.9 billion. For the year ended December 31, 1998, these systems had revenues
of approximately $268 million. The following table is a breakdown of our recent
acquisitions:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, 1999
----------------------------
CLOSING PURCHASE BASIC REVENUE
RECENT ACQUISITION DATE PRICE SUBSCRIBERS (IN THOUSANDS)
- ------------------ ------- -------- ----------- --------------
<S> <C> <C> <C> <C>
American Cable Entertainment, LLC....................... 4/99 $240 million 68,000 $ 9,151
Renaissance Media Group LLC............................. 4/99 459 million 132,000 15,254
Cable Systems of Greater Media Cablevision, Inc. ....... 6/99 500 million 174,000 20,394
-------------- ------- -------
Helicon Partners I, L.P. and Affiliates................. 7/99 550 million 172,000 21,252
Other (Vista Broadband Communications, LLC and certain
cable assets of Cable Satellite of South Miami,
Inc.)................................................. 7/99 and 8/99 148 million 36,000 3,354
Total............................................... $1.9 billion 582,000 $69,405
============== ======= =======
</TABLE>
PENDING ACQUISITIONS
In addition to the recent acquisitions described above, since the beginning
of 1999, we have entered into agreements to acquire additional cable systems.
The total purchase price for these acquisitions will be approximately $2.3
billion. This includes the exchange with another cable service provider of
certain of our cable television systems with a fair market value of $0.4 billion
for cable systems that we can operate more efficiently because of their
geographic proximity to our other systems. As of March 31, 1999, the systems to
be acquired by us served, in the
2
<PAGE> 6
aggregate, approximately 729,000 customers. For the year ended December 31,
1998, these systems had revenues of approximately $329 million. The following
table is a breakdown of our pending acquisitions:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, 1999
ANTICIPATED ----------------------------
CLOSING PURCHASE BASIC REVENUE
PENDING ACQUISITION DATE PRICE SUBSCRIBERS (IN THOUSANDS)
- ------------------- ----------- -------- ----------- --------------
<S> <C> <C> <C> <C>
Cable systems of InterMedia Capital Partners 408,000
IV, L.P., InterMedia Partners and 3rd or 4th $872.7 million + (142,000)
Affiliates.................................. Quarter 1999 systems' swap 266,000 $48,288
Rifkin Acquisition Partners, L.L.L.P. and 3rd or 4th
Interlink Communications Partners, L.L.P.... Quarter 1999 1,460 million 463,000 50,914
------------------ -------- -------
Total..................................... $2.3 billion 729,000 $99,202
================== ======== =======
</TABLE>
We expect to finance these pending acquisitions with additional borrowings
under our credit facilities and with additional equity.
3
<PAGE> 7
ORGANIZATION
The new notes to be issued in the exchange offer will be issued by Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation, the issuers of the original notes. Charter Communications Holding
Company, LLC is the 100% owner of Charter Holdings and Charter Holdings is the
100% owner of Charter Capital. Our cable systems are owned by wholly owned
subsidiaries of Charter Communications Operating, LLC, which is 100% owned by
Charter Holdings. The chart below sets forth our corporate structure. We have
illustrated "Operating Companies that formerly comprised CCA Group" on this
chart in order to show the placement of the successor entities to the entities
that served as the basis for CCA Group's historical financial statements
presented in this prospectus.
[CHARTER COMMUNICATIONS ORGANIZATION CHART]
Charter Communications, Inc., a newly formed Delaware corporation, recently
filed a registration statement for an initial public offering of its Class A
common stock. Charter Communications, Inc. expects to raise approximately $3.45
billion through its offering and will use these proceeds to purchase membership
interests in our direct parent, Charter Holdco, thereby become the controlling
managing member of Charter Holdco. Charter Holdco will also raise an additional
$750 million through the sale of membership interests to Vulcan Cable III, Inc.,
a company owned by Paul G. Allen. We will not receive any of the proceeds from
the sale of Charter Holdco membership interests to Charter Communications, Inc.
and Vulcan Cable III. Those proceeds will be used to fund acquisitions being
undertaken by Charter Holdco. Charter Holdco will thereafter be owned by Charter
Investment, Charter Communications, Inc. and Vulcan Cable III. The equity
interest of each of these owners has not yet been determined. We will continue
to be 100% owned by Charter Holdco.
4
<PAGE> 8
THE EXCHANGE OFFER
Resales Without Further
Registration.................... We believe that the new notes issued
pursuant to the exchange offer in exchange
for original notes may be offered for
resale, resold and otherwise transferred by
you without compliance with the registration
and prospectus delivery provisions of the
Securities Act of 1933, provided that:
- you are acquiring the new notes issued in
the exchange offer in the ordinary course
of your business;
- you have not engaged in, do not intend to
engage in, and have no arrangement or
understanding with any person to
participate in the distribution of the
new notes issued to you in the exchange
offer; and
- you are not our "affiliate," as defined
under Rule 405 of the Securities Act.
Each of the participating broker-dealers
that receives new notes for its own account
in exchange for original notes that were
acquired by such broker or dealer as a
result of market-making or other activities
must acknowledge that it will deliver a
prospectus in connection with the resale of
the new notes.
Expiration Date................. 5:00 p.m., New York City time, on
, 1999, unless we extend the
exchange offer.
Exchange and Registration Rights
Agreements.................... You have the right to exchange the original
notes that you hold for new notes with
substantially identical terms. This exchange
offer is intended to satisfy these rights.
Once the exchange offer is complete, you
will no longer be entitled to any exchange
or registration rights with respect to your
notes.
Accrued Interest on the New
Notes and Original Notes........ The new notes will bear interest from March
17, 1999. Holders of original notes which
are accepted for exchange will be deemed to
have waived the right to receive any payment
in respect of interest on such original
notes accrued to the date of issuance of the
new notes.
Conditions to the Exchange
Offer........................... The exchange offer is conditioned upon
certain customary conditions which we may
waive and upon compliance with securities
laws.
5
<PAGE> 9
Procedures for Tendering
Original Notes.................. Each holder of original notes wishing to
accept the exchange offer must:
- complete, sign and date the letter of
transmittal, or a facsimile of the letter
of transmittal; or
- arrange for the Depository Trust Company
to transmit certain required information
to the exchange agent in connection with a
book-entry transfer.
You must mail or otherwise deliver such
documentation together with the original
notes to the exchange agent.
Special Procedures for
Beneficial Holders.............. If you beneficially own original notes
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and you wish to tender your original
notes in the exchange offer, you should
contact such registered holder promptly and
instruct them to tender on your behalf. If
you wish to tender on your own behalf, you
must, before completing and executing the
letter of transmittal for the exchange offer
and delivering your original notes, either
arrange to have your original notes
registered in your name or obtain a properly
completed bond power from the registered
holder. The transfer of registered ownership
may take considerable time.
Guaranteed Delivery
Procedures...................... You must comply with the applicable
procedures for tendering if you wish to
tender your original notes and:
- time will not permit your required
documents to reach the exchange agent by
the expiration date of the exchange offer;
or
- you cannot complete the procedure for
book-entry transfer on time; or
- your original notes are not immediately
available.
Withdrawal Rights............... You may withdraw your tender of original
notes at any time prior to 5:00 p.m., New
York City time, on the date the exchange
offer expires.
Failure to Exchange Will Affect
You Adversely................... If you are eligible to participate in the
exchange offer and you do not tender your
original notes, you will not have further
exchange or registration rights and your
original notes will continue to be subject
to some restrictions on transfer.
Accordingly, the
6
<PAGE> 10
liquidity of the original notes will be
adversely affected.
Material United States Federal
Income Tax Considerations..... The disclosure in this prospectus represents
our legal counsel's opinion as to the
material United States Federal income tax
consequences of participating in the
exchange offer and in connection with the
ownership and disposition of the new notes.
The exchange of original notes for new notes
pursuant to the exchange offer will not
result in a taxable event. Accordingly, it
is our legal counsel's opinion that:
- no gain or loss will be realized by a U.S.
holder upon receipt of a new note;
- a holder's holding period for new notes
will include the holding period for
original notes; and
- the adjusted tax basis of the new notes
will be the same as the adjusted tax basis
of the original notes exchanged at the
time of such exchange.
Paul, Hastings, Janofsky & Walker LLP has
rendered the above-referenced opinion in
connection with the exchange offer. See
"Material United States Federal Income Tax
Considerations."
Exchange Agent.................. Harris Trust Company of New York is serving
as exchange agent.
Use of Proceeds................. We will not receive any proceeds from the
exchange offer.
7
<PAGE> 11
SUMMARY TERMS OF NEW NOTES
Issuers......................... Charter Communications Holdings, LLC and
Charter Communications Holdings Capital
Corporation.
Notes Offered................... $600 million in principal amount of 8.250%
senior notes due 2007.
$1.5 billion in principal amount of 8.625%
senior notes due 2009.
$1.475 billion in principal amount at
maturity of 9.920% senior discount notes due
2011.
The form and terms of the new notes will be
the same as the form and terms of the
outstanding notes except that:
- the new notes will bear a different CUSIP
number from the original notes;
- the new notes will have been registered
under the Securities Act of 1933 and,
therefore, will not bear legends
restricting their transfer; and
- you will not be entitled to any exchange
or registration rights with respect to the
new notes.
The new notes will evidence the same debt as
the original notes. They will be entitled to
the benefits of the indentures governing the
original notes and will be treated under the
indentures as a single class with the
original notes.
8
<PAGE> 12
<TABLE>
<CAPTION>
MATURITY
DATE ISSUE PRICE INTEREST
------------- --------------------- ---------------------
<S> <C> <C> <C>
8.250% notes......... April 1, 2007 99.233% plus accrued 8.250% per annum,
interest, if any, payable every six
from March 17, 1999 months on April 1 and
October 1, beginning
October 1, 1999
8.625% notes......... April 1, 2009 99.695%, plus accrued 8.625% per annum,
interest, if any, payable every six
from March 17, 1999 months on April 1,
and October 1,
beginning October 1,
1999
9.920% notes......... April 1, 2011 61.394% Interest to accrete
at a rate of 9.920%
per annum through
April 1, 2004; cash
interest every six
months on April 1 and
October 1 at the rate
of 9.920% per annum,
beginning October 1,
2004
</TABLE>
Ranking......................... The new notes are senior debts. They rank
equally with the current and future
unsecured and unsubordinated debt, including
trade payables, which are accounts payable
to vendors, suppliers and service providers,
of Charter Holdings. Charter Holdings is a
holding company and conducts all of its
operations through its subsidiaries. If it
defaults, your right to payment under the
new notes will rank below all existing and
future liabilities, including trade
payables, of its subsidiaries. As of March
31, 1999, all of our outstanding
indebtedness, other than the notes but
including our credit facilities, was
incurred by our subsidiaries. As of that
date, our subsidiaries' liabilities, on a
pro forma basis giving effect for our recent
and pending acquisitions, totaled $4
billion. All such liabilities would have
ranked senior to the new notes.
Optional Redemption............. We will not have the right to redeem the
8.250% notes prior to their maturity date on
April 1, 2007.
Before April 1, 2002, we may redeem up to
35% of the 8.625% notes and the 9.920% notes
with the proceeds of certain offerings of
equity securities. On or after April 1,
2004, we may redeem some or all of the
8.625% notes and the 9.920% notes at any
time.
9
<PAGE> 13
Mandatory Offer to Repurchase... If we experience certain changes of control,
we must offer to repurchase any then-issued
notes at 101% of their principal amount or
accreted value, as applicable in each class
of notes, plus accrued and unpaid interest.
Basic Covenants of Indentures... The indentures governing the notes, among
other things, restrict our ability and the
ability of certain of our subsidiaries to:
- borrow money;
- create certain liens;
- pay dividends on stock or repurchase
stock;
- make investments;
- sell all or substantially all of our
assets or merge with or into other
companies;
- sell assets;
- in the case of our restricted
subsidiaries, create or permit to
exist dividend or payment
restrictions with respect to us; and
- engage in certain transactions with
affiliates.
These covenants are subject to important
exceptions.
RISK FACTORS
You should carefully consider all of the information in this prospectus. In
particular, you should evaluate the specific risk factors under "Risk Factors"
for a discussion of certain risks involved with an investment in the new notes.
10
<PAGE> 14
UNAUDITED SUMMARY PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Summary Pro Forma Financial Statements are based on
the financial statements of Charter Holdings, CCA Group, and CharterComm
Holdings, LLC, as adjusted to illustrate the estimated effects of our recent
acquisitions and pending acquisitions, as if such acquisitions, had occurred on
March 31, 1999 for the Balance Sheet Data and Operating Data and for the
estimated effects of the following transactions, as if such transactions had
occurred on January 1, 1998 for the Statements of Operations and Other Financial
Data:
(1) the acquisition of us on December 23, 1998 by Paul G. Allen;
(2) the acquisition of certain cable systems of Sonic Communications,
Inc., located in California and Utah, on May 20, 1998, by us for
an aggregate purchase price, net of cash acquired, of $228.4
million, comprised of $167.5 million in cash and $60.9 million in
a note payable to the seller;
(3) the acquisition of Marcus Cable Company, L.L.C. on April 23, 1998
by Mr. Allen;
(4) the acquisitions and dispositions during 1998 by Marcus Cable;
(5) our merger with Marcus Holdings;
(6) our recent acquisitions and pending acquisitions; and
(7) the refinancing of all our debt through the issuance of the
original notes and funding under our current credit facilities.
The Unaudited Summary Pro Forma Financial Statements reflect the
application of the principles of purchase accounting to the transactions listed
in items (1) through (4) and (6) of the preceding sentence. In purchase
accounting, all separately identifiable assets and liabilities are recorded at
fair value with the excess purchase price recorded as franchises. The allocation
of the purchase price is based, in part, on preliminary information, which is
subject to adjustment upon obtaining complete valuation information of
intangible assets. The valuation information is expected to be finalized in the
fourth quarter of 1999. However, no significant adjustments are anticipated.
11
<PAGE> 15
The Unaudited Summary Pro Forma Financial Statements do not purport to be
indicative of what our financial position or results of operations would
actually have been had the transactions described above been completed on the
dates indicated or to project our results of operations for any future date. See
"Unaudited Pro Forma Financial Statements."
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................. $ 286,135 $ 70,511 $ 356,646 $ 88,625 $ -- $ 445,271
---------- ----------- ---------- ---------- -------- -----------
Operating expenses:
Operating, general and
administrative........................ 152,075 36,223 188,298 48,000 -- 236,298
Depreciation and amortization........... 153,747 35,470 189,217 49,233 -- 238,450
Corporate expense charges(a)............ 5,323 1,757 7,080 -- -- 7,080
Management fees......................... -- 1,338 1,338 1,444 -- 2,782
---------- ----------- ---------- ---------- -------- -----------
Total operating expenses.............. 311,145 74,788 385,933 98,677 -- 484,610
---------- ----------- ---------- ---------- -------- -----------
Loss from operations...................... (25,010) (4,277) (29,287) (10,052) -- (39,339)
Interest expense.......................... (71,591) (14,818) (86,409) (38,782) (12,775) (137,966)
Interest income........................... 1,733 159 1,892 100 -- 1,992
Other income (expense).................... 15 (31) (16) (106) -- (122)
---------- ----------- ---------- ---------- -------- -----------
Net loss.................................. $ (94,853) $ (18,967) $ (113,820) $ (48,840) $(12,775) $ (175,435)
========== =========== ========== ========== ======== ===========
OTHER FINANCIAL DATA:
EBITDA(b)................................. $ 128,752 $ 31,162 $ 159,914 $ 39,075 $ 198,989
EBITDA margin(c).......................... 45.0% 44.2% 44.8% 44.1% 44.7%
Adjusted EBITDA(d)........................ 134,060 34,288 168,348 40,625 208,973
Cash flows from operating activities...... 45,824 19,420 65,244 20,424 85,668
Cash flows used in investing activities... (116,800) (19,953) (136,753) (31,220) (163,973)
Cash flows from financing activities...... 1,098,950 (1,030,691) 68,259 172,077 240,336
Cash interest expense..................... 109,186
Capital expenditures...................... $ 109,629 $ 12,517 $ 122,146 $ 30,951 $ 153,097
Total debt to annualized EBITDA........... 8.3x
Total debt to annualized Adjusted
EBITDA.................................. 7.9
EBITDA to cash interest expense........... 1.8
EBITDA to interest expense................ 1.4
Deficiency of earnings to cover fixed
charges(e).............................. $ 175,435
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.............................. $8,357,282 $ 902,237 $9,259,519 $2,381,963 $ -- $11,641,482
Total debt................................ 4,754,018 863,130 5,617,148 1,007,172 -- 6,624,320
Members' equity........................... 3,326,142 -- 3,326,142 1,325,000 -- 4,651,142
</TABLE>
12
<PAGE> 16
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES):
Homes passed(f)........................... 3,977,000 823,000 4,800,000 1,092,000 5,892,000
Basic customers(g)........................ 2,344,000 582,000 2,926,000 729,000 3,655,000
Basic penetration(h)...................... 58.9% 70.7% 61.0% 66.8% 62.0%
Premium units(i).......................... 1,322,000 318,000 1,640,000 439,000 2,079,000
Premium penetration(j).................... 56.4% 54.6% 56.0% 60.2% 56.9%
Average monthly revenue per basic
customer(k)............................. $ 40.69 $ 40.38 $ 40.63 $ 40.52 $ 40.61
</TABLE>
13
<PAGE> 17
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS MARCUS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- --------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... $ 611,690 $ 448,192 $ 268,460 $1,328,342 $ 328,981 $ -- $ 1,657,323
---------- --------- ---------- ---------- ---------- -------- -----------
Operating expenses:
Operating, general and
administrative................ 310,100 231,050 138,524 679,674 167,686 -- 847,360
Depreciation and amortization... 375,899 252,855 141,535 770,289 186,485 -- 956,774
Corporate expense charges(a).... 16,493 17,042 6,759 40,294 -- -- 40,294
Management fees................. -- -- 4,573 4,573 10,100 -- 14,673
---------- --------- ---------- ---------- ---------- -------- -----------
Total operating expenses...... 702,492 500,947 291,391 1,494,830 364,271 -- 1,859,101
---------- --------- ---------- ---------- ---------- -------- -----------
Loss from operations.............. (90,802) (52,755) (22,931) (166,488) (35,290) -- (201,778)
Interest expense.................. (207,468) (137,953) (95,489) (440,910) (118,511) 7,500 (551,921)
Other income (expense)............ 518 -- 84 602 (5,944) -- (5,342)
---------- --------- ---------- ---------- ---------- -------- -----------
Net loss.......................... $ (297,752) $(190,708) $ (118,336) $ (606,796) $ (159,745) $ 7,500 $ (759,041)
========== ========= ========== ========== ========== ======== ===========
OTHER FINANCIAL DATA:
EBITDA(b)......................... $ 285,615 $ 200,100 $ 118,688 $ 604,403 $ 145,251 $ 749,654
EBITDA margin(c).................. 46.7% 44.6% 44.2% 45.5% 44.2% 45.2%
Adjusted EBITDA(d)................ 301,590 217,142 129,936 648,668 161,295 809,963
Cash flows from operating
activities...................... 137,160 139,908 38,186 315,254 36,208 351,462
Cash flows used in investing
activities...................... (387,633) (217,729) (56,242) (661,604) (177,891) (839,495)
Cash flows from (used in)
financing activities............ 211,726 108,504 (21,932) 298,298 45,184 343,482
Cash interest expense............. 436,432
Capital expenditures.............. $ 213,353 $ 224,723 $ 22,672 $ 460,748 $ 70,435 $ 531,183
Total debt to EBITDA.............. 8.8x
Total debt to Adjusted EBITDA..... 8.1
EBITDA to cash interest expense... 1.7
EBITDA to interest expense........ 1.4
Deficiency of earnings to cover
fixed charges(e)................ $ 759,041
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets...................... $7,235,656 $ -- $1,941,773 $9,177,429 $2,409,913 $125,000 $11,712,342
Total debt........................ 3,523,201 -- 1,901,590 5,424,791 1,007,171 128,604 6,560,566
Members' equity................... 3,429,291 -- -- 3,429,291 1,325,000 (3,604) 4,750,687
</TABLE>
14
<PAGE> 18
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS MARCUS ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ---------- ------------ ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES):
Homes passed(f).................. 2,149,000 1,743,000 806,000 4,698,000 989,000 5,687,000
Basic customers(g)............... 1,255,000 1,062,000 562,000 2,879,000 738,000 3,617,000
Basic penetration(h)............. 58.4% 60.9% 69.7% 61.3% 74.6% 63.6%
Premium units(i)................. 845,000 411,000 299,000 1,555,000 512,000 2,067,000
Premium penetration(j)........... 67.3% 38.7% 53.2% 54.0% 69.4% 57.1%
Average monthly revenue per basic
customer(k).................... NM NM $ 39.81 $ 38.45 $ 37.15 $ 38.18
</TABLE>
- -------------------------
(a) Charter Investment provided corporate management and consulting services to
our subsidiaries during 1998 and 1999, and to subsidiaries of Marcus
Holdings beginning in October 1998. See "Certain Relationships and Related
Transactions."
(b) EBITDA represents earnings (loss) before interest, income taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a cable television company's ability to
service indebtedness. However, 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. EBITDA should also not be
construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because 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 EBITDA may be limited by working
capital, debt service and capital expenditure requirements and by
restrictions related to legal requirements, commitments and uncertainties.
(c) EBITDA margin represents EBITDA as a percentage of revenues.
(d) Adjusted EBITDA means EBITDA before corporate expenses, management fees and
other income (expense) in accordance with the term "Consolidated EBITDA"
used in the indentures governing the notes. See "Description of Notes" for
a complete presentation of the methodology employed in calculating Adjusted
EBITDA. Adjusted EBITDA is presented because it is a widely accepted
financial indicator of a cable company's ability to meet its debt payments
and because it is used in the indentures to determine compliance with
certain covenants. 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 also 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.
(e) Earnings include net income (loss) plus fixed charges. Fixed charges
consist of interest expense and an estimated interest component of rent
expense.
(f) Homes passed are the number of living units, such as single residence
homes, apartments and condominium units, passed by the cable television
distribution network in a given cable system service area.
(g) Basic customers are customers who receive basic cable service.
(h) Basic penetration represents basic customers as a percentage of homes
passed.
(i) Premium units represent the total number of subscriptions to premium
channels.
(j) Premium penetration represents premium units as a percentage of basic
customers.
(k) Average monthly revenue per basic customer represents revenues divided by
the number of months in the period divided by the number of basic customers
at period end.
See "Notes to the Unaudited Pro Forma Financial Statements."
15
<PAGE> 19
UNAUDITED SUMMARY HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
The Unaudited Summary Historical Combined Financial and Operating Data for
the years ended December 31, 1996, 1997 and 1998 have been derived from the
separate financial statements of Charter Holdings, CCA Group, and CharterComm
Holdings, which have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this prospectus. The combined
financial and operating data represent the sum of the results of each of our
operating subsidiaries. Each of the companies was managed by Charter Investment,
under the terms of its respective management agreement with such company during
the presented periods. Since our operating subsidiaries were under common
management, we believe presenting combined financial information of these
companies is informative.
As a result of the acquisition of us by Paul G. Allen, we have applied
purchase accounting, whereby all separately identifiable assets and liabilities
are recorded at fair value, which had the effect of increasing total assets,
total debt and members' equity as of December 23, 1998. In addition, we have
retroactively restated our financial statements to include the results of
operations of Marcus Cable for the period from December 24, 1998 through
December 31, 1998, and the balance sheet of Marcus Cable as of December 31,
1998. As a result of our acquisition by Mr. Allen and our merger with Marcus
Holdings, we believe that the periods on or prior to December 23, 1998 are not
comparable to the periods after December 23, 1998.
16
<PAGE> 20
<TABLE>
<CAPTION>
CHARTER HOLDINGS, CCA GROUP, CHARTER
AND CHARTERCOMM HOLDINGS HOLDINGS
---------------------------------- ----------
YEAR ENDED DECEMBER 31, 1/1/98 12/24/98
----------------------- THROUGH THROUGH
1996 1997 12/23/98 12/31/98
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT CUSTOMER DATA)
<S> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS:
Revenues........................................... $ 368,553 $ 484,155 $570,964 $ 23,450
---------- ---------- -------- ----------
Operating expenses:
Operating, general and administrative............ 190,084 249,419 288,428 12,679
Depreciation and amortization.................... 154,273 198,718 240,294 13,811
Management fees/corporate expense charges(a)..... 15,094 20,759 38,348 766
---------- ---------- -------- ----------
Total operating expenses...................... 359,451 468,896 567,070 27,256
---------- ---------- -------- ----------
Income (loss) from operations...................... $ 9,102 $ 15,259 $ 3,894 $ (3,806)
========== ========== ======== ==========
CAPITAL EXPENDITURES............................... $ 110,291 $ 162,607 $195,468 $ 13,672
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets....................................... $1,660,242 $2,002,181 $7,235,656
Total debt......................................... 1,195,899 1,846,159 3,523,201
Members' equity.................................... 26,099 (80,505) 3,429,291
OPERATING DATA (AT END OF PERIOD, EXCEPT FOR
AVERAGES):
Homes passed(b).................................... 1,546,000 1,915,000 3,892,000
Basic customers(c)................................. 902,000 1,086,000 2,317,000
Basic penetration(d)............................... 58.3% 56.7% 59.5%
Premium units(e)................................... 517,000 629,000 1,256,000
Premium penetration(f)............................. 57.3% 57.9% 54.2%
</TABLE>
- -------------------------
(a) Charter Investment provided corporate management and consulting services to
us. CCA Group, and CharterComm Holdings paid fees to Charter Investment as
compensation for such services and recorded such fees as expense. See
"Certain Relationships and Related Transactions." Charter Holdings recorded
charges for actual corporate expenses incurred by Charter Investment on
behalf of Charter Holdings. Management fees/corporate expense charges for
the period ended December 23, 1998 include $14.4 million of change of
control payments under the terms of then-existing equity appreciation rights
plans. Such payments were triggered by the acquisition of us by Paul G.
Allen. Such payments were made by Charter Investment and were not subject to
reimbursement by us but were allocated to us for financial reporting
purposes. The equity appreciation rights plans were terminated in connection
with our acquisition by Mr. Allen, and these costs will not recur.
(b) Homes passed are the number of living units, such as single residence homes,
apartments and condominium units, passed by the cable television
distribution network in a given cable system service area.
(c) Basic customers are customers who receive basic cable service.
(d) Basic penetration represents basic customers as a percentage of homes
passed.
(e) Premium units represent the total number of subscriptions to premium
channels.
(f) Premium penetration represents premium units as a percentage of basic
customers.
17
<PAGE> 21
RISK FACTORS
The new notes, like the old notes, entail the following risks. You should
carefully consider these risk factors, as well as the other information in this
prospectus, before tendering original notes in exchange for new notes.
OUR BUSINESS
WE HAVE SUBSTANTIAL EXISTING DEBT AND WILL INCUR SUBSTANTIAL ADDITIONAL DEBT
WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING
OUR OBLIGATIONS UNDER THE NOTES.
We have a significant amount of debt. As of March 31, 1999, pro forma for
our pending acquisitions and acquisitions completed since that date, our total
debt was approximately $6.6 billion, our total members' equity was approximately
$4.7 billion, and the deficiency of our earnings available to cover fixed
charges was approximately $175 million.
Our substantial debt could have important consequences to you. For example,
it could:
- make it more difficult for us to satisfy our obligations to you with
respect to the notes and to satisfy our obligations under our credit
facilities;
- increase our vulnerability to general adverse economic and cable industry
conditions, including interest rate fluctuations, because much of our
borrowings are and will continue to be at variable rates of interest;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which will reduce our funds available
for working capital, capital expenditures, acquisitions of additional
systems and other general corporate expenses;
- limit our flexibility in planning for, or reacting to, changes in our
business and the cable industry generally;
- place us at a disadvantage compared to our competitors that have
proportionately less debt; and
- limit our ability to borrow additional funds in the future, if we need
them, due to applicable financial and restrictive covenants in such debt.
We anticipate incurring substantial additional debt in the future to fund
the expansion, maintenance and the upgrade of our systems. If new debt is added
to our current debt levels, the related risks that we and you now face could
intensify.
18
<PAGE> 22
THE AGREEMENTS AND INSTRUMENTS GOVERNING OUR DEBT CONTAIN RESTRICTIONS AND
LIMITATIONS WHICH COULD SIGNIFICANTLY IMPACT OUR ABILITY TO OPERATE OUR BUSINESS
AND REPAY THE NOTES.
Our credit facilities and the indentures governing the notes contain a
number of significant covenants that could adversely impact our business. These
covenants, 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, our credit facilities require the particular borrower to maintain
cash 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.
IF WE DEFAULT UNDER OUR CREDIT FACILITIES, WE MAY NOT HAVE THE ABILITY TO MAKE
PAYMENTS ON THE NOTES, WHICH WOULD PLACE US IN DEFAULT UNDER OUR INDENTURES.
SUCH DEFAULTS MAY ADVERSELY AFFECT US.
In the event of a default under our credit facilities, lenders could elect
to declare all amounts borrowed, together with accrued and unpaid interest and
other fees, to be due and payable. In any event, when a default exists under our
credit facilities, funds may not be distributed by our subsidiaries to Charter
Holdings to pay interest or principal on the notes. If the amounts outstanding
under our credit facilities are accelerated, thereby causing an acceleration of
amounts outstanding under the notes, we may not be able to repay such amounts or
the notes. In addition, under the terms of the Charter Operating credit
facilities, if the 8.250% notes are not refinanced at least six months prior to
the date of their maturity, the entire amount due under such credit facilities
will become due and payable and we may not have the ability to make such
payment. Any default under any of our credit facilities or our indentures may
adversely affect our growth, our financial condition and our results of
operations.
THE NOTES ARE THE OBLIGATIONS OF A HOLDING COMPANY WHICH HAS NO OPERATIONS AND
DEPENDS ON ITS OPERATING SUBSIDIARIES FOR CASH. OUR SUBSIDIARIES MAY BE LIMITED
IN THEIR ABILITY TO MAKE FUNDS AVAILABLE FOR THE PAYMENT OF AMOUNTS DUE UNDER
THE NOTES.
As a holding company, Charter Holdings does not hold substantial assets
other than its direct or indirect investments in and advances to our operating
subsidiaries. Consequently, our subsidiaries conduct all of our operations and
own substantially all of our assets. As a result, our cash flow and our ability
to meet our debt payment obligations on the notes will depend upon the cash flow
of our subsidiaries and the payment of funds by our subsidiaries to us in the
form of loans, equity distributions or otherwise. Our
19
<PAGE> 23
subsidiaries are not obligated to make funds available to us for payment on the
notes. In addition, our subsidiaries' ability to make any such loans, equity
distributions or other payments to us will depend on their earnings, the terms
of their indebtedness, business and tax considerations and legal restrictions.
BECAUSE OF OUR HOLDING COMPANY STRUCTURE, THE NOTES WILL BE SUBORDINATE TO ALL
LIABILITIES OF OUR SUBSIDIARIES.
Under our credit facilities, Charter Operating is the borrower, and our
other subsidiaries are guarantors. The lenders under our credit facilities will
have the right to be paid before you from any of our subsidiaries' assets. In
the event of bankruptcy, liquidation or dissolution of a subsidiary, following
payment by such subsidiary of its liabilities, such subsidiary may not have
sufficient assets remaining to make payments to us as a shareholder or
otherwise. This will adversely affect our ability to make payments to you as a
holder of the notes.
OUR ABILITY TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO SERVICE OUR
DEBT AND GROW OUR BUSINESS DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on our debt, including the notes, and to fund
our planned capital expenditures for upgrading our cable systems and for other
purposes 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. If our business does not generate sufficient cash flow from operations,
and sufficient future borrowings are not available to us under our credit
facilities or from other sources of financing, we may not be able to repay our
debt, including the notes, to grow our business or to fund our other liquidity
needs.
WE HAVE GROWN RAPIDLY AND HAVE A LIMITED HISTORY OF OPERATING OUR CURRENT
SYSTEMS. THIS MAKES IT DIFFICULT FOR YOU TO COMPLETELY EVALUATE OUR PERFORMANCE.
We commenced active operations in 1994 and have grown rapidly since then
through acquisitions of cable systems. Giving effect to our merger with Marcus
Holdings and our recent and pending acquisitions, our systems currently serve
approximately 58% more customers than were served as of December 31, 1998. As a
result, historical financial information about us may not be indicative of the
future or of results that we can achieve with the cable systems which will be
under our control. Our recent growth in revenue and growth in EBITDA over our
short operating history is not necessarily indicative of future performance.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO EXPERIENCE NET LOSSES.
CONSEQUENTLY, WE MAY NOT HAVE THE ABILITY TO FINANCE OUR FUTURE OPERATIONS.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. We reported net losses from continuing
operations, before extraordinary items, of $157 million for 1997, $200 million
for 1998, and $94.9 million for the three months ended March 31, 1999. On a pro
forma basis, giving effect to our merger with Marcus Holdings and our recent and
pending acquisitions, we had net losses from continuing operations, before
extraordinary items of $759 million for 1998. For the three months ended March
31, 1999, on the same pro forma basis, we had net losses from continuing
operations, before extraordinary items of $175 million. We expect our net losses
to increase as a result of our recent and pending acquisitions. We cannot
predict what
20
<PAGE> 24
impact, if any, continued losses will have on our ability to finance our
operations in the future.
WE MAY NOT BE ABLE TO OBTAIN CAPITAL SUFFICIENT TO FUND OUR PLANNED UPGRADES AND
OTHER CAPITAL EXPENDITURES. THIS COULD ADVERSELY AFFECT OUR ABILITY TO OFFER NEW
PRODUCTS AND SERVICES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
We intend to upgrade a significant portion of our cable systems over the
coming years and make other capital investments. Over the next three years, we
plan to spend approximately $900 million, or $1.2 billion pro forma including
our recent and pending acquisitions, to upgrade the systems we own and the
systems we have agreed to acquire in our pending acquisitions. We also plan to
spend an additional $900 million, or $1.3 billion pro forma for our recent and
pending acquisitions, to maintain and expand the systems we own and the systems
we will acquire. We cannot assure you that these amounts will be sufficient to
accomplish our planned system upgrades, maintenance and expansion. If we cannot
obtain the necessary funds from increases in our operating cash flow, additional
borrowings or other sources, we may not be able to fund our planned upgrades and
expansion and offer new products and services on a timely basis. Consequently,
our growth, our financial condition and the results of our operations could
suffer materially.
IF WE ARE UNSUCCESSFUL IN IMPLEMENTING OUR GROWTH STRATEGY, WE MAY BE UNABLE TO
FULFILL OUR OBLIGATIONS UNDER THE NOTES.
We expect that a substantial portion of our future growth will be achieved
through revenues from new products and services and the acquisition of
additional cable systems. We may not be able to offer these new products and
services successfully to our customers and these new products and services may
not generate adequate revenues. In addition, we cannot predict the success of
our acquisition strategy. In the past year, the cable television industry has
undergone dramatic consolidation which has reduced the number of future
acquisition prospects. This consolidation may increase the purchase price of
future acquisitions, and we may not be successful in identifying attractive
acquisition targets in the future. Additionally, those acquisitions we do
complete are not likely to have a positive net impact on our operating results
in the near future. If we are unable to grow our cash flow sufficiently, we may
be unable to fulfill our obligations to you under the notes or obtain
alternative financing.
WE MAY NOT HAVE THE ABILITY TO INTEGRATE THE NEW SYSTEMS THAT WE ACQUIRE AND THE
CUSTOMERS THEY SERVE WITH OUR EXISTING SYSTEMS. THIS COULD ADVERSELY AFFECT OUR
OPERATING RESULTS AND GROWTH STRATEGY.
Upon the completion of our pending acquisitions, we will own and operate
cable systems serving approximately 3.7 million customers, as compared to the
cable systems we currently own which serve approximately 2.3 million customers
as of March 31, 1999. In addition, we may acquire more cable systems in the
future, through system swaps or otherwise. The integration of our new cable
systems poses a number of significant risks, including:
- our acquisitions may not have a positive impact on our cash flows from
operations.
- the integration of these new systems and customers will place significant
demands on our management and our operations, informational services, and
financial, legal and marketing resources. Our current operating and
financial systems and controls
21
<PAGE> 25
and information services may not be adequate, and any steps taken to
improve these systems and controls may not be sufficient.
- our current information systems may be incompatible with the information
systems we have acquired or plan to acquire. We may be unable to
integrate these information systems at a reasonable cost or in a timely
manner.
- acquired businesses sometimes result in unexpected liabilities and
contingencies which could be significant.
- our continued growth will also increase our need for qualified personnel.
We may not be able to hire such additional qualified personnel.
We cannot assure you that we will successfully integrate any acquired
systems into our operations.
THE FAILURE TO OBTAIN NECESSARY REGULATORY APPROVALS, OR TO SATISFY OTHER
CLOSING CONDITIONS, COULD IMPEDE THE CONSUMMATION OF A PENDING ACQUISITION. THIS
WOULD PREVENT OR DELAY OUR STRATEGY TO EXPAND OUR BUSINESS AND INCREASE
REVENUES.
Our pending acquisitions are subject to federal, state and local regulatory
approvals. We cannot assure that we will be able to obtain any necessary
approvals. These pending acquisitions are also subject to a number of other
closing conditions. There can be no assurance as to when, or if, each such
acquisition will be consummated. Any delay, prohibition or modification could
adversely affect the terms of a pending acquisition or could require us to
abandon an otherwise attractive opportunity and possible forfeit earnest money.
OUR PROGRAMMING COSTS ARE INCREASING. WE MAY NOT HAVE THE ABILITY TO PASS THESE
INCREASES ON TO OUR CUSTOMERS, WHICH WOULD ADVERSELY AFFECT OUR CASH FLOW AND
OPERATING MARGINS.
Programming has been and is expected to continue to be our largest single
expense item. In recent years, the cable industry has experienced a rapid
escalation in the cost of programming, particularly sports programming. This
escalation may continue and we may not be able to pass programming cost
increases on to our customers. In addition, as we upgrade the channel capacity
of our systems and add programming to our basic and expanded basic programming
tiers, and reposition premium services to the basic tier, we may face additional
market constraints on our ability to pass programming costs on to our customers.
Basic programming includes a variety of entertainment and local programming.
Expanded basic programming offers more services than basic programming. Premium
service provides unedited, commercial-free movies, sports and other special
event entertainment programming. The inability to pass programming cost
increases on to our customers will have an adverse impact on our cash flow and
operating margins.
WE MAY BE UNABLE TO NEGOTIATE CONSTRUCTION CONTRACTS ON FAVORABLE TERMS AND OUR
CONSTRUCTION COSTS MAY INCREASE SIGNIFICANTLY. THIS COULD ADVERSELY AFFECT OUR
GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The expansion and upgrade of our existing systems and the systems we plan
to acquire in our pending acquisitions will require us to hire contractors and
enter into a number of construction agreements. We may have difficulty hiring
experienced civil contractors, and the contractors we hire may encounter cost
overruns or delays in construction. Our construction costs may increase
significantly over the next few years as
22
<PAGE> 26
existing contracts expire and as demand for cable construction services
continues to grow. We cannot assure you that we will be able to construct new
systems or expand or upgrade existing or acquired systems in a timely manner or
at a reasonable cost. This may adversely affect our growth, financial condition
and results of operations.
OUR PRINCIPAL EQUITY HOLDER MAY HAVE INTERESTS ADVERSE TO YOUR INTERESTS.
Paul G. Allen beneficially owns approximately 96% of our outstanding equity
interests on a fully diluted basis. Accordingly, Mr. Allen has the ability to
control fundamental corporate transactions requiring equity holder approval,
including without limitation, election of directors, approval of merger
transactions involving us and sales of all or substantially all of our assets.
Further, through his effective control of our management and affairs, Mr. Allen
could cause us to enter into contracts with another corporation in which he owns
an interest, or cause us to decline a transaction that he or an entity in which
he owns an interest ultimately enters into.
Mr. Allen may engage in other businesses involving the operation of cable
television systems, video programming, high-speed Internet access or electronic
commerce, or other businesses that compete or may in the future compete with us
through one or more of his affiliates. If he did so, we and Mr. Allen would be
competing. In addition, Mr. Allen currently engages and may engage in the future
in businesses that are complementary to our cable television business.
Accordingly, conflicts could arise with respect to the allocation of corporate
opportunities between us and Mr. Allen's affiliates. Current or future
agreements between us and Mr. Allen may not be the result of arm's-length
negotiations. Consequently, such agreements may be less favorable to us than
agreements that we could otherwise have entered into with unaffiliated third
parties. Further, many past and future transactions with Mr. Allen or his
affiliates are informal in nature and, therefore, costs and benefits are not
formally allocated among the parties to the transactions. As a result, there
inevitably will be some discretion left to the parties, who are subject to the
potentially conflicting interests described above.
We have not instituted any formal plan or arrangement to address potential
conflicts of interest or allocation of corporate opportunities that may arise.
UPON THE COMPLETION OF THE INITIAL PUBLIC OFFERING BY CHARTER COMMUNICATIONS,
INC., IT IS ANTICIPATED THAT WE WILL NOT BE PERMITTED TO ENGAGE IN ANY BUSINESS
ACTIVITY OTHER THAN THE CABLE TRANSMISSION OF VIDEO, AUDIO AND DATA UNLESS MR.
ALLEN FIRST DETERMINES NOT TO PURSUE THE PARTICULAR BUSINESS ACTIVITY. THIS
COULD ADVERSELY AFFECT OUR ABILITY TO OFFER NEW PRODUCTS AND SERVICES OUTSIDE OF
THE CABLE TRANSMISSION BUSINESS AND ENTER INTO NEW BUSINESSES, WHICH COULD
ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The certificate of incorporation of Charter Communications, Inc. and
Charter Holdco's operating agreement will provide that, until all of the shares
of Charter Communications, Inc.'s Class B common stock held by Mr. Allen have
automatically converted into shares of Class A common stock, Charter
Communications, Inc. and Charter Holdco, including their subsidiaries, cannot
engage in any business transaction outside the cable transmission business,
unless the opportunity to pursue the particular business transaction is first
offered to Mr. Allen. Mr. Allen must decide not to pursue such other business
transaction and consent to our engaging in the business transaction. These
provisions may limit our ability to take advantage of attractive business
opportunities. Consequently, our ability to offer new products and services
outside of the cable
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<PAGE> 27
transmission business and enter into new businesses could be adversely affected,
resulting in an adverse effect on our growth, financial condition and results of
operations. See "Certain Relationships and Related Transactions -- Allocation of
Business Opportunities with Mr. Allen."
OUR MANAGEMENT WILL BE RESPONSIBLE FOR MANAGING OTHER CABLE OPERATIONS AND WILL
NOT DEVOTE THEIR FULL TIME TO OUR OPERATIONS. THIS COULD IMPAIR OUR OPERATING
RESULTS AND GIVE RISE TO CONFLICTS OF INTEREST.
Mr. Allen and certain other of our affiliates, including our direct parent,
Charter Holdco, have agreed to acquire, and may from time to time in the future
acquire, cable systems in addition to those owned or acquired by us. To date,
such affiliates have signed agreements to purchase cable systems with a total of
approximately 2.5 million customers. Although in the past, Charter Investment
has assigned certain of their acquisitions to us, there is no present intention
on the part of Charter Investment or any of our other affiliates to contribute
any additional acquisitions to us or to any of our subsidiaries.
Charter Investment, of which Mr. Allen is the majority owner, as well as
some of the officers of Charter Investment who currently manage our cable
systems, will have a substantial role in managing these outside systems. Charter
Investment and its officers and employees now devote substantially all of their
time to managing our systems. However, when such persons begin to manage outside
cable systems as well, the time they devote to managing our systems will be
correspondingly reduced. This could impair our results of operations. Moreover,
allocating managers' time and other resources of Charter Investment between our
systems and outside systems held by our affiliates could give rise to conflicts
of interest. Charter Investment does not have or plan to create formal
procedures for determining whether and to what extent outside cable television
systems described above will receive priority with respect to personnel
requirements.
THE LOSS OF CERTAIN KEY EXECUTIVES COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE
OUR BUSINESS.
Our operations are managed by Charter Investment which, in turn, is managed
by a small number of key executive officers, including Jerald L. Kent. The loss
of the services of these individuals, and, in particular, of Mr. Kent, could
adversely affect our ability to manage our business which, in turn, could
adversely affect our financial condition and results of operations.
DATA PROCESSING FAILURES AFTER DECEMBER 31, 1999 COULD SIGNIFICANTLY DISRUPT OUR
OPERATIONS, CAUSING A DECLINE IN CASH FLOW AND REVENUES AND OTHER DIFFICULTIES.
The year 2000 problem affects our owned and licensed computer systems and
equipment used in connection with internal operations. It also affects our
non-information technology systems, including embedded systems in our buildings
and other infrastructure. Additionally, since we 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.
Much of our assessment efforts regarding the year 2000 problem has
involved, and depends on, inquiries to third party service providers. Some of
these third parties that have certified the readiness of their products will not
certify that such products have operating compatibility with our systems. If we,
or a significant third party with whom we communicate and do business through
computers, fails to become year 2000 ready, or if
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<PAGE> 28
the year 2000 problem causes our systems to become internally incompatible or
incompatible with key third party systems, our business could suffer material
disruptions. We could also face disruptions if the year 2000 problem causes
general widespread problems or an economic crisis. We cannot now estimate the
extent of these potential disruptions. We cannot assure you that our efforts to
date and our ongoing efforts to prepare for the year 2000 problem will be
sufficient to prevent a material disruption of our operations, particularly with
respect to systems we may acquire prior to December 31, 1999. As a result of any
such disruption our growth, financial condition and results of operations could
suffer materially.
THERE SHOULD BE NO EXPECTATION THAT MR. ALLEN WILL FUND OUR OPERATIONS OR
OBLIGATIONS IN THE FUTURE.
In the past, Mr. Allen has contributed equity to Charter Investment. In
July 1999, Mr. Allen agreed to contribute $500 million on or before August 13,
1999, and $825 million on or before September 1, 1999, to Charter Holdco,
pursuant to a membership interests purchase agreement. Charter Holdco has
committed to contribute all of this equity to us. There can be no expectation
that Mr. Allen will continue to contribute funds to us or to our affiliates in
the future.
OUR INDUSTRY
WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT WHICH CAN AFFECT OUR
BUSINESS AND OPERATIONS.
The industry in which we operate is highly competitive. In some instances
we compete against companies with fewer regulatory burdens, easier access to
financing, greater personnel resources, greater brand name recognition and
long-standing relationships with regulatory authorities. Mergers, joint ventures
and alliances among cable television operators, regional telephone companies,
long distance telephone service providers, electric utilities, local exchange
carriers that provide local telecommunications exchange and access services to
customers, providers of cellular and other wireless communications services and
others may result in providers capable of offering cable television and other
telecommunications services in direct competition with us.
We also face competition within the subscription television industry, which
includes providers of paid television service, and excludes broadcast companies
that transmit their signal to customers without assessing a subscription fee.
The competition we face is from non-cable technologies for distributing
television broadcast signals and from other communications and entertainment
media, including conventional off-air television and radio broadcasting
services, newspapers, movie theaters, the Internet, live sports events and home
video products. We cannot assure you that upgrading our cable systems will allow
us to compete effectively. Additionally, as we expand and introduce new and
enhanced services, including additional telecommunications services, we will be
subject to competition from other telecommunications providers. We cannot
predict the extent to which this competition may affect our business and
operations in the future.
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<PAGE> 29
WE MAY NOT BE ABLE TO FUND THE CAPITAL EXPENDITURES NECESSARY TO KEEP PACE WITH
TECHNOLOGICAL DEVELOPMENTS OR OUR CUSTOMERS' DEMAND FOR NEW PRODUCTS OR
SERVICES. THIS COULD LIMIT OUR ABILITY TO COMPETE EFFECTIVELY.
The cable business is characterized by rapid technological change and the
introduction of new products and services. We cannot assure you that we will be
able to fund the capital expenditures necessary to keep pace with technological
developments, or that we will successfully anticipate the demand of our
customers for products or services requiring new technology. This type of rapid
technological change could adversely affect our plans to upgrade or expand our
systems and respond to competitive pressures. Our inability to upgrade, maintain
and expand our systems and provide enhanced services in a timely manner, or to
anticipate the demands of the market place, could adversely affect our ability
to compete. Consequently, our growth, results of operation and financial
condition could suffer materially.
WE OPERATE OUR CABLE SYSTEMS UNDER FRANCHISES WHICH ARE NON-EXCLUSIVE. LOCAL
FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE COMPETITION
IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY.
Our cable systems are operated under franchises granted by local
franchising authorities. These franchises are non-exclusive. Consequently, such
local franchising authorities can grant additional franchises to competitors in
the same geographic area. As a result, competing operators may build systems in
areas in which we hold franchises. The existence of more than one cable system
operating in the same territory is referred to as an overbuild. Overbuilds can
adversely affect our operations. We are currently aware of overbuild situations
in six of our systems and potential overbuild situations in another four of our
systems, together representing a total of approximately 89,000 customers.
Additional overbuild situations may occur in other systems.
OUR CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES WHICH ARE SUBJECT TO NON-
RENEWAL OR TERMINATION. THE FAILURE TO RENEW A FRANCHISE COULD ADVERSELY AFFECT
OUR BUSINESS IN A KEY MARKET.
Our cable systems generally operate pursuant to non-exclusive franchises,
permits or licenses typically granted by a municipality or other state or local
government controlling the public rights-of-way. Many franchises establish
comprehensive facilities and service requirements, as well as specific customer
service standards and establish monetary penalties for non-compliance. In many
cases, franchises are terminable if the franchisee fails to comply with material
provisions set forth in the franchise agreement governing system operations.
Franchises are generally granted for fixed terms and must be periodically
renewed. Local franchising authorities may resist granting a renewal if either
past performance or the prospective operating proposal is considered inadequate.
Franchise authorities often demand concessions or other commitments as a
condition to renewal, which have been and may continue to be costly to us. In
certain cases, franchises have not been renewed at expiration, and we have
operated under either temporary operating agreements or without a license while
negotiating renewal terms with the local franchising authorities. We cannot
assure you that we will be able to renew these franchises in the future. In the
future, a sustained and material failure to renew a franchise could adversely
affect our business in the affected metropolitan area.
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<PAGE> 30
LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL REGULATORY
CONSTRAINTS ON OUR BUSINESS. THIS CAN FURTHER INCREASE OUR EXPENSES.
In addition to the franchise document, cable authorities have also adopted
in some jurisdictions cable regulatory ordinances that further regulate the
operation of cable systems. This additional regulation increases our expenses in
operating our business. We cannot assure you that the local franchising
authorities will not impose new and more restrictive requirements.
Local franchising authorities also have the power to reduce rates and order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. Basic service tier
rates are the prices charged for a basic programming services. As of March 31,
1999, we have refunded an aggregate amount of approximately $453,000 since our
inception. We may be required to refund additional amounts in the future.
OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND REGULATION.
THE APPLICABLE LEGISLATION AND REGULATIONS, AND CHANGES TO THEM, COULD ADVERSELY
AFFECT OUR BUSINESS BY INCREASING OUR EXPENSES.
Regulation of the cable industry has increased the administrative and
operational expenses and limited the revenues of cable systems. Cable operators
are subject to, among other things:
- limited rate regulation;
- requirements that, under specified circumstances, a cable system carry a
local broadcast station or obtain consent to carry a local or distant
broadcast station;
- rules for franchise renewals and transfers; and
- other requirements covering a variety of operational areas such as equal
employment opportunity, technical standards and customer service
requirements.
Additionally, many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. There are also
ongoing efforts to amend or expand the state and local regulation of some of our
cable systems, which may compound the regulatory risks we already face. We
expect further efforts, but cannot predict whether any of the states or
localities in which we now operate will expand regulation of our cable systems
in the future or how they will do so.
WE MAY BE REQUIRED TO PROVIDE ACCESS TO OUR NETWORKS TO OTHER INTERNET SERVICE
PROVIDERS. THIS COULD SIGNIFICANTLY INCREASE OUR COMPETITION AND ADVERSELY
AFFECT THE UPGRADE OF OUR SYSTEMS OR OUR ABILITY TO PROVIDE NEW PRODUCTS AND
SERVICES.
There are proposals before the United States Congress and the Federal
Communications Commission to require all cable operators to make a portion of
their cable systems' bandwidth available to other Internet service providers,
such as telephone companies. Certain local franchising authorities are
considering or have already approved such "open access" requirements. A federal
district court in Portland, Oregon, recently upheld the legality of an open
access requirement. Recently, a number of companies, including telephone
companies and Internet service providers, have requested local authorities and
the Federal Communications Commission to require cable operators to provide
access to cable's broadband infrastructure, which allows cable to deliver a
multitude of channels and/or services, so that these companies may deliver
Internet services directly to customers over cable facilities. Broward County,
Florida recently granted open access to an
27
<PAGE> 31
Internet service provider as a condition to a cable operators' transfer of its
franchise for cable service. The cable operator has commenced legal action at
the district level. Allocating a portion of our bandwidth capacity to other
Internet service providers would impair our ability to use our bandwidth in ways
that would generate maximum revenues. In addition, our Internet service provider
competitors would be strengthened. We may also decide not to upgrade our systems
which would prevent us from introducing our planned new products and services.
In addition, we cannot assure that if we were required to provide access in this
manner, it would not adversely impact our profitability in many ways, including
any or all of the following:
- significantly increasing competition;
- increasing the expenses we incur to maintain our systems; and
- increasing the expense of upgrading and/or expanding our systems.
DESPITE RECENT DEREGULATION OF EXPANDED BASIC CABLE PROGRAMMING PACKAGES, WE ARE
CONCERNED THAT CABLE RATE INCREASES COULD GIVE RISE TO FURTHER REGULATION. THIS
COULD IMPAIR OUR ABILITY TO RAISE RATES TO COVER OUR INCREASING COSTS OR CAUSE
US TO DELAY OR CANCEL SERVICE OR PROGRAMMING ENHANCEMENTS.
On March 31, 1999, the pricing guidelines of expanded basic cable
programming packages were deregulated, permitting cable operators to set their
own rates. This deregulation was not applicable to basic services. However, the
Federal Communications Commission and the United States Congress continue to be
concerned that cable rate increases are exceeding inflation. It is possible that
either the Federal Communications Commission or the United States Congress will
again restrict the ability of cable television operators to implement rate
increases. Should this occur, it would impede our ability to raise our rates. If
we are unable to raise our rates in response to increasing costs, our financial
condition and results of operations could be materially adversely affected.
IF WE OFFER TELECOMMUNICATIONS SERVICES, WE MAY BE SUBJECT TO ADDITIONAL
REGULATORY BURDENS CAUSING US TO INCUR ADDITIONAL COSTS.
If we enter the business of offering telecommunications services, we may be
required to obtain federal, state and local licenses or other authorizations to
offer such services. We may not be able to obtain such authorizations in a
timely manner, if at all, and conditions could be imposed upon such licenses or
authorizations that may not be favorable to us. Furthermore, telecommunications
companies, including Internet protocol telephony companies, which provide the
ability to offer telephone services over the Internet, generally are subject to
significant regulation as well as higher fees for pole attachments. In
particular, cable operators who provide telecommunications services and cannot
reach agreement with local utilities over pole attachment rates in states that
do not regulate pole attachment rates will be subject to a methodology
prescribed by the Federal Communications Commission for determining the rates.
These rates may be higher than those paid by cable operators who do not provide
telecommunications services. The rate increases are to be phased in over a
five-year period beginning on February 8, 2001. If we become subject to
telecommunications regulation or higher pole attachment rates, we may incur
additional costs which may be material to our business.
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<PAGE> 32
THE OFFERING
THERE IS NO PUBLIC MARKET FOR THE NOTES. AN ACTIVE MARKET MAY NOT DEVELOP
CAUSING DIFFICULTIES FOR YOU IF YOU TRY TO RESELL THE NOTES.
The new notes will be new securities for which there is currently no public
market. We do not intend to list the new notes on any national securities
exchange or quotation system. There can be no assurance as to the development of
any market or liquidity of any market that may develop for the new notes. If a
trading market does not develop or is not maintained, you may experience
difficulty in reselling new notes, or you may be unable to sell them at all.
IF YOU FAIL TO EXCHANGE YOUR ORIGINAL NOTES FOR NEW NOTES, SUCH ORIGINAL NOTES
WILL REMAIN SUBJECT TO RESTRICTIONS ON TRANSFER. ACCORDINGLY, THE LIQUIDITY OF
THE MARKET FOR THE ORIGINAL NOTES COULD BE ADVERSELY AFFECTED.
Holders of original notes who do not exchange their original notes for new
notes pursuant to the exchange offer will continue to be subject to the
restrictions on transfer of the original notes set forth in the legend on the
original notes. This is a consequence of the issuance of the original notes
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act. In general, original notes may
not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. If we complete the exchange
offer, we will not be required to register the original notes, and we do not
anticipate that we will register the original notes, under the Securities Act.
Additionally, to the extent that original notes are tendered and accepted in the
exchange offer, the aggregate principal amount of original notes outstanding
will decrease, with a resulting decrease in the liquidity of the market for the
original notes.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FULFILL OUR
OBLIGATIONS UNDER THE NOTES FOLLOWING A CHANGE OF CONTROL OFFER. THIS WOULD
PLACE US IN DEFAULT UNDER THE INDENTURES GOVERNING THE NOTES.
Under the indentures governing the notes, upon the occurrence of specified
change of control events, we will be required to offer to repurchase all
outstanding notes. However, we may not have sufficient funds at the time of the
change of control event to make the required repurchase of the notes. In
addition, a change of control would require the repayment of borrowings under
our credit facilities. Because the credit facilities are obligations of our
subsidiaries, the credit facilities would have to be repaid by our subsidiaries
before their assets could be used to repurchase the notes. Our failure to make
or complete an offer to repurchase the notes would place us in default under the
indentures.
THE 9.920% NOTES WILL BE ISSUED WITH ORIGINAL ISSUE DISCOUNT. CONSEQUENTLY,
HOLDERS OF 9.920% NOTES WILL GENERALLY BE REQUIRED TO INCLUDE AMOUNTS IN GROSS
INCOME FOR FEDERAL INCOME TAX PURPOSES IN ADVANCE OF RECEIVING CASH.
The 9.920% notes will be issued at a substantial discount from their stated
principal amount. As a result, purchasers of such notes generally will be
required to include the accrued portion of such discount in gross income, as
interest, for United States federal income tax purposes in advance of the
receipt of cash payments of such interest.
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<PAGE> 33
IF A BANKRUPTCY PETITION WERE FILED BY OR AGAINST US, YOU MAY RECEIVE A LESSER
AMOUNT FOR YOUR CLAIM THAN YOU WOULD BE ENTITLED TO RECEIVE UNDER THE INDENTURE
GOVERNING THE 9.920% NOTES, AND YOU MAY REALIZE TAXABLE GAIN OR LOSS UPON
PAYMENT OF YOUR CLAIM.
If a bankruptcy petition were filed by or against us under the U.S.
Bankruptcy Code after the issuance of the 9.920% notes, the claim by a holder of
such notes for the principal amount of such notes may be limited to an amount
equal to the sum of:
(1) the initial offering price for such notes; and
(2) that portion of the original issue discount that does not constitute
"unmatured interest" for purposes of the U.S. Bankruptcy Code.
Any original issue discount that was not amortized as of the date of the
bankruptcy filing would constitute unmatured interest. Accordingly, holders of
9.920% notes under these circumstances may receive a lesser amount than they
would be entitled to receive under the terms of the indenture governing the
9.920% notes, even if sufficient funds are available. In addition, to the extent
that the U.S. Bankruptcy Code differs from the Internal Revenue Code in
determining the method of amortization of original issue discount, a holder of
9.920% notes may realize taxable gain or loss upon payment of that holder's
claim in bankruptcy.
IF WE DO NOT FULFILL OUR OBLIGATIONS TO YOU UNDER THE NOTES, YOU WILL NOT HAVE
ANY RECOURSE AGAINST OUR EQUITY HOLDERS OR THEIR AFFILIATES.
The notes will be issued solely by Charter Holdings and Charter Capital.
None of our equity holders, directors, officers, employees or affiliates,
including Paul G. Allen, will be an obligor or guarantor under the notes.
Furthermore, the indentures governing the notes expressly provide that these
parties will not have any liability for our obligations under the notes or the
indentures. By accepting the notes, you waive and release all such liability as
consideration for issuance of the notes. Consequently, if we do not fulfill our
obligations to you under the notes, you will have no recourse against any of
these parties.
Additionally, our equity holders, including Mr. Allen, will be free to
manage other entities, including other cable companies. If we do not fulfill our
obligations to you under the notes, you will have no recourse against those
other entities or their assets as well.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements regarding, among other
things, our plans, strategies and prospects, both business and financial.
Although we believe that our plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, we cannot assure
you that we will achieve or realize these plans, intentions or expectations.
Forward-looking statements are inherently subject to risks, uncertainties and
assumptions. Important factors that could cause actual results to differ
materially from the forward-looking statements we make in this prospectus are
set forth under the caption "Risk Factors" and elsewhere in this prospectus, and
include, but are not limited to:
- our plans to achieve growth by offering new and enhanced services and
through acquisitions;
- our anticipated capital expenditures for our planned upgrades, and the
ability to fund such upgrades;
- our beliefs regarding the affects of governmental regulation on our
business;
- our ability to effectively compete in a highly competitive environment;
and
- our expectations to be ready for any year 2000 problem.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by those cautionary statements.
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<PAGE> 35
USE OF PROCEEDS
This exchange offer is intended to satisfy certain of our obligations under
the exchange and registration rights agreements entered into in connection with
the offering of the original notes. We will not receive any proceeds from the
exchange offer. In consideration for issuing the new notes, we will receive
original notes with like original principal amount at maturity. The form and
terms of the original notes are the same as the form and terms of the new notes,
except as otherwise described in this prospectus. The original notes surrendered
in exchange for new notes will be retired and canceled and cannot be reissued.
Accordingly, the issuance of the new notes will not result in any increase in
our outstanding debt.
We received proceeds totaling approximately $2.99 billion from the private
placement of the original notes. Some of these proceeds were used to complete
cash tender offers for certain then-outstanding notes of our subsidiaries. Some
of these proceeds were also used to pay off a portion of our previous credit
facilities, and to fund working capital, capital expenditures and recent
acquisitions.
The break-down of the uses of these proceeds are as follows (in billions):
<TABLE>
<S> <C>
Tender offers:
CharterComm Holdings (a)
14.00% senior secured discount debentures due 2007..... $0.14
11.25% senior notes due 2006........................... 0.14
Marcus Cable (b)
13.50% senior subordinated guaranteed discount notes
due 2004.............................................. 0.43
14.25% senior discount notes due 2005.................. 0.30
Previous credit facilities:
Charter Properties credit agreement (c)................... 0.07
CharterComm Holdings credit agreements (d)................ 0.16
CCA Group credit agreements (e)........................... 0.27
Marcus Cable credit agreement (f):........................ 0.83
Cash used to fund working capital, capital expenditures and
recent acquisitions....................................... 0.53
Discounts and commissions................................... 0.07
Expenses.................................................... 0.05
-----
Total....................................................... $2.99
=====
</TABLE>
- ---------------
(a) As of December 31, 1998, the effective interest rate of the 14.00% senior
secured discount debentures, which mature March 2007, was 10.7%, and the
effective interest rate of the 11.25% senior notes, which mature March 2006,
was 9.6%.
(b) As of December 31, 1998, the effective interest rate of the 13.50% senior
subordinated guaranteed discount notes, which mature August 2004, was 10.0%,
and the effective interest rate of the 14.25% senior discount notes, which
mature December 2005, was 14.1%.
(c) As of December 31, 1998, the variable interest rates of the Charter
Properties credit agreement, with maturity dates ranging from March 2000
through June 2007, ranged from 7.44% to 8.19%. Included in the $70 million
repayment is $30 million of borrowings, incurred in March 1998, to finance
part of the Sonic acquisition.
(d) As of December 31, 1998, the variable interest rates of the CharterComm
Holdings credit agreements, with maturity dates ranging from June 2002
through June 2007, ranged from 6.69% to 7.31%.
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(e) As of December 31, 1998, the variable interest rates of one of the CCA Group
credit agreements, with maturity dates ranging from March 2002 through March
2007, ranged from 6.88% to 8.06% and the variable interest rates of the
other CCA Group credit agreement, with maturity dates ranging from December
1999 through March 2006, ranged from 6.56% to 7.59%. Included in the $270
million repayment is $30 million of borrowings, incurred in October 1998, to
repay a portion of a note payable.
(f) As of December 31, 1998, the variable interest rates of the Marcus credit
agreement, with maturity dates ranging from December 2002 through April
2004, ranged from 6.23% to 7.75%.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 as
adjusted to give effect to additional borrowings under our credit facilities and
an additional equity contribution in connection with our recent acquisitions and
pending acquisitions, as if such transactions had occurred on March 31, 1999.
This table should be read in conjunction with the Unaudited Pro Forma
Financial Statements and the accompanying notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------
AS
HISTORICAL ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CHARTER HOLDINGS:
Cash and cash equivalents(a).............................. $1,038,360 $ 30,464
========== ===========
Long-term debt:
Credit facilities......................................... $1,750,000 $ 3,512,686
8.250% senior notes....................................... 598,398 598,398
8.625% senior notes....................................... 1,495,480 1,495,480
9.920% senior discount notes.............................. 909,055 909,055
Other(b).................................................. 1,085 26,085
10% senior discount notes -- Renaissance(c)............... -- 82,616
---------- -----------
Total long-term debt................................... 4,754,018 6,624,320
Members' equity(d)........................................ 3,326,142 4,651,142
---------- -----------
Total capitalization................................... $8,080,160 $11,275,462
========== ===========
</TABLE>
- -------------------------
(a) We presented cash and cash equivalents historical of $1 billion since we
were required to draw the full amount of the Tranche B term loan under our
credit facilities pursuant to the terms of the credit facilities. Therefore,
Charter Holdings will have cash available pending application of such
amounts to future acquisitions, capital expenditures and other working
capital purposes.
(b) Represents the notes of certain subsidiaries not tendered in connection with
the tender offers and preferred equity interests.
(c) Represents debt of Renaissance Media Group LLC.
(d) Members' equity, as adjusted, is increased by $1.325 billion, the additional
equity that is expected from Paul Allen in connection with our recent and
pending acquisitions.
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UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Pro Forma Financial Statements are based on the
financial statements of Charter Holdings, CCA Group, and CharterComm Holdings.
They are adjusted to illustrate the estimated effects of our recent and pending
acquisitions, as if such acquisitions had occurred on March 31, 1999 for the
Balance Sheet Data and Operating Data, and for the estimated effects of the
following transactions as if they had occurred on January 1, 1998 for the
Statement of Operations and Other Financial Data:
(1) the acquisition of us on December 23, 1998 by Paul G. Allen;
(2) the acquisition of Sonic on May 20, 1998 by us;
(3) the acquisition of Marcus Cable on April 23, 1998 by Paul G. Allen;
(4) the acquisitions and dispositions during 1998 by Marcus Cable;
(5) our merger with Marcus Holdings;
(6) our recent and pending acquisitions; and
(7) the refinancing of all the debt of our subsidiaries through the
issuance of the original notes and funding under our credit facilities.
The Unaudited Pro Forma Financial Statements reflect the application of the
principles of purchase accounting to the transactions listed in items (1)
through (4) and (6). The allocation of purchase price is based, in part, on
preliminary information which is subject to adjustment upon obtaining complete
valuation information of intangible assets. The valuation information is
expected to be finalized in the third quarter of 1999. We believe that
finalization of the purchase price will not have a material impact on the
results of operations or financial position of Charter Holdings.
The unaudited pro forma adjustments are based upon available information
and certain assumptions that we believe are reasonable. In particular, the pro
forma adjustments assume that the sellers of Rifkin will elect all cash for
payment of the Rifkin purchase price. The Rifkin sellers may elect to take up to
$240 million of the purchase price in preferred limited liability company
interests. The impact of such is disclosed in Note B to the Unaudited Pro Forma
Statement of Operations for the three months ended March 31, 1999 and Note D to
the Unaudited Pro Forma Statement of Operations for the year ended December 31,
1998. We have also assumed the obligations to purchase the Helicon and Rifkin
notes through tender offers. We have already purchased 30% of the Renaissance
notes. We have financed, and will finance these purchases through borrowings
under our credit facilities. The Helicon notes are currently callable. The
estimated impact on interest expense, should we be unsuccessful in our tender
offer for the Rifkin notes, is disclosed in Note B to the Unaudited Pro Forma
Statement of Operations for the three months ended March 31, 1999, and Note D to
the Unaudited Pro Forma Statement of Operations for the year ended December 31,
1998. The Unaudited Pro Forma Financial Statements and accompanying notes should
be read in conjunction with the historical financial statements and other
financial information appearing elsewhere in this prospectus, including
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
35
<PAGE> 39
The Unaudited Pro Forma Financial Statements do not purport to be
indicative of what our financial position or results of operations would
actually have been had the transactions above been completed on the dates
indicated or to project our results of operations for any future date.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
------------------------------------------------------------------------------------
RECENT PENDING REFINANCING
CHARTER ACQUISITIONS ACQUISITIONS ADJUSTMENTS
HOLDINGS (NOTE A) SUBTOTAL (NOTE A) (NOTE B) TOTAL
---------- ------------ ---------- ---------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 286,135 $ 70,511 $ 356,646 $ 88,625 $ -- $ 445,271
---------- ----------- ---------- ---------- ---------- ----------
Operating expenses:
Operating, general and
administrative............ 152,075 36,223 188,298 48,000 -- 236,298
Depreciation and
amortization.............. 153,747 35,470 189,217 49,233 -- 238,450
Corporate expense charges
(Note C).................. 5,323 1,757 7,080 -- -- 7,080
Management fees............. -- 1,338 1,338 1,444 -- 2,782
---------- ----------- ---------- ---------- ---------- ----------
Total operating
expenses............... 311,145 74,788 385,933 98,677 -- 484,610
---------- ----------- ---------- ---------- ---------- ----------
Loss from operations.......... (25,010) (4,277) (29,287) (10,052) -- (39,339)
Interest expense.............. (71,591) (14,818) (86,409) (38,782) (12,775) (137,966)
Interest income............... 1,733 159 1,892 100 -- 1,992
Other income (expense)........ 15 (31) (16) (106) -- (122)
---------- ----------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item.......... $ (94,853) $ (18,967) $ (113,820) $ (48,840) $ (12,775) $ (175,435)
========== =========== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA (Note D)............... $ 128,752 $ 31,162 $ 159,914 $ 39,075 $ 198,989
EBITDA margin (Note E)........ 45.0% 44.2% 44.8% 44.1% 44.7%
Adjusted EBITDA (Note F)...... 134,060 34,288 168,348 40,625 208,973
Cash flows from operating
activities.................. 45,824 19,420 65,244 20,424 85,668
Cash flows used in investing
activities.................. (116,800) (19,953) (136,753) (31,220) (163,973)
Cash flows from financing
activities.................. 1,098,950 (1,030,691) 68,259 172,077 240,336
Cash interest expense......... 109,186
Capital expenditures.......... $ 109,629 $ 12,517 $ 122,146 $ 30,951 $ 153,097
Total debt to annualized
EBITDA...................... 8.3x
Total debt to annualized
Adjusted EBITDA............. 7.9
EBITDA to cash interest
expense..................... 1.8
EBITDA to interest expense.... 1.4
Deficiency of earnings to
cover fixed charges (Note
G).......................... $ 175,435
OPERATING DATA (AT END OF
PERIOD, EXCEPT FOR
AVERAGES):
Homes passed (Note H)......... 3,977,000 823,000 4,800,000 1,092,000 5,892,000
Basic customers (Note I)...... 2,344,000 582,000 2,926,000 729,000 3,655,000
Basic penetration (Note J).... 58.9% 70.7% 61.0% 66.8% 62.0%
Premium units (Note K)........ 1,322,000 318,000 1,640,000 439,000 2,079,000
Premium penetration (Note
L).......................... 56.4% 54.6% 56.0% 60.2% 56.9%
Average monthly revenue per
basic customer (Note M)..... $ 40.69 $ 40.38 $ 40.63 $ 40.52 $ 40.61
</TABLE>
36
<PAGE> 40
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for our recent acquisitions and
pending acquisitions consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
-----------------------------------------------------------------------------------------------------
Recent Acquisitions -- Historical Pending Acquisitions -- Historical
-------------------------------------------------------------- ------------------------------------
Greater
American Media Total Intermedia Total
Renaissance Cable Systems Helicon Other Recent Systems Rifkin(a) Pending
----------- -------- ------- ------- ------ -------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $15,254 $ 9,151 $20,394 $21,252 $3,354 $ 69,405 $ 48,288 $ 50,914 $ 99,202
Operating expenses:
Operating, general and
administrative........ 6,889 4,681 12,757 11,277 1,594 37,198 26,080 27,028 53,108
Depreciation and
amortization.......... 6,655 5,536 2,425 6,828 938 22,382 26,100 26,187 52,287
Management fees......... -- 275 -- 1,063 -- 1,338 781 841 1,622
------- ------- ------- ------- ------ -------- -------- -------- --------
Total operating
expenses............ 13,544 10,492 15,182 19,168 2,532 60,918 52,961 54,056 107,017
Income (loss) from
operations.............. 1,710 (1,341) 5,212 2,084 822 8,487 (4,673) (3,142) (7,815)
Interest expense.......... (4,797) (2,450) (157) (7,821) (758) (15,983) (5,778) (11,414) (17,192)
Interest income........... 90 18 -- 51 -- 159 77 -- 77
Other income (expense).... -- -- (16) -- -- (16) -- (77) (77)
------- ------- ------- ------- ------ -------- -------- -------- --------
Income (loss) before
income tax expense
(benefit)............... (2,997) (3,773) 5,039 (5,686) 64 (7,353) (10,374) (14,633) (25,007)
Income tax (benefit)
expense................. 58 -- 2,088 -- -- 2,146 (1,396) (537) (1,933)
------- ------- ------- ------- ------ -------- -------- -------- --------
Income (loss) before
extraordinary item...... $(3,055) $(3,773) $ 2,951 $(5,686) $ 64 $ (9,499) $ (8,978) $(14,096) $(23,074)
======= ======= ======= ======= ====== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
--------------------------------------------------------------------------------------
Recent Acquisitions Pending Acquisitions
------------------------------------------------------ ----------------------------
Pro Forma Pro Forma
----------------------------------------- ---------------
Historical Acquisitions(b) Adjustments Total Historical Acquisitions(b)
---------- --------------- ----------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............... $69,405 $1,106 $ -- $ 70,511 $ 99,202 $ 5,372
Operating expenses:
Operating, general
and
administrative..... 37,198 782 (1,757)(d) 36,223 53,108 2,794
Depreciation and
amortization....... 22,382 529 12,559(e) 35,470 52,287 881
Corporate expense
charges............ -- -- 1,757(d) 1,757 -- --
Management fees...... 1,338 -- -- 1,338 1,622 280
------- ------ -------- -------- -------- -------
Total operating
expenses........... 60,918 1,311 12,559 74,788 107,017 3,955
Income (loss) from
operations........... 8,487 (205) (12,559) (4,277) (7,815) 1,417
Interest expense....... (15,983) (25) 1,190(f) (14,818) (17,192) (1,309)
Interest income........ 159 -- -- 159 77 23
Other income
(expense)............ (16) (15) -- (31) (77) (29)
------- ------ -------- -------- -------- -------
Income (loss) before
income tax expense
(benefit)............ (7,353) (245) (11,369) (18,967) (25,007) 102
Income tax (benefit)
expense.............. 2,146 -- (2,146)(h) -- (1,933) (114)
------- ------ -------- -------- -------- -------
Income (loss) before
extraordinary item... $(9,499) $ (245) $ (9,223) $(18,967) $(23,074) $ 216
======= ====== ======== ======== ======== =======
<CAPTION>
Three Months Ended March 31, 1999
-----------------------------------------
Pending Acquisitions
-----------------------------------------
Pro Forma
-----------------------------------------
Dispositions(c) Adjustments Total
--------------- ----------- --------
<S> <C> <C> <C>
Revenues............... $(15,949) $ -- $ 88,625
Operating expenses:
Operating, general
and
administrative..... (7,902) -- 48,000
Depreciation and
amortization....... (6,883) 2,948(e) 49,233
Corporate expense
charges............ -- -- --
Management fees...... (458) -- 1,444
-------- -------- --------
Total operating
expenses........... (15,243) 2,948 98,677
Income (loss) from
operations........... (706) (2,948) (10,052)
Interest expense....... (4) (20,277)(f) (38,782)
Interest income........ -- -- 100
Other income
(expense)............ -- -- (106)
-------- -------- --------
Income (loss) before
income tax expense
(benefit)............ (710) (23,225) (48,840)
Income tax (benefit)
expense.............. -- 2,047(g) --
-------- -------- --------
Income (loss) before
extraordinary item... $ (710) $(25,272) $(48,840)
======== ======== ========
</TABLE>
37
<PAGE> 41
- -------------------------
(a) Includes the results of operations of Rifkin Acquisition Partners, L.L.L.P.,
Rifkin Cable Income Partners L.P., Indiana Cable Associates, Ltd. and R/N
South Florida Cable Management Limited Partnership, all under common
ownership as follows (dollars in thousands):
<TABLE>
<CAPTION>
RIFKIN RIFKIN INDIANA SOUTH
ACQUISITION CABLE INCOME CABLE FLORIDA OTHER TOTAL
----------- ------------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $24,017 $1,351 $2,102 $ 6,146 $17,298 $ 50,914
Income (loss) from operations........ 467 404 (361) (4,523) 871 (3,142)
Income (loss) before extraordinary
item............................... (5,000) 305 (564) (5,131) (3,706) (14,096)
</TABLE>
(b) Represents the historical results of operations for the period from January
1, 1999 through the date of purchase for acquisitions completed by
Renaissance and Rifkin, and for the period from January 1, 1999 through
March 31, 1999 for acquisitions to be completed subsequent to March 31,
1999.
These acquisitions will be accounted for using the purchase method of
accounting. A definitive written agreement exists for all acquisitions that have
not yet closed. Purchase price and anticipated closing dates are as follows:
<TABLE>
<CAPTION>
RENAISSANCE RIFKIN
ACQUISITION ACQUISITIONS
------------- ---------------------
<S> <C> <C>
Purchase price........................................... $ 2.7 million $165.0 million
Closing date............................................. Feb. 1999 Feb. 1999
Purchase price........................................... $53.8 million
Closing date............................................. July 1999
</TABLE>
(c) Represents the elimination of the operating results primarily related to the
cable systems to be transferred to the InterMedia Systems as part of a swap
of cable systems and to the sale of several smaller cable systems. A
definitive written agreement exists for the disposition on these systems.
The fair value of our systems to be transferred is $420 million. No material
gain or loss is anticipated on the disposition as these systems were
recently acquired and recorded at fair value at that time. It is anticipated
that this transfer will close during the third or fourth quarter of 1999.
(d) Reflects a reclassification of expenses representing corporate expenses that
would have occurred at Charter Investment.
(e) Represents additional amortization of franchises as a result of our recent
and pending acquisitions. A large portion of the purchase price was
allocated to franchises ($3.6 billion) that are amortized over 15 years. The
adjustment to depreciation and amortization expense consists of the
following (in millions):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE USEFUL LIFE AMORTIZATION
---------- ---------------- -------------
<S> <C> <C> <C>
Franchises........................................... $3,600.0 15 $60.0
Cable distribution systems........................... 888.3 9 24.5
Land, buildings and improvements..................... 20.7 10 0.5
Vehicles and equipment............................... 61.8 3 5.2
-----
Total depreciation and amortization............................................. 90.2
Less-historical depreciation and amortization................................... 74.7
-----
Adjustment................................................................. $15.5
=====
</TABLE>
38
<PAGE> 42
(f) Reflects additional interest expense on borrowings, which will be used to
finance the acquisitions as follows (in millions):
<TABLE>
<S> <C>
$2.8 billion credit facilities at 7.4%...................... $51.6
$83 million 10% senior discount notes -- Renaissance........ 2.0
-----
Total interest expense................................. 53.6
Less-historical interest expense from acquired
companies............................................. 34.5
-----
Adjustment........................................ $19.1
=====
</TABLE>
(g) Reflects the elimination of income tax expense as a result of being acquired
by a limited liability company.
NOTE B: We have extinguished substantially all of our long-term debt, excluding
borrowings of our previous credit facilities, and refinanced all previous credit
facilities, and have incurred and plan to incur additional debt in connection
with our recent acquisitions and pending acquisitions. See "Capitalization." The
refinancing adjustment of greater interest expense consists of the following
(dollars in thousands):
<TABLE>
<CAPTION>
INTEREST
DESCRIPTION EXPENSE
----------- --------
<S> <C>
$600 million 8.25% senior notes............................. $12,400
$1,500 million 8.625% senior notes.......................... 32,400
$1,475 million ($906 million carrying value) 9.92% senior
discount notes............................................ 22,450
Credit facilities ($3,476 million at composite current rate
of 7.4%).................................................. 64,250
Amortization of debt issuance costs......................... 3,900
Commitment fee on unused portion of our credit facilities
($624,000 at 0.375%)...................................... 575
10% senior discount notes -- Renaissance.................... 2,000
-------
Total pro forma interest expense.......................... 137,975
Less -- interest expense (including our recent and pending
acquisitions).......................................... 125,200
-------
Adjustment............................................. $12,775
=======
</TABLE>
An increase in the interest rate of 0.125% would result in an increase in
interest expense of $1.1 million. The Rifkin sellers may take up to $250 million
in equity instead of cash. This would reduce interest expense by up to $4.6
million. Additionally, we have assumed that the Rifkin notes will be tendered.
Should we be unable to purchase all or a portion of the Rifkin notes, interest
expense will increase by up to $1.2 million.
NOTE C: Charter Investment provides corporate management and consulting
services to us. See "Certain Relationships and Related Transactions."
NOTE D: EBITDA represents earnings (loss) before interest, income taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a cable television company's ability to service
indebtedness. However, 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. EBITDA should also not be construed as an indication of a company's
operating performance or as a measure of liquidity. In addition, because 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 EBITDA may be limited by working capital,
debt service and capital expenditure requirements and by restrictions related to
legal requirements, commitments and uncertainties.
NOTE E: EBITDA margin represents EBITDA as a percentage of revenues.
NOTE F: Adjusted EBITDA means EBITDA before corporate expenses, management fees
and other income (expense) in accordance with the term "Consolidated EBITDA"
used in the indentures governing the notes. See "Description of Notes" for a
complete presentation of the methodology employed in calculating Adjusted
EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial
indicator of a cable
39
<PAGE> 43
company's ability to service indebtedness and because it is used in the
indentures to determine compliance with certain covenants. 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 also 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.
NOTE G: Earnings include net income (loss) plus fixed charges. Fixed charges
consist of interest expense and an estimated interest component of rent expense.
NOTE H: Homes passed are the number of living units, such as single residence
homes, apartments and condominium units, passed by the cable television
distribution network in a given cable system service area.
NOTE I: Basic customers are customers who receive basic cable service.
NOTE J: Basic penetration represents basic customers as a percentage of homes
passed.
NOTE K: Premium units represent the total number of subscriptions to premium
channels.
NOTE L: Premium penetration represents premium units as a percentage of basic
customers.
NOTE M: Average monthly revenue per basic customer represents revenues divided
by the number of months in the period divided by the number of basic customers
at March 31, 1999.
40
<PAGE> 44
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------------
CHARTER RECENT PENDING REFINANCING
HOLDINGS MARCUS ACQUISITIONS ACQUISITIONS ADJUSTMENTS
(NOTE A) (NOTE B) (NOTE C) SUBTOTAL (NOTE C) (NOTE D) TOTAL
--------- --------- ------------ ---------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 611,690 $ 448,192 $ 268,460 $1,328,342 $ 328,981 $ -- $1,657,323
--------- --------- --------- ---------- --------- ------ ----------
Operating expenses:
Operating, general and
administrative.............. 310,100 231,050 138,524 679,674 167,686 -- 847,360
Depreciation and
amortization................ 375,899 252,855 141,535 770,289 186,485 -- 956,774
Corporate expense charges
(Note E).................... 16,493 17,042 6,759 40,294 -- -- 40,294
Management fees............... -- -- 4,573 4,573 10,100 -- 14,673
--------- --------- --------- ---------- --------- ------ ----------
Total operating expenses.... 702,492 500,947 291,391 1,494,830 364,271 -- 1,859,101
--------- --------- --------- ---------- --------- ------ ----------
Loss from operations............ (90,802) (52,755) (22,931) (166,488) (35,290) -- (201,778)
Interest (expense) benefit...... (207,468) (137,953) (95,489) (440,910) (118,511) 7,500 (551,921)
Other income (expense).......... 518 -- 84 602 (5,944) -- (5,342)
--------- --------- --------- ---------- --------- ------ ----------
Net income (loss)............... $(297,752) $(190,708) $(118,336) $ (606,796) ($159,745) $7,500 $ (759,041)
========= ========= ========= ========== ========= ====== ==========
OTHER FINANCIAL DATA:
EBITDA (Note F)................. $ 285,615 $ 200,100 $ 118,688 $ 604,403 $ 145,251 $ 749,654
EBITDA margin (Note G).......... 46.7% 44.6% 44.2% 45.5% 44.2% 45.2%
Adjusted EBITDA (Note H)........ 301,590 217,142 129,936 648,668 161,295 809,963
Cash flows from operating
activities.................... 137,160 139,908 38,186 315,254 36,208 351,462
Cash flows used in investing
activities.................... (387,633) (217,729) (56,242) (661,604) (177,891) (839,495)
Cash flows from (used in)
financing activities.......... 211,726 108,504 (21,932) 298,298 45,184 343,482
Cash interest expense........... 436,432
Capital expenditures............ $ 213,353 $ 224,723 $ 22,672 $ 460,748 $ 70,435 $ 531,183
Total debt to EBITDA............ 8.8x
Total debt to Adjusted EBITDA... 8.1
EBITDA to cash interest
expense....................... 1.7
EBITDA to interest expense...... 1.4
Deficiency of earnings to cover
fixed charges (Note I)........ $ 759,041
OPERATING DATA (AT END OF
PERIOD, EXCEPT FOR AVERAGES):
Homes passed (Note J)........... 2,149,000 1,743,000 806,000 4,698,000 989,000 5,687,000
Basic customers (Note K)........ 1,255,000 1,062,000 562,000 2,879,000 738,000 3,617,000
Basic penetration (Note L)...... 58.4% 60.9% 69.7% 61.3% 74.6% 63.6%
Premium units (Note M).......... 845,000 411,000 299,000 1,555,000 512,000 2,067,000
Premium penetration (Note N).... 67.3% 38.7% 53.2% 54.0% 69.4% 57.1%
Average monthly revenue per
basic customer (Note O)....... NM NM $ 39.81 $ 38.45 $ 37.15 $ 38.18
</TABLE>
See "Notes to the Unaudited Pro Forma Financial Statements."
41
<PAGE> 45
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for Charter Holdings, including the
acquisition of us on December 23, 1998 by Paul G. Allen and the acquisition of
Sonic, consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
12/24/98 1/1/98
THROUGH THROUGH
1/1/98 THROUGH 12/23/98 12/31/98 5/20/98
----------------------------------- -------- -------
CCA CHARTERCOMM
GROUP HOLDINGS CHARTER HOLDINGS SONIC ELIMINATIONS SUBTOTAL
--------- ----------- ------------------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 324,432 $196,801 $ 49,731 $23,450 $17,276 $ -- $ 611,690
--------- -------- -------- ------- ------- --------- ---------
Operating expenses:
Operating, general and
administrative............ 164,145 98,331 25,952 12,679 8,993 -- 310,100
Depreciation and
amortization.............. 136,689 86,741 16,864 13,811 2,279 -- 256,384
Management fees/corporate
expense charges........... 17,392 14,780 6,176 766 -- -- 39,114
--------- -------- -------- ------- ------- --------- ---------
Total operating
expenses................ 318,226 199,852 48,992 27,256 11,272 -- 605,598
--------- -------- -------- ------- ------- --------- ---------
Income (loss) from
operations.................. 6,206 (3,051) 739 (3,806) 6,004 -- 6,092
Interest expense.............. (113,824) (66,121) (17,277) (5,051) (2,624) 1,900(c) (202,997)
Other income (expense)........ 4,668 (1,684) (684) 133 (15) (1,900)(c) 518
--------- -------- -------- ------- ------- --------- ---------
Income (loss) before income
taxes....................... (102,950) (70,856) (17,222) (8,724) 3,365 -- (196,387)
Provision for income taxes.... -- -- -- -- 1,346 -- 1,346
--------- -------- -------- ------- ------- --------- ---------
Income (loss) before
extraordinary item.......... $(102,950) $(70,856) $(17,222) $(8,724) $ 2,019 $ -- $(197,733)
========= ======== ======== ======= ======= ========= =========
<CAPTION>
PRO FORMA
------------------------
ADJUSTMENTS TOTAL
----------- ---------
<S> <C> <C>
Revenues...................... $ -- $ 611,690
--------- ---------
Operating expenses:
Operating, general and
administrative............ 310,100
Depreciation and
amortization.............. 119,515(a) 375,899
Management fees/corporate
expense charges........... (22,621)(b) 16,493
--------- ---------
Total operating
expenses................ 96,894 702,492
--------- ---------
Income (loss) from
operations.................. (96,894) (90,802)
Interest expense.............. (4,471)(d) (207,468)
Other income (expense)........ -- 518
--------- ---------
Income (loss) before income
taxes....................... (101,365) (297,752)
Provision for income taxes.... (1,346)(e) --
--------- ---------
Income (loss) before
extraordinary item.......... $(100,019) $(297,752)
========= =========
</TABLE>
- -------------------------
(a) Represents additional amortization of franchises as a result of the
acquisition of us by Mr. Allen. A large portion of the purchase price was
allocated to franchises ($3.6 billion) that are amortized over 15 years. The
adjustment to depreciation and amortization expense consists of the
following (dollars in millions).
<TABLE>
<CAPTION>
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE (IN YEARS) LIFE AMORTIZATION
---------- ---------------- -------------
<S> <C> <C> <C>
Franchises............................................ $3,600.0 15 $240.0
Cable distribution systems............................ 1,439.2 12 120.1
Land, buildings and improvements...................... 41.3 11 3.6
Vehicles and equipment................................ 61.2 5 12.2
------
Total depreciation and amortization.............. 375.9
Less-historical depreciation and amortization.... 256.4
------
Adjustment.................................. $119.5
======
</TABLE>
(b) Reflects the reduction in corporate expense charges of approximately $8.2
million to reflect the actual costs incurred. Management fees charged to CCA
Group and CharterComm Holdings, companies not controlled by Charter
Investment at that time exceeded the allocated costs incurred by Charter
Investment on behalf of those companies by $8.2 million. Also reflects the
elimination of approximately $14.4 million of change of control payments
under the terms of then-existing equity appreciation rights plans. Such
payments were triggered by the acquisition of us by Mr. Allen. Such payments
were made by Charter Investment and were not subject to reimbursement by us,
but were allocated to us for financial reporting purposes. The equity
appreciation rights plans were terminated in connection with the acquisition
of us by Mr. Allen, and these costs will not recur.
(c) Represents the elimination of intercompany interest on a note payable from
Charter Holdings to CCA Group.
(d) Reflects additional interest expense of $228.4 million of borrowings under
our previous credit facilities used to finance the acquisition by us of
Sonic, using a 7.4% interest rate as follows (in millions):
<TABLE>
<S> <C>
$228.4 million of credit facilities......................... $ 7.1
Less historical Sonic interest expense...................... (2.6)
-----
Adjustment........................................ $ 4.5
=====
</TABLE>
(e) Reflects the elimination of provision for income taxes, as Charter Holdings
will operate as a limited liability company and all income taxes will flow
through to the members.
42
<PAGE> 46
NOTE B: Pro forma operating results for Marcus Cable consist of the
following (dollars in thousands):
<TABLE>
<CAPTION>
January 1, April 23,
1998 1998
through through Pro Forma
APRIL 22, DECEMBER 23, ------------------------------------------------------------
1998 1998 Acquisitions(a) Dispositions(b) Adjustments Total
---------- ------------ --------------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $ 157,763 $ 332,320 $2,620 $(44,511) $ -- $ 448,192
--------- --------- ------ -------- --------- ---------
Operating expenses:
Operating, general and
administrative................ 84,746 181,347 1,225 (20,971) (15,297)(c) 231,050
Depreciation and
amortization.................. 64,669 174,968 -- -- 13,218(d) 252,855
Corporate expense charges........ -- 17,042(c) 17,042
Management fees.................. -- 3,048 -- -- (3,048)(c) --
Transaction and severance
costs......................... 114,167 16,034 -- -- (130,201)(e) --
--------- --------- ------ -------- --------- ---------
Total operating expenses...... 263,582 375,397 1,225 (20,971) (118,286) 500,947
--------- --------- ------ -------- --------- ---------
Income (loss) from
operations....................... (105,819) (43,077) 1,395 (23,540) 118,286 (52,755)
Interest (expense) benefit......... (49,905) (93,103) -- -- 5,055(d) (137,953)
Other income (expense)............. 43,662 -- -- (43,662) -- --
--------- --------- ------ -------- --------- ---------
Income (loss) before extraordinary
item............................. $(112,062) $(136,180) $1,395 $(67,202) $ 123,341 $(190,708)
========= ========= ====== ======== ========= =========
</TABLE>
- -------------------------
(a) Represents the results of operations of acquired cable systems prior to
their acquisition in 1998 by Marcus Cable.
(b) Represents the elimination of the operating results and corresponding gain
on sale of cable systems sold by Marcus Cable during 1998.
(c) Represents a reclassification to reflect the expenses totaling $15.3 million
from operating, general and administrative to corporate expenses. Also
reflects the elimination of management fees and the addition of corporate
expense charges of $1.7 million for actual costs incurred by Charter
Investment, on behalf of Marcus Cable. Management fees charged to Marcus
Cable exceeded the costs incurred by Charter Investment by $1.3 million.
(d) As a result of the acquisition of Marcus Cable by Paul G. Allen, a large
portion of the purchase price was recorded as franchises ($2.5 billion) that
are amortized over 15 years. This resulted in additional amortization for
the period from January 1, 1998 through April 23, 1998. The adjustment to
depreciation and amortization expense consists of the following (dollars in
millions):
<TABLE>
<CAPTION>
Weighted Average Depreciation/
Fair Value (in years) life Amortization
---------- ---------------- -------------
<S> <C> <C> <C>
Franchises........................................ $2,500.0 15 $166.7
Cable distribution systems........................ 777.4 10 78.1
Land, buildings and improvements.................. 30.6 10 3.1
Vehicles and equipment............................ 14.7 3 4.9
------
Total depreciation and amortization..... 252.8
Less-historical depreciation and
amortization.......................... 239.6
------
Adjustment............................ $ 13.2
======
</TABLE>
43
<PAGE> 47
Additionally, the carrying value of outstanding debt was recorded at
estimated fair value, resulting in a debt premium that is to be amortized
as an offset to interest expense over the term of the debt. This resulted
in a reduction in interest expense for the period from January 1, 1998
through April 23, 1998.
(e) As a result of the acquisition of Marcus Cable by Mr. Allen, Marcus Cable
recorded transaction costs of approximately $114.2 million. These costs
comprised of approximately $90.2 million paid to employees of Marcus Cable
in settlement of specially designated Class B units and approximately $24.0
million of transaction fees paid to certain equity partners for investment
banking services. In addition, Marcus Cable recorded costs related to
employee and officer stay-bonus and severance arrangements of approximately
$16.0 million.
44
<PAGE> 48
NOTE C: Pro forma operating results for our recent and pending
acquisitions consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------
RECENT ACQUISITIONS -- HISTORICAL
---------------------------------------------------------------------
GREATER
AMERICAN MEDIA OTHER TOTAL
RENAISSANCE CABLE SYSTEMS HELICON ACQUISITIONS RECENT
----------- -------- ------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 41,524 $15,685 $78,635 $ 75,577 $ 9,336 $220,757
-------- ------- ------- -------- ------- --------
Operating expenses:
Operating, general and
administrative...... 21,037 7,441 48,852 40,179 4,618 122,127
Depreciation and
amortization........ 19,107 6,784 8,612 24,290 2,794 61,587
Corporate expense
charges............. -- -- -- -- -- --
Management fees....... -- 471 -- 3,496 -- 3,967
-------- ------- ------- -------- ------- --------
Total operating
expenses.......... 40,144 14,696 57,464 67,965 7,412 187,681
-------- ------- ------- -------- ------- --------
Income from
operations............ 1,380 989 21,171 7,612 1,924 33,076
Interest expense........ (14,358) (4,501) (535) (27,634) (2,375) (49,403)
Interest income......... 158 122 -- 93 -- 373
Other income
(expense)............. -- -- (493) -- 3 (490)
-------- ------- ------- -------- ------- --------
Income (loss) before
income tax expense
(benefit)............. (12,820) (3,390) 20,143 (19,929) (448) (16,444)
Income tax (benefit)
expense............... 135 -- 7,956 -- -- 8,091
-------- ------- ------- -------- ------- --------
Income (loss) before
extraordinary item.... $(12,955) $(3,390) $12,187 $(19,929) $ (448) $(24,535)
======== ======= ======= ======== ======= ========
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------
PENDING ACQUISITIONS -- HISTORICAL
------------------------------------
INTERMEDIA TOTAL
SYSTEMS RIFKIN(a) PENDING
----------- ---------- ---------
<S> <C> <C> <C>
Revenues................ $176,062 $124,382 $300,444
-------- -------- --------
Operating expenses:
Operating, general and
administrative...... 86,753 63,815 150,568
Depreciation and
amortization........ 85,982 47,657 133,639
Corporate expense
charges............. -- -- --
Management fees....... 3,147 4,106 7,253
-------- -------- --------
Total operating
expenses.......... 175,882 115,578 291,460
-------- -------- --------
Income from
operations............ 180 8,804 8,984
Interest expense........ (25,449) (30,482) (55,931)
Interest income......... 341 -- 341
Other income
(expense)............. 23,030 36,279 59,309
-------- -------- --------
Income (loss) before
income tax expense
(benefit)............. (1,898) 14,601 12,703
Income tax (benefit)
expense............... 1,623 (4,178) (2,555)
-------- -------- --------
Income (loss) before
extraordinary item.... $ (3,521) $ 18,779 $ 15,258
======== ======== ========
</TABLE>
45
<PAGE> 49
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------------------------------------
Recent Acquisitions Pending Acquisitions
------------------------------------------------------- ----------------------------
Pro Forma Pro Forma
------------------------------------------ ---------------
Total
Historical Acquisitions(b) Adjustments Recent Historical Acquisitions(b)
---------- --------------- ----------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............. $220,757 $47,703 $ -- $ 268,460 $300,444 $ 98,245
Operating expenses:
Operating, general
and
administrative... 122,127 23,156 (6,759)(d) 138,524 150,568 52,689
Depreciation and
amortization..... 61,587 17,290 62,658(e) 141,535 133,639 21,224
Corporate expense
charges.......... -- -- 6,759(d) 6,759 -- --
Management fees.... 3,967 606 -- 4,573 7,253 3,783
-------- ------- -------- --------- -------- --------
Total operating
expenses....... 187,681 41,052 62,658 291,391 291,460 77,696
-------- ------- -------- --------- -------- --------
Income (loss) from
operations......... 33,076 6,651 (62,658) (22,931) 8,984 20,549
Interest expense..... (49,403) (7,434) (38,652)(f) (95,489) (55,931) (27,212)
Interest income...... 373 157 -- 530 341 175
Other income
(expense).......... (490) 140 (96)(g) (446) 59,309 263
-------- ------- -------- --------- -------- --------
Income (loss) before
income tax expense
(benefit).......... (16,444) (486) (101,406) (118,336) 12,703 (6,225)
Income tax expense
(benefit).......... 8,091 1,191 (9,282)(h) -- (2,555) 329
-------- ------- -------- --------- -------- --------
Income (loss) before
extraordinary
item............... $(24,535) $(1,677) $(92,124) $(118,336) $ 15,258 $ (6,554)
======== ======= ======== ========= ======== ========
<CAPTION>
Year Ended December 31, 1998
------------------------------------------
Pending Acquisitions
------------------------------------------
Pro Forma
------------------------------------------
Total
Dispositions(c) Adjustments Pending
--------------- ----------- ---------
<S> <C> <C> <C>
Revenues............. $(69,708) $ -- $ 328,981
Operating expenses:
Operating, general
and
administrative... (35,571) -- 167,686
Depreciation and
amortization..... (40,812) 72,434(e) 186,485
Corporate expense
charges.......... -- -- --
Management fees.... (936) -- 10,100
-------- --------- ---------
Total operating
expenses....... (77,319) 72,434 364,271
-------- --------- ---------
Income (loss) from
operations......... 7,611 (72,434) (35,290)
Interest expense..... 19,544 (54,912)(f) (118,511)
Interest income...... (9) -- 507
Other income
(expense).......... (379) (65,644)(g) (6,451)
-------- --------- ---------
Income (loss) before
income tax expense
(benefit).......... 26,767 (192,990) (159,745)
Income tax expense
(benefit).......... 310 1,916(h) --
-------- --------- ---------
Income (loss) before
extraordinary
item............... $ 26,457 $(194,906) $(159,745)
======== ========= =========
</TABLE>
- -------------------------
(a) Includes the results of operations of Rifkin Acquisition Partners, L.L.L.P.,
as follows (dollars in thousands):
<TABLE>
<CAPTION>
Rifkin
Acquisition Other Total
----------- ------- --------
<S> <C> <C> <C>
Revenues.............................................. $89,921 $34,461 $124,382
Income from operations................................ 1,040 7,764 8,804
Income (loss) before extraordinary item............... 24,419 (5,640) 18,779
</TABLE>
(b) Represents the historical results of operations for the period from January
1, 1998 through the date of purchase for acquisitions completed by
Renaissance, the InterMedia systems, Helicon and Rifkin, and for the period
from January 1, 1998 through December 31, 1998 for acquisitions to be
completed in 1999. A definitive written agreement exists for all
acquisitions that have not yet closed.
46
<PAGE> 50
These acquisitions will be accounted for using the purchase method of
accounting. Purchase price and the closing date or anticipated closing date
for significant acquisitions are as follows:
<TABLE>
<CAPTION>
RENAISSANCE INTERMEDIA HELICON RIFKIN
ACQUISITIONS ACQUISITION ACQUISITION ACQUISITIONS
-------------- ------------- ------------- ---------------------
<S> <C> <C> <C> <C>
Purchase price.................................... $2.7 million $29.1 million $26.1 million $165.0 million
Closing date...................................... Feb. 1999 Dec. 1998 Dec. 1998 Feb. 1999
Purchase price.................................... $309.5 million $53.8 million
Closing date...................................... April 1999 July 1999
</TABLE>
The InterMedia acquisition above is part of a "swap."
(c) Represents the elimination of the operating results primarily related to the
cable systems to be transferred to the InterMedia systems as part of a swap
of cable systems and to the sale of several smaller cable systems. A
definitive written agreement exists for the disposition on these systems.
The fair value of the systems to be transferred is $420 million. No material
gain or loss is anticipated on the disposition as these systems were
recently acquired and recorded at fair value at that time. It is anticipated
that this transfer will close during the third or fourth quarter of 1999.
(d) Reflects a reclassification of expenses representing corporate expenses that
would have occurred at Charter Investment.
(e) Represents additional amortization of franchises as a result of our recent
and pending acquisitions. A large portion of the purchase price was
allocated to franchises ($3.6 billion) that are amortized over 15 years. The
adjustment to depreciation and amortization expense consists of the
following (in millions):
<TABLE>
<CAPTION>
FAIR WEIGHTED AVERAGE DEPRECIATION/
VALUE USEFUL LIFE AMORTIZATION
---------- ---------------- -------------
<S> <C> <C> <C>
Franchises......................................... $3,600.0 15 240.0
Cable distribution systems......................... 798.2 10 73.4
Land, building and improvements.................... 19.0 10 1.8
Vehicles and equipment............................. 57.8 4 12.9
------
Total depreciation and amortization........... 328.1
Less-historical depreciation and 193.0
amortization................................
------
Adjustment.................................. $135.1
======
</TABLE>
(f) Reflects additional interest expense on borrowings which will be used to
finance the acquisitions as follows (in millions):
<TABLE>
<S> <C>
$2.8 billion credit facilities at 7.4%...................... $206.0
$83 million 10% senior discount notes -- Renaissance........ 8.0
------
Total interest expenses................................... 214.0
Less-historical interest expense from acquired
companies.............................................. 120.4
------
Adjustment............................................. $93.6
======
</TABLE>
(g) Represents the elimination of gain (loss) on the sale of cable television
systems whose results of operations have been eliminated in (c) above.
(h) Reflects the elimination of income tax expense as a result of being acquired
by a limited liability company.
47
<PAGE> 51
NOTE D: We have extinguished substantially all of our long-term debt,
excluding borrowings of our previous credit facilities, and refinanced all
previous credit facilities, and have incurred and plan to incur additional debt
in connection with our recent acquisitions and pending acquisitions. See
"Capitalization." The refinancing adjustment of lower interest expense consists
of the following (dollars in thousands):
<TABLE>
<CAPTION>
INTEREST
DESCRIPTION EXPENSE
- ----------- ---------
<S> <C>
$600 million 8.25% senior notes............................. $ 49,600
$1,500 million 8.625% senior notes.......................... 129,600
$1,475 million ($906 million carrying value) 9.92% senior
discount notes............................................ 89,800
Credit facilities ($3,476 million at composite current rate
of 7.4%).................................................. 257,000
Amortization of debt issuance costs......................... 15,600
Commitment fee on unused portion of credit facilities
($624,000 at 0.375%)...................................... 2,300
10% senior discount notes -- Renaissance.................... 8,000
---------
Total pro forma interest expense.......................... 551,900
Less -- interest expense (including Marcus Cable and
recent acquisitions and pending acquisitions).......... (559,400)
---------
Adjustment............................................. $ (7,500)
=========
</TABLE>
An increase in the interest rate of 0.125% would result in an increase in
interest expense of $4.3 million. The Rifkin sellers may take up to $250
million in equity instead of cash. This would reduce interest expense by up
to $18.5 million. Additionally, we have assumed that the Rifkin notes will
be tendered. Should we be unable to tender all or a portion of the Rifkin
notes, interest expense will increase by up to $4.7 million.
NOTE E: Charter Investment provided corporate management and consulting
services to Charter Holdings in 1998 and to Marcus Cable beginning in October
1998. See "Certain Relationships and Related Transactions."
NOTE F: EBITDA represents earnings (loss) before interest expense, income
taxes, depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a cable television company's ability to service
indebtedness. However, 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. EBITDA should also not be construed as an indication of a company's
operating performance or as a measure of liquidity. In addition, because 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 EBITDA may be limited by working capital,
debt service and capital expenditure requirements and by restrictions related to
legal requirements, commitments and uncertainties.
NOTE G: EBITDA margin represents EBITDA as a percentage of revenues.
NOTE H: Adjusted EBITDA means EBITDA before corporate expenses, management
fees and other income (expense) in accordance with the term "Consolidated
EBITDA" used in the indentures governing the notes. See "Description of Notes"
for a complete presentation of the methodology employed in calculating Adjusted
EBITDA. Adjusted EBITDA is presented because it is a widely accepted financial
indicator of a cable company's ability to service indebtedness and because it is
used in the indentures to determine compliance with certain covenants. 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 also 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
48
<PAGE> 52
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.
NOTE I: Earnings include net income (loss) plus fixed charges. Fixed
charges consist of interest expense and an estimated interest component of rent
expense.
NOTE J: Homes passed are the number of living units, such as single
residence homes, apartments and condominium units, passed by the cable
television distribution network in a given cable system service area.
NOTE K: Basic customers are customers who receive basic cable service.
NOTE L: Basic penetration represents basic customers as a percentage of
homes passed.
NOTE M: Premium units represent the total number of subscriptions to
premium channels.
NOTE N: Premium penetration represents premium units as a percentage of
basic customers.
NOTE O: Average monthly revenue per basic customer represents revenues
divided by the number of months in the period divided by the number of basic
customers at December 31, 1998.
49
<PAGE> 53
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1999
-------------------------------------------------------------------
RECENT PENDING
CHARTER ACQUISITIONS ACQUISITIONS PRO FORMA
HOLDINGS (NOTE A) SUBTOTAL (NOTE A) TOTAL
---------- ------------ ---------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
Cash and cash equivalents............... $1,038,360 $(1,013,769) $ 24,591 $ 5,873 $ 30,464
Accounts receivable, net................ 30,314 8,504 38,818 15,341 54,159
Prepaid expenses and other.............. 15,882 7,846 23,728 3,745 27,473
---------- ----------- ---------- ---------- -----------
Total current assets............... 1,084,556 (997,419) 87,137 24,959 112,096
Property, plant and equipment........... 1,533,197 245,740 1,778,937 434,872 2,213,809
Franchises.............................. 5,607,539 1,653,916 7,261,455 1,922,132 9,183,587
Other assets............................ 131,990 -- 131,990 -- 131,990
---------- ----------- ---------- ---------- -----------
Total assets....................... $8,357,282 $ 902,237 $9,259,519 $2,381,963 $11,641,482
========== =========== ========== ========== ===========
Accounts payable and accrued expenses... $ 216,397 $ 34,734 $ 251,131 $ 49,791 $ 300,922
Payables to manager of cable television
systems............................... 12,554 -- 12,554 -- 12,554
---------- ----------- ---------- ---------- -----------
Total current liabilities.......... 228,951 34,734 263,685 49,791 313,476
Long-term debt.......................... 4,754,018 863,130 5,617,148 1,007,172 6,624,320
Other long-term liabilities............. 48,171 4,373 52,544 -- 52,544
Members' equity......................... 3,326,142 -- 3,326,142 1,325,000 4,651,142
---------- ----------- ---------- ---------- -----------
Total liabilities and equity....... $8,357,282 $ 902,237 $9,259,519 $2,381,963 $11,641,482
========== =========== ========== ========== ===========
</TABLE>
50
<PAGE> 54
NOTE A: Pro forma balance sheet for our recent acquisitions, fully
described in the "Business" section, and pending acquisitions consists of the
following (dollars in thousands):
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
------------------------------------------------------------------------------------------------------
RECENT ACQUISITIONS -- HISTORICAL PENDING ACQUISITIONS -- HISTORICAL
----------------------------------------------------------------- ----------------------------------
GREATER
AMERICAN MEDIA TOTAL INTERMEDIA TOTAL
RENAISSANCE CABLE SYSTEMS HELICON OTHER RECENT SYSTEMS RIFKIN PENDING
----------- -------- ------- --------- ------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents.............. $ 8,901 $ 1,201 $ 2,440 $ 11,464 $ 585 $ 24,591 $ -- $ 7,580 $ 7,580
Accounts receivable, net... 1,283 620 2,577 1,619 1,450 7,549 13,949 12,009 25,958
Receivable from related
party.................... -- -- -- -- -- -- 5,038 -- 5,038
Prepaid expenses and
other.................... 381 1,436 3,052 2,867 110 7,846 1,053 2,789 3,842
-------- -------- ------- --------- ------- -------- -------- -------- ----------
Total current assets..... 10,565 3,257 8,069 15,950 2,145 39,986 20,040 22,378 42,418
Receivable from related
party.................... -- -- -- -- -- -- -- -- --
Property, plant and
equipment................ 64,594 15,327 58,196 88,723 9,934 236,774 225,682 283,208 508,890
Franchises................. 222,971 143,546 2,653 12,096 55,452 436,718 240,567 456,523 697,090
Deferred income tax
assets................... -- -- -- -- -- -- 13,994 -- 13,994
Other assets............... 16,129 2,334 80 83,546 205 102,294 3,697 54,469 58,166
-------- -------- ------- --------- ------- -------- -------- -------- ----------
Total assets............. $314,259 $164,464 $68,998 $ 200,315 $67,736 $815,772 $503,980 $816,578 $1,320,558
======== ======== ======= ========= ======= ======== ======== ======== ==========
Accounts payable and
accrued expenses......... $ 7,649 $ 3,623 $ 6,022 $ 16,496 $ 1,899 $ 35,689 $ 19,030 $ 34,486 $ 53,516
Current deferred revenue... -- -- 1,904 -- 1,207 3,111 11,944 2,092 14,036
Note payable to related
party.................... -- -- -- -- -- -- 3,057 -- 3,057
-------- -------- ------- --------- ------- -------- -------- -------- ----------
Total current
liabilities............ 7,649 3,623 7,926 16,496 3,106 38,800 34,031 36,578 70,609
Deferred revenue........... 651 -- -- -- -- 651 3,900 -- 3,900
Deferred income taxes...... -- -- -- -- -- -- -- 7,405 7,405
Long-term debt............. 212,503 118,000 -- 295,345 38,914 664,762 -- 541,575 541,575
Note payable to related
party, including accrued
interest................. 135 -- -- 5,137 -- 5,272 412,436 -- 412,436
Other long-term
liabilities, including
redeemable preferred
shares................... 755 -- 3,618 18,708 -- 23,081 14,430 -- 14,430
Equity..................... 92,566 42,841 57,454 (135,371) 25,716 83,206 39,183 231,020 270,203
-------- -------- ------- --------- ------- -------- -------- -------- ----------
Total liabilities and
equity................. $314,259 $164,464 $68,998 $ 200,315 $67,736 $815,772 $503,980 $816,578 $1,320,558
======== ======== ======= ========= ======= ======== ======== ======== ==========
</TABLE>
51
<PAGE> 55
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------------------------------------------------------------------------------
Recent Acquisitions Pending Acquisitions
------------------------------------------ ----------------------------------------------
Pro Forma Pro Forma
------------------------------------------ ----------------------------------------------
Historical Adjustments Total Historical Acquisitions(a) Dispositions(b)
---------- -------------- ----------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents.............. $ 24,591 $(1,038,360)(c) $(1,013,769) $ 7,580 $ 90 $ (1,797)
Accounts receivable, net... 7,549 955 8,504 25,958 54 (1,671)
Receivable from related
party.................... -- -- -- 5,038 -- --
Prepaid expenses and
other.................... 7,846 -- 7,846 3,842 713 (810)
-------- ----------- ----------- ---------- ------- ---------
Total current assets..... 39,986 (1,037,405) (997,419) 42,418 857 (4,278)
Property, plant and
equipment................ 236,774 8,966 245,740 508,890 4,009 (78,027)
Franchises................. 436,718 1,217,198(f) 1,653,916 697,090 98 (342,844)
Deferred income tax
assets................... -- -- -- 13,994 -- --
Other assets............... 102,294 (102,294)(h) -- 58,166 -- --
-------- ----------- ----------- ---------- ------- ---------
Total assets............. $815,772 $ 86,465 $ 902,237 $1,320,558 $ 4,964 $(425,149)
======== =========== =========== ========== ======= =========
Accounts payable and
accrued expenses......... $ 35,689 $ (955) $ 34,734 $ 53,516 $ 896 $ (4,621)
Current deferred revenue... 3,111 (3,111)(d) -- 14,036 -- --
Note payable to related
party.................... -- -- -- 3,057 -- --
-------- ----------- ----------- ---------- ------- ---------
Total current
liabilities............ 38,800 (4,066) 34,734 70,609 896 (4,621)
Deferred revenue........... 651 (651)(d) -- 3,900 173 --
Deferred income taxes...... -- -- -- 7,405 -- --
Long-term debt............. 664,762 198,368(j) 863,130 541,575 1,260 (420,528)
Note payable to related
party, including accrued
interest................. 5,272 (5,272)(i) -- 412,436 -- --
Other long-term
liabilities.............. 23,081 (18,708) 4,373 14,430 -- --
Equity..................... 83,206 (83,206)(k) -- 270,203 2,635 --
-------- ----------- ----------- ---------- ------- ---------
Total liabilities and
equity................. $815,772 $ 86,465 $ 902,237 $1,320,558 $ 4,964 $(425,149)
======== =========== =========== ========== ======= =========
<CAPTION>
As of March 31, 1999
-------------------------
Pending Acquisitions
-------------------------
Pro Forma
-------------------------
Adjustments Total
----------- ----------
<S> <C> <C>
Cash and cash
equivalents.............. $ -- $ 5,873
Accounts receivable, net... (9,000)(d) 15,341
Receivable from related
party.................... (5,038)(e) --
Prepaid expenses and
other.................... -- 3,745
---------- ----------
Total current assets..... (14,038) 24,959
Property, plant and
equipment................ -- 434,872
Franchises................. 1,567,788(f) 1,922,132
Deferred income tax
assets................... (13,994)(g) --
Other assets............... (58,166)(h) --
---------- ----------
Total assets............. $1,481,590 $2,381,963
========== ==========
Accounts payable and
accrued expenses......... $ -- $ 49,791
Current deferred revenue... (14,036)(d) --
Note payable to related
party.................... (3,057)(i) --
---------- ----------
Total current
liabilities............ (17,093) 49,791
Deferred revenue........... (4,073)(d) --
Deferred income taxes...... (7,405)(g) --
Long-term debt............. 884,865(j) 1,007,172
Note payable to related
party, including accrued
interest................. (412,436)(i) --
Other long-term
liabilities.............. (14,430)(i) --
Equity..................... 1,052,162(k) 1,325,000
---------- ----------
Total liabilities and
equity................. $1,481,590 $2,381,963
========== ==========
</TABLE>
- -------------------------
(a) Represents the historical balance sheets as of March 31, 1999, of our recent
and pending acquisitions.
(b) Represents the historical assets and liabilities as of March 31, 1999, of
the cable systems to be transferred to InterMedia as part of a swap of cable
systems. The cable systems being swapped will be accounted for at fair
value. No material gain or loss is anticipated in conjunction with the swap.
See the "Business" section.
(c) Represents the use of Charter Holdings cash for the recent and pending
acquisitions. The sources of cash for the recent and pending acquisitions is
as follows (in millions):
<TABLE>
<S> <C> <C>
Charter Holdings historical cash............................ $1,038.3
Expected equity contribution................................ 1,325.0
Expected credit facilities draw down........................ 1,762.7
10% senior discount notes-Renaissance....................... 82.7
Helicon preferred limited liability company interests....... 25.0
--------
$4,233.7
========
</TABLE>
52
<PAGE> 56
(d) Represents the offset of advance billings against deferred revenue to be
consistent with Charter Holdings' accounting policy and the elimination of
deferred revenue.
(e) Reflects assets retained by the seller.
(f) Substantial amounts of the purchase price in (c) above have been allocated
to franchises based on estimated fair values. This results in an allocation
of purchase price as follows (in thousands):
<TABLE>
<CAPTION>
GREATER
AMERICAN MEDIA INTERMEDIA
RENAISSANCE CABLE SYSTEMS SYSTEMS HELICON RIFKIN OTHER TOTAL
----------- -------- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Working capital.................. $ 2,916 $ (366) $ 2,047 $(12,685) $ 1,364 $ (12,147) $ 246 $ (18,625)
Property, plant and equipment.... 64,594 15,327 58,196 147,655 88,723 287,217 18,900 680,612
Franchises....................... 397,085 225,039 443,375 737,202 459,913 1,184,930 128,504 3,576,048
Other............................ (755) -- (3,618) -- -- -- -- (4,373)
-------- -------- -------- -------- -------- ---------- -------- ----------
$463,840 $240,000 $500,000 $872,172 $550,000 $1,460,000 $147,650 $4,233,662
======== ======== ======== ======== ======== ========== ======== ==========
</TABLE>
(g) Represents the elimination of deferred income tax assets and liabilities.
(h) Represents the elimination of the unamortized historical cost of various
assets based on the allocation of purchase price (see (f) above) as follows
(in thousands):
<TABLE>
<S> <C>
Subscriber lists............................................ $(104,244)
Noncompete agreements....................................... (14,570)
Deferred financing costs.................................... (18,062)
Goodwill.................................................... (69,324)
Other assets................................................ (6,415)
---------
(212,615)
Less-accumulated amortization............................... 52,155
---------
$(160,460)
=========
</TABLE>
(i) Represents liabilities retained by the seller.
(j) Represents the following (in thousands):
<TABLE>
<S> <C>
Long-term debt not assumed.................................. $ (664,451)
Additional borrowings under our credit facilities........... 1,722,684
Helicon preferred limited liability company interests....... 25,000
----------
$1,083,233
==========
</TABLE>
(k) Represents the following (in thousands):
<TABLE>
<S> <C>
Elimination of historical equity............................ $ (356,044)
Additional contributions.................................... 1,325,000
----------
$ 968,956
==========
</TABLE>
53
<PAGE> 57
UNAUDITED SELECTED HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
The Unaudited Selected Historical Combined Financial and Operating Data for
the years ended December 31, 1996, 1997 and 1998 have been derived from the
separate financial statements of Charter Holdings, CCA Group and CharterComm
Holdings, which have been audited by Arthur Andersen, independent public
accountants, and are included elsewhere in this prospectus. The combined
financial and operating data represent the sum of the results of each of our
then-existing subsidiaries prior to our merger with Marcus Holdings and our
recent acquisitions. Each such subsidiary was managed by Charter Investment in
accordance with its respective management agreement during the presented
periods. Since these subsidiaries were under common management, we believe
presenting combined financial information of these companies is informative.
As a result of the acquisition of us by Paul G. Allen, we have applied the
purchase accounting method which had the effect of increasing total assets,
total debt and members' equity as of December 23, 1998. In addition, we have
retroactively restated our financial statements to include the results of
operations of Marcus Cable for the period from December 24, 1998, through
December 31, 1998, and the balance sheet of Marcus Cable as of December 31,
1998. As a result of the acquisition of us by Mr. Allen and our merger with
Marcus Holdings, we believe that the periods on or prior to December 23, 1998
are not comparable to the periods after December 23, 1998.
<TABLE>
<CAPTION>
CHARTER HOLDINGS, CCA GROUP AND CHARTER
CHARTERCOMM HOLDINGS HOLDINGS
---------------------------------- ----------
YEAR ENDED DECEMBER 31, 1/1/98 12/24/98
----------------------- THROUGH THROUGH
1996 1997 12/23/98 12/31/98
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
<S> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS:
Revenues............................ $ 368,553 $ 484,155 $570,964 $ 23,450
---------- ---------- -------- ----------
Operating expenses:
Operating, general and
administrative................. 190,084 249,419 288,428 12,679
Depreciation and amortization..... 154,273 198,718 240,294 13,811
Management fees/corporate expense
charges(a)..................... 15,094 20,759 38,348 766
---------- ---------- -------- ----------
Total operating expenses....... 359,451 468,896 567,070 27,256
---------- ---------- -------- ----------
Income (loss) from operations....... $ 9,102 $ 15,259 $ 3,894 $ (3,806)
========== ========== ======== ==========
CAPITAL EXPENDITURES................ $ 110,291 $ 162,607 $195,468 $ 13,672
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets........................ $1,660,242 $2,002,181 $7,235,656
Total debt.......................... 1,195,899 1,846,159 3,523,201
Members' equity..................... 26,099 (80,505) 3,429,291
</TABLE>
54
<PAGE> 58
<TABLE>
<CAPTION>
CHARTER HOLDINGS, CCA GROUP AND CHARTER
CHARTERCOMM HOLDINGS HOLDINGS
---------------------------------- ----------
YEAR ENDED DECEMBER 31, 1/1/98 12/24/98
----------------------- THROUGH THROUGH
1996 1997 12/23/98 12/31/98
---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
<S> <C> <C> <C> <C>
OPERATING DATA (AT END OF PERIOD,
EXCEPT FOR AVERAGES):
Homes passed(b)..................... 1,546,000 1,915,000 3,892,000
Basic customers(c).................. 902,000 1,086,000 2,317,000
Basic penetration(d)................ 58.3% 56.7% 59.5%
Premium units(e).................... 517,000 629,000 1,256,000
Premium penetration(f).............. 57.3% 57.9% 54.2%
</TABLE>
- -------------------------
(a) Charter Investment provided corporate management and consulting services to
us. CCA Group and CharterComm Holdings paid fees to Charter Investment as
compensation for such services and recorded management fee expense. See
"Certain Relationships and Related Transactions." Charter Holdings recorded
actual corporate expense charges incurred by Charter Investment on our
subsidiaries' behalf. Management fees and corporate expenses for the year
ended December 31, 1998 include $14.4 million of change of control payments
under the terms of then-existing equity appreciation rights plans. Such
payments were triggered by the acquisition of us by Paul G. Allen. Such
payments were made by Charter Investment and were not subject to
reimbursement by us, but were allocated to us for financial reporting
purposes. The equity appreciation rights plans were terminated in connection
with the acquisition of us Mr. Allen, and these costs will not recur.
(b) Homes passed are the number of living units, such as single residence homes,
apartments and condominium units, passed by the cable television
distribution network in a given cable system service area.
(c) Basic customers are customers who receive basic cable service.
(d) Basic penetration represents basic customers as a percentage of homes
passed.
(e) Premium units represent the total number of subscriptions to premium
channels.
(f) Premium penetration represents premium units as a percentage of basic
customers.
55
<PAGE> 59
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data below for the years ended December
31, 1996 and 1997, for the periods from January 1, 1998, through December 23,
1998, and from December 24, 1998 through December 31, 1998, are derived from the
consolidated financial statements of Charter Holdings. They have been audited by
Arthur Andersen LLP, independent public accountants, and are included elsewhere
in this prospectus. The selected historical financial data for the period from
October 1, 1995 through December 31, 1995, are derived from the predecessor of
Charter Holdings' unaudited financial statements and are not included elsewhere
in this prospectus. The selected historical financial data for the year ended
December 31, 1994 and for the period from January 1, 1995 through September 30,
1995 are derived from the unaudited financial statements of Charter Holdings'
predecessor business and are not included elsewhere in this prospectus. The
information presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements of Charter Holdings and related notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PREDECESSOR OF
CHARTER HOLDINGS CHARTER HOLDINGS
---------------------- ----------------------------------------------------
YEAR ENDED
YEAR ENDED 1/1/95 10/1/95 DECEMBER 31, 1/1/98 12/24/98
DECEMBER 31, THROUGH THROUGH ----------------- THROUGH THROUGH
1994 9/30/95 12/31/95 1996 1997 12/23/98 12/31/98
------------ ------- -------- ------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues....................... $ 6,584 $ 5,324 $ 1,788 $14,881 $18,867 $ 49,731 $ 23,450
Operating expenses:
Operating, general and
administrative............ 3,247 2,581 931 8,123 11,767 25,952 12,679
Depreciation and
amortization.............. 2,508 2,137 648 4,593 6,103 16,864 13,811
Management fees/corporate
expense charges........... 106 224 54 446 566 6,176 766
-------- ------- ------- ------- ------- -------- ----------
Total operating
expenses................ 5,861 4,942 1,633 13,162 18,436 48,992 27,256
-------- ------- ------- ------- ------- -------- ----------
Income (loss) from
operations................... 723 382 155 1,719 431 739 (3,806)
Interest expense............... -- -- (691) (4,415) (5,120) (17,277) (5,051)
Interest income................ 26 -- 5 20 41 44 133
Other income (expense)......... -- 38 -- (47) 25 (728) --
-------- ------- ------- ------- ------- -------- ----------
Net income (loss).............. $ 749 $ 420 $ (531) $(2,723) $(4,623) $(17,222) $ (8,724)
======== ======= ======= ======= ======= ======== ==========
Ratio of Earnings to Fixed
Charges(a)................... 45.14x 34.00x -- -- -- -- --
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets................... $ 25,511 $26,342 $31,572 $67,994 $55,811 $281,969 $7,235,656
Total debt..................... 10,194 10,480 28,847 59,222 41,500 274,698 3,523,201
Members' equity (deficit)...... 14,822 15,311 971 2,648 (1,975) (8,397) 3,429,291
</TABLE>
- -------------------------
(a) Earnings include net income (loss) plus fixed charges. Fixed charges consist
of interest expense and an estimated interest component of rent expense.
Earnings for the period from October 1, 1995 through December 31, 1995,
years ended December 31, 1996 and 1997, periods from January 1, 1998 through
December 23, 1998, and the period from December 24, 1998 through December
31, 1998 were inadequate to cover fixed charges by $531, $2,723, $4,623,
$17,222 and $8,724, respectively.
56
<PAGE> 60
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 discussion of important factors
that could cause actual results to differ from expectations and non-historical
information contained herein.
INTRODUCTION
We do not believe that our historical financial condition and results of
operations are accurate indicators of future results because of recent and
pending significant events, including:
(1) the acquisition of us by Paul G. Allen,
(2) our merger with Marcus Holdings,
(3) our recent and pending acquisitions,
(4) the refinancing of our previous credit facilities, and
(5) the purchase of publicly held notes that had been issued by several of
our subsidiaries.
Provided below is a discussion of:
(1) our operation and development prior to the acquisition of us by Mr.
Allen,
(2) the acquisition of us by Mr. Allen,
(3) our merger with Marcus Holdings, and
(4) our recent acquisitions and pending acquisitions.
ORGANIZATIONAL HISTORY
Prior to our acquisition by Mr. Allen on December 23, 1998, our cable
systems were operated under four groups. Three of these groups were comprised of
companies that were managed by Charter Investment prior to our acquisition by
Mr. Allen and the fourth group was comprised of companies that collectively were
part of Marcus Cable.
The following is an explanation of how:
(1) Charter Properties, the operating companies that formerly comprised CCA
Group, Charter Communications, LLC 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.
THE CHARTER COMPANIES
Prior to Charter Investment acquiring the remaining interests it did not
previously own in CCA Group and CharterComm Holdings, LLC, as described below,
the operating subsidiaries were parties to separate management agreements with
Charter Investment pursuant to which Charter Investment provided management and
consulting services. The three groups which
57
<PAGE> 61
formerly comprised the companies managed by Charter Investment prior to our
acquisition by Mr. Allen were as follows:
(1) Charter Communications Properties Holdings, LLC
CCP Holdings was a wholly owned subsidiary of Charter Investment. The
primary subsidiary of CCP Holdings which owned the cable systems was
Charter Properties. In connection with Mr. Allen's acquisition on December
23, 1998, CCP Holdings was merged out of existence. Charter Properties
became a direct, wholly owned subsidiary of Charter Investment.
(2) CCA Group
The controlling interests in CCA Group were held by affiliates of
Kelso & Co. Charter Investment had only a minority interest. On December
21, 1998, prior to Mr. Allen's acquisition, the remaining interests it did
not previously own in CCA Group were acquired by Charter Investment from
the Kelso affiliates. Consequently, the companies comprising CCA Group
became wholly owned subsidiaries of Charter Investment.
CCA Group consisted of the following three sister companies:
(i) CCT Holdings, LLC,
(ii) CCA Holdings, LLC, and
(iii) Charter Communications Long Beach, LLC
The cable systems were owned by the various subsidiaries of these
three sister companies. 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 systems under this former group. These
operating subsidiaries became indirect, wholly owned subsidiaries of
Charter Investment.
(3) CharterComm Holdings, LLC
The controlling interests in CharterComm Holdings were held by
affiliates of Charterhouse Group International Inc. Charter Investment had
only a minority interest. On December 21, 1998, prior to Mr. Allen's
acquisition, the remaining interests it did not previously own in
CharterComm Holdings were acquired by Charter Investment from the
Charterhouse affiliates. Consequently, CharterComm Holdings became a wholly
owned subsidiary of Charter Investment.
The cable 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 systems under this former group. CharterComm Holdings was merged
out of existence. Charter Communications, LLC became a direct, wholly owned
subsidiary of Charter Investment.
In February 1999, Charter Holdings was formed as a wholly owned subsidiary
of Charter Investment, and Charter Operating was formed as a wholly owned
subsidiary of Charter Holdings. All of Charter Investment's direct interests in
the entities described
58
<PAGE> 62
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 and Charter Operating.
In May 1999, Charter Holdco was formed as a wholly owned subsidiary of
Charter Investment. All of Charter Investment's interests in Charter Holdings
were transferred to Charter Holdco.
Our 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 for an aggregate purchase price of $2.2
billion, excluding $2.0 billion in debt we assumed. Charter Properties, the
operating companies that formerly comprised CCA Group and Charter
Communications, LLC were contributed to Charter Operating subsequent to Mr.
Allen's acquisition. Charter Properties is deemed to be our predecessor.
Consequently, the contribution of Charter Properties was accounted for as a
reorganization under common control. Accordingly, the accompanying financial
statements for periods prior to December 24, 1998, include the accounts of
Charter Properties. The contributions of the operating companies that formerly
comprised CCA Group and Charter Communications, LLC were accounted for in
accordance with purchase accounting. Accordingly, the financial statements for
periods after December 23, 1998, include the accounts of Charter Properties, 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. In October 1998, Marcus Cable entered into a management consulting
agreement with Charter Investment, pursuant to which Charter Investment provided
management and consulting services to Marcus Cable and its subsidiaries which
own the cable systems. This agreement placed the Marcus cable systems under
common management with our cable systems.
In February 1999, Marcus Holdings was formed and all of Mr. Allen's
interests in Marcus Cable were transferred to Marcus Holdings. In March 1999,
Mr. Allen acquired the remaining interests in Marcus Cable, which interests were
transferred to Marcus Holdings. In April 1999, Mr. Allen merged Marcus Holdings
into us, and the operating subsidiaries of Marcus Holdings and all of the cable
systems they own came under the ownership of Charter Holdings.
Our merger with Marcus Holding was accounted for as a reorganization under
common control similar to a pooling of interests because of Mr. Allen's
controlling interests in Marcus Holdings and Charter Holdings. As such, the
accounts of Charter Holdings and Marcus Holdings have been consolidated since
December 23, 1998.
ACQUISITIONS
In the second and third quarters of 1999, we acquired American Cable, the
Greater Media systems, Renaissance, Helicon, Vista and certain cable assets of
Cable Satellite of South Miami for a total purchase price of approximately $1.9
billion and total debt assumed of $226 million. See "Business -- Acquisitions"
and "Description of Certain Indebtedness." These acquisitions were funded
through excess cash from the issuance of the original notes, additional
borrowings under our credit facilities and the assumption of Renaissance notes
and Helicon notes. Due to the change of control of Renaissance, an offer to
purchase the Renaissance notes was made at 101% of their accreted value on the
59
<PAGE> 63
date of purchase, plus accrued interest. Of the $163.175 million face amount of
Renaissance notes outstanding, $48.762 million were repurchased. Due to the
change of control of Helicon, an offer to purchase the Helicon notes will be
made in accordance with the terms of the Helicon notes.
In addition to these acquisitions, since the beginning of 1999, we have
entered into definitive agreements to acquire the InterMedia systems and Rifkin,
all as forth in the table below. These acquisitions are expected to be funded
through excess cash, additional borrowings under our credit facilities,
additional equity contributions and the assumption of Rifkin notes. Rifkin
sellers could elect to receive some of the purchase price in the form of
preferred or common equity of Charter Holdings or, if mutually agreed to by the
parties, of a parent of Charter Holdings. If issued, this equity would be valued
between approximately $25 million and $250 million. The Rifkin notes are
expected to be tendered after closing.
As part of the transaction with InterMedia, we will "swap" some of our
non-strategic cable systems located in Indiana, Montana, Utah and northern
Kentucky, representing 142,000 basic customers, and pay cash of $872 million.
The InterMedia systems serve approximately 408,000 customers in Georgia, North
Carolina, South Carolina and Tennessee.
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS ENDED
MARCH 31, 1999
-------------------------
(DOLLARS IN
ACTUAL OR THOUSANDS)
ANTICIPATED PURCHASE BASIC -----------
ACQUISITION ACQUISITION DATE PRICE SUBSCRIBERS REVENUE
- ----------- ---------------- -------- ----------- -------
<S> <C> <C> <C> <C>
American Cable......................... 4/99 $240 million 68,000 $ 9,151
Renaissance............................ 4/99 459 million 132,000 15,254
Greater Media Systems.................. 6/99 500 million 174,000 20,394
Helicon................................ 7/99 550 million 172,000 21,252
Other (Vista and certain cable assets
of Cable Satellite).................. 7/99 and 8/99 148 million 36,000 3,354
InterMedia Systems..................... 3rd or 4th Quarter 872 million + 408,000 48,288
1999 systems' swap (142,000)
---------
266,000
Rifkin................................. 3rd or 4th Quarter 1,460 million 463,000 50,914
1999
---------------- --------- --------
Total.............................. $4,229 million 1,311,000 $168,607
================ ========= ========
</TABLE>
The systems acquired pursuant to these recent and pending acquisitions
serve, in the aggregate, approximately 1.3 million customers. In addition, we
are negotiating with several other potential acquisition candidates whose
systems would further complement our regional operating clusters. We expect to
finance our pending acquisitions and any other future acquisitions with
additional borrowings under our credit facilities and with additional equity.
Certain of these acquisitions were originally acquisitions of Charter
Investment. Charter Investment subsequently assigned those acquisitions to us.
Charter Investment and other affiliates are making other acquisitions. There is
no present intention on their part to assign these other acquisitions to us.
60
<PAGE> 64
PUBLIC OFFERING OF COMMON STOCK BY AN INDIRECT PARENT OF CHARTER HOLDINGS
Charter Communications, Inc. filed a registration statement for an initial
public offering of its Class A common stock. Charter Communications, Inc.
expects to raise approximately $3.45 billion through its offering and will use
these proceeds to purchase membership interests in Charter Holdco, thereby
become the controlling managing member of Charter Holdco. Charter Holdco will
also raise an additional $750 million through the sale of membership interests
to Vulcan Cable III. Charter Holdco will thereafter be owned by Charter
Investment, Charter Communications, Inc. and Vulcan Cable III. The equity
interest of each of these owners has not yet been determined. We will continue
to be 100% owned by Charter Holdco.
The initial public offering will affect us in many ways, including the
following:
- Our Management. The current management agreement between Charter
Operating and Charter Investment, described under the heading "Certain
Relationships and Related Transactions," will be terminated and a new management
agreement will be entered into between Charter Communications, Inc. and Charter
Holdco. The new management agreement will have terms substantially identical to
the existing management agreement except that the fees payable thereunder will
only allow Charter Communications, Inc. to be reimbursed for its actual
expenses. This agreement will apply to us and all of our subsidiaries.
- Option Plan. After the initial public offering, each Charter Holdco
membership interest held as a result of an exercise of an option will
automatically be exchanged into shares of Class A common stock of Charter
Communications, Inc. Any shares of Class A common stock received in any such
exchange will be subject to purchase by Mr. Allen or Charter Holdco in the event
of the termination of the employment or consulting relationship of the optionee
for cause as described in "Management -- Option Plan."
- Business Activities. It is contemplated that, upon the completion of the
initial public offering, we will not be permitted to engage in business activity
other than the cable transmission of video, audio and data unless Mr. Allen
first determines not to pursue the particular business activity. See "Risk
Factors -- We will not be able to engage in any business other than the cable
transmission of video, audio and data unless Mr. Allen first determines not to
pursue the particular business activity."
OVERVIEW
Approximately 87% of our revenues are primarily 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 increases
in revenues in each of the past three fiscal years, 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. This
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
61
<PAGE> 65
expected to significantly contribute to our revenue. One of these services is
digital cable, which provides subscribers with additional programming options.
We are also offering high speed Internet access to the worldwide 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, Inc., which
provides users with 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 50 percent of our operating costs. 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 to 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 for corporate management and consulting
services. Charter Holdings records actual corporate expense charges incurred by
Charter Investment 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 equal to 3.0% to 5.0% of gross revenues plus
certain expenses. In October 1998, Charter Investment began managing the cable
operations of Marcus Holdings under a management fee arrangement. The Charter
Operating credit facilities limit management fees to 3.5% of gross revenues.
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 the depreciation and amortization expenses
associated with our acquisitions, the 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.
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<PAGE> 66
RESULTS OF OPERATIONS
The following discusses the results of operations for
(1) Charter Holdings, comprised of Charter Properties, for the period from
January 1, 1998 through March 31, 1998, and
(2) Charter Holdings, comprised of Charter Properties, CCA Group,
CharterComm Holdings and Marcus Holdings, for the period from January
1, 1999 through March 31, 1999.
The following table sets forth the percentages of revenues that items in
the statements of operations constitute for the indicated periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
3/31/99 3/31/98
----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Revenues.................................... $286,135 100.0% $ 4,782 100.00%
-------- ----- ------- ------
Operating expenses
Operating, general and administrative
costs.................................. 152,075 53.1% 2,638 55.2%
Depreciation and amortization............. 153,747 53.7% 1,605 33.6%
Management fees/corporate expense
charges................................ 5,323 1.9% 143 3.0%
-------- ----- ------- ------
Total operating expenses.......... 311,145 108.7% 4,386 91.7%
-------- ----- ------- ------
Income (loss) from operations............... (25,010) (8.7%) 396 8.3%
Interest income............................. 1,733 0.6% 8 0.2%
Interest expense............................ (71,591) (25.0%) (1,329) (27.8%)
Other income................................ 15 0.0% 2 0.0%
-------- ----- ------- ------
Net loss before extraordinary item.......... (94,853) (33.1%) $ (923) (19.3%)
Extraordinary item-loss from early
extinguishment of debt.................... 3,604 (1.3%) -- 0.0%
------- ------
Net loss.................................... $(98,457) (34.4%) $ (923) (19.3%)
======== ===== ======= ======
</TABLE>
63
<PAGE> 67
PERIOD FROM JANUARY 1, 1999 THROUGH MARCH 31, 1999
COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH MARCH 31, 1998
REVENUES. Revenues increased by $281.3 million, or 5,883.6%, from $4.8
million for the period from January 1, 1998 through March 31, 1998 to $286.1
million for the period from January 1, 1999 through March 31, 1999. The increase
in revenues primarily resulted from the acquisitions of the CCA Group,
CharterComm Holdings and Sonic, and our merger with Marcus Holdings. The
revenues of these entities for the three months ended March 31, 1999 were $89.4
million, $53.4 million, $13.1 million and $125.2 million, respectively.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $149.5 million, or 5.750.0%, from $2.6
million for the period from January 1, 1998 through March 31, 1998 to $152.1
million for the period from January 1, 1999 through March 31, 1999. This
increase was due primarily to the acquisitions of the CCA Group, CharterComm
Holdings and Sonic, and our merger with Marcus Holdings whose operating, general
and administrative expenses were $46.5 million, $26.9 million, $6.9 million and
$69.0 million for the three months ended March 31, 1999, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $152.1 million, or 9,479.3%, from $1.6 million for the period from
January 1, 1998 through March 31, 1998 to $153.7 million for the period from
January 1, 1999 through March 31, 1999. There was a significant increase in
amortization resulting from the acquisitions of the CCA Group, CharterComm
Holdings and Sonic, and our merger with Marcus Holdings whose incremental
amortization expenses for the three months ended March 31, 1999 were $49.1
million, $32.6 million, $4.3 million and $63.7 million for the three months
ended March 31, 1999, respectively.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $5.2 million, or 3,622.4% from $0.1 million for the
period from January 1, 1998 through March 31, 1998 to $5.3 million for the
period from January 1, 1999 through March 31, 1999. The increase from the period
from January 1, 1998 through March 31, 1998 compared to the period from January
1, 1999 through March 31, 1999 was the result of the acquisitions of the CCA
Group, CharterComm Holdings and Sonic, and our merger with Marcus Holdings.
INTEREST EXPENSE. Interest expense increased by $70.2 million, or
5,286.8%, from $1.3 million for the period from January 1, 1998 through March
31, 1998 to $71.6 million for the period from January 1, 1999 through March 31,
1999. This increase resulted primarily from the financing of the acquisitions of
the CCA Group and CharterComm Holdings, and our merger with Marcus Holdings. The
interest expenses resulting from each of these transactions were $14.4 million,
$12.0 million, and $26.1 million, respectively.
NET LOSS. Net loss increased by $97.5 million, or 10,567.1%, from $0.9
million for the period from January 1, 1998 through March 31, 1998 to $98.5
million for the period from January 1, 1999 through March 31, 1999.
The increase in revenues that resulted from the acquisitions of the CCA
Group, CharterComm Holdings and Sonic, and our merger with Marcus Holdings was
not sufficient to offset the significant costs related to the acquisitions.
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<PAGE> 68
RESULTS OF OPERATIONS
The following discusses the results of operations for
(1) Charter Holdings, comprised of Charter Properties, for the period from
January 1, 1998 through December 23, 1998 and for the years ended
December 31, 1997 and 1996, and
(2) Charter Holdings, comprised of Charter Properties, CCA Group,
CharterComm Holdings and Marcus Holdings, for the period from December
24, 1998 through December 31, 1998.
The following table sets forth the percentages of revenues that items in
the statements of operations constitute for the indicated periods.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1/1/98 12/24/98
------------------------------------ THROUGH THROUGH
1996 1997 12/23/98 12/31/98
---------------- ---------------- ----------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Revenues........................... $14,881 100.0% $18,867 100.0% $ 49,731 100.0% $23,450 100.0%
------- ----- ------- ----- -------- ----- ------- -----
Operating expenses
Operating costs................... 5,888 39.6% 9,157 48.5% 18,751 37.7% 9,957 42.5%
General and administrative
costs........................... 2,235 15.0% 2,610 13.8% 7,201 14.5% 2,722 11.6%
Depreciation and amortization..... 4,593 30.9% 6,103 32.3% 16,864 33.9% 13,811 58.9%
Management fees/corporate expense
charges......................... 446 3.0% 566 3.0% 6,176 12.4% 766 3.3%
------- ----- ------- ----- -------- ----- ------- -----
Total operating expenses.......... 13,162 88.4% 18,436 97.7% 48,992 98.5% 27,256 116.2%
------- ----- ------- ----- -------- ----- ------- -----
Income (loss) from operations...... 1,719 11.6% 431 2.3% 739 1.5% (3,806) (16.2%)
Interest income.................... 20 0.1% 41 0.2% 44 0.1% 133 0.6%
Interest expense................... (4,415) (29.7%) (5,120) (27.1%) (17,277) (34.7%) (5,051) (21.5%)
Other income (expense)............. (47) (0.3%) 25 0.1% (728) (1.5%) -- --
------- ----- ------- ----- -------- ----- ------- -----
Net loss........................... $(2,723) (18.3%) $(4,623) (24.5%) $(17,222) (34.6%) $(8,724) (37.2%)
======= ===== ======= ===== ======== ===== ======= =====
</TABLE>
65
<PAGE> 69
PERIOD FROM DECEMBER 24, 1998, THROUGH DECEMBER 31, 1998
This period is not comparable to any other period presented. The financial
statements represent eight days of operations. This period not only contains the
results of operations of Charter Properties, but also the results of operations
of those entities purchased in the acquisition of us and our merger with Marcus
Holdings. As a result, no comparison of the operating results for this eight-day
period is presented.
PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998 COMPARED TO 1997
REVENUES. Revenues increased by $30.8 million, or 163.6%, from $18.9
million in 1997 to $49.7 million for the period from January 1, 1998 through
December 23, 1998. The increase in revenues primarily resulted from the
acquisition of Sonic whose revenues for that period were $30.5 million.
OPERATING EXPENSES. Operating expenses increased by $9.6 million, or
104.8%, from $9.2 million in 1997 to $18.8 million for the period from January
1, 1998 through December 23, 1998. This increase was due primarily to the
acquisition of Sonic, whose operating expenses for that period were $11.5,
partially offset by the loss of $1.4 million on the sale of a cable system in
1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $4.6 million, or 175.9%, from $2.6 million in 1997 to $7.2 million
for the period from January 1, 1998 through December 23, 1998. This increase was
due primarily to the acquisition of Sonic whose general and administrative
expenses for that period were $4.4 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $10.8 million, or 176.3%, from $6.1 million in 1997 to $16.9
million for the period from January 1, 1998 through December 23, 1998. There was
a significant increase in amortization resulting from the acquisition of Sonic.
Incremental depreciation and amortization expenses of the acquisition of Sonic
were $10.3 million.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges
increased by $5.6 million, or 991.2% from $0.6 million in 1997 to $6.2 million
for the period from January 1, 1998 through December 23, 1998. The increase from
1997 compared to the period from January 1, 1998 through December 23, 1998 was
the result of additional Charter Investment charges related to equity
appreciation rights plans of $3.8 million for the period from January 1, 1998
through December 23, 1998 and an increase of $1.5 million in management services
provided by Charter Investment as a result of the acquisition of Sonic.
INTEREST EXPENSE. Interest expense increased by $12.2 million, or 237.4%,
from $5.1 million in 1997 to $17.3 million for the period from January 1, 1998
through December 23, 1998. This increase resulted primarily from the
indebtedness of $220.6 million, including a note payable for $60.7 million,
incurred in connection with the acquisition of Sonic resulting in $12.1 million
of additional interest expense.
NET LOSS. Net loss increased by $12.6 million, or 272.5%, from $4.6
million in 1997 to $17.2 million for the period from January 1, 1998 through
December 23, 1998.
The increase in revenues that resulted from cable television customer
growth was not sufficient to offset the significant costs related to the
acquisition of Sonic.
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<PAGE> 70
1997 COMPARED TO 1996
REVENUES. Revenues increased by $4.0 million, or 26.8%, from $14.9 million
in 1996 to $18.9 million in 1997. The primary reason for this increase is due to
the acquisition of 5 cable systems in 1996 that increased customers by 58.9%.
Revenues of Charter Properties, excluding the activity of any other systems
acquired during the periods, increased by $0.7 million, or 8.9%, from $7.9
million in 1996 to $8.6 million in 1997.
OPERATING EXPENSES. Operating expenses increased by $3.3 million, or
55.5%, from $5.9 million in 1996 to $9.2 million in 1997. This increase was
primarily due to the acquisitions of the cable systems in 1996 and the loss of
$1.4 million on the sale of a cable system in 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $0.4 million, or 16.8%, from $2.2 million in 1996 to $2.6 million
in 1997. This increase was primarily due to the acquisitions of the cable
systems in 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $1.5 million, or 32.9%, from $4.6 million in 1996 to $6.1 million
in 1997. There was a significant increase in amortization resulting from the
acquisitions of the cable systems in 1996.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges
increased by $0.1 million, or 26.9%, from $0.4 million in 1996 to $0.6 million
in 1997. These fees were 3.0% of revenues in both 1996 and 1997.
INTEREST EXPENSE. Interest expense increased by $0.7 million, or 16.0%,
from $4.4 million in 1996 to $5.1 million in 1997. This increase resulted
primarily from the indebtedness incurred in connection with the acquisitions of
several cable systems in 1996.
NET LOSS. Net loss increased by $1.9 million, or 69.8%, from $2.7 million
in 1996 to $4.6 million in 1997. The increase in net loss is primarily related
to the $1.4 million loss on the sale of a cable system.
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<PAGE> 71
SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS
COMBINED CHARTER COMPANIES OPERATING RESULTS
The following discusses the combined statements of operations of Charter
Holdings, CCA Group and CharterComm Holdings for the years ended December 31,
1996 and 1997, and for the period from January 1, 1998 through December 23,
1998. Since these companies were under the common management of Charter
Investment, the current manager of our cable systems, we believe presenting
their combined results of operations is meaningful and informative. These
statements depict the historical results of the companies acquired by Paul G.
Allen on December 23, 1998. The statements do not reflect any pro forma
adjustments.
<TABLE>
<CAPTION>
CHARTER HOLDINGS, CCA GROUP AND CHARTERCOMM HOLDINGS
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------- 1/1/98 THROUGH
1996 1997 12/23/98
------------------------ ------------------------ ------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
Revenues.................................... $ 368,553 100.0% $ 484,155 100.0% $ 570,964 100.0%
--------------- ------ --------------- ------ --------------- ------
Operating expenses:
Operating costs........................... 159,835 43.4% 207,802 42.9% 238,201 41.7%
General and administrative costs.......... 30,249 8.2% 41,617 8.6% 50,227 8.8%
Depreciation and amortization............. 154,273 41.9% 198,718 41.0% 240,294 42.1%
Management fees/corporate expense
charges................................. 15,094 4.1% 20,759 4.3% 38,348 6.7%
--------------- ------ --------------- ------ --------------- ------
Total operating expenses............ 359,451 97.4% 468,896 96.8% 567,070 99.3%
--------------- ------ --------------- ------ --------------- ------
Income (loss) from operations............... $ 9,102 2.6% $ 15,259 3.2% $ 3,894 0.7%
=============== ====== =============== ====== =============== ======
</TABLE>
68
<PAGE> 72
PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998 COMPARED TO 1997
REVENUES. Revenues increased by $86.8 million, or 17.9%, from $484.2
million in 1997 to $571.0 million for the period from January 1, 1998 through
December 23, 1998. Increase in revenues of $30.5 million and $16.8 million
resulted from the acquisitions of Sonic in 1998 and Long Beach in 1997,
respectively. The remaining increase in revenues is primarily related to
internally generated increases in basic subscribers and increases in premium
service subscriptions.
We have grown our subscriber base internally as a result of management's
marketing efforts to add new customers, increased efforts to retain existing
customers and a limited amount of new-build construction to increase the
coverage area of our systems.
Premium subscriptions have increased as a result of the acquisition of
Sonic and our marketing efforts.
OPERATING EXPENSES. Operating expenses increased by $30.4 million, or
14.6%, from $207.8 million in 1997 to $238.2 million for the period from January
1, 1998 through December 23, 1998. Increases in operating expenses of $11.5
million and $6.0 million resulted from acquisitions of Sonic in 1998 and Long
Beach in 1997, respectively. The remaining difference is primarily related to
increased programming cost.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $8.6 million, or 20.7%, from $41.6 million in 1997 to $50.2 million
for the period from January 1, 1998 through December 23, 1998. Increases in
general and administrative expenses of $4.4 million and $1.6 million resulted
from acquisitions of Sonic in 1998 and Long Beach in 1997, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$41.6 million, or 20.9% from $198.7 million in 1997 to $240.3 million for the
period from January 1, 1998 through December 23, 1998. Increases in depreciation
and amortization of $10.3 million and $8.4 million resulted from acquisitions of
Sonic in 1998 and Long Beach in 1997, respectively. The increase is also
attributed to capital expenditures of $195.5 million for the period from January
1, 1998 through December 23, 1998 and $162.6 million during 1997.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $17.6 million, or 84.7% from $20.8 million in 1997
to $38.3 million for the period from January 1, 1998 through December 23, 1998.
The increase from 1997 compared to 1998 was primarily the result of additional
Charter Investment charges related to the equity appreciation rights plans of
$14.4 million for fiscal 1998 and the additional management fees as a result of
the Sonic and Long Beach acquisitions of $1.5 million and $0.5 million,
respectively.
1997 COMPARED TO 1996
REVENUES. Revenues increased by $115.6 million, or 31.4%, from $368.6
million in 1996 to $484.2 million in 1997. This increase was due to several
acquisitions of cable systems in 1996 and 1997, including the acquisition of
Long Beach whose incremental revenues were $23.7 million, as well as an increase
in the average monthly revenue per basic customer from $34.05 in 1996 to $37.15
in 1997.
OPERATING EXPENSES. Operating expenses increased by $48.0 million, or
30.0%, from $159.8 million in 1996 to $207.8 million in 1997. This increase was
primarily due to the
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<PAGE> 73
acquisitions in 1996 and 1997, most significant being the acquisition of Long
Beach whose operating expenses were $10.9 million.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $11.4 million, or 37.6%, from $30.2 million in 1996 to $41.6
million in 1997. This increase was primarily due to the acquisitions acquired in
1996 and 1997, most significant being the acquisition of Long Beach whose
general and administrative expenses were $1.9 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$44.4 million, or 28.8%, from $154.3 million in 1996 to $198.7 million in 1997.
There was a significant increase in amortization resulting from the acquisitions
of several cable systems in 1996 and 1997. In connection, with such
acquisitions, the acquired franchises were recorded at fair market value, which
resulted in a stepped-up basis upon acquisition. The increase is also attributed
to capital expenditures of $162.6 million in 1997 and $110.3 million in 1996.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $5.7 million, or 37.5%, from $15.1 million in 1996
to $20.8 million in fiscal 1997. This increase is primarily the result of an
increase in revenues from 1996 and 1997 and additional costs incurred by Charter
Investment to provide the management services.
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 plant and infrastructure;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
We seek to "cluster" cable 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
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 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 transaction with
InterMedia. We are currently negotiating other possible swap transactions.
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<PAGE> 74
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 and financings, debt financings and
borrowings under our credit facilities.
Pro forma for our recent and pending acquisitions, our cash flows from
operating activities for 1998 were $351.5 million, and for the three months
ended March 31, 1999 were $85.7 million. Without giving effect to the cable
systems we acquired in 1999, our cash flows for 1998 were $137.2 million, and
for the three months ended March 31, 1999 were $45.8 million.
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We make
capital expenditures primarily to upgrade, rebuild and expand our existing cable
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 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.
Over the next three years, we plan to spend $1.8 billion for capital
expenditures, approximately $900 million of which will be used to upgrade and
rebuild our existing systems to bandwidth capacity of 550 megahertz or greater
and add two-way capability, so that we may offer advanced services. The
remaining $900 million will be used for extensions of systems, development of
new products and services, converters and system maintenance. Capital
expenditures for 1999, 2000 and 2001 are expected to be approximately $600
million, $650 million, and $550 million, respectively. If our recent and pending
acquisitions are completed over the next three years, we plan to spend an
additional $700 million to upgrade our systems to bandwidth capacity of 550
megahertz or greater, so that we may offer advanced cable services. An
additional $400 million will be used for plant extensions, new services,
converters and system maintenance. We expect to finance 80% and 20% of the
anticipated capital expenditures with distributions generated from operations
and additional borrowings under our credit facilities, respectively. We cannot
assure you that these amounts will be sufficient to accomplish our planned
system upgrade, expansion and maintenance. See "Risk Factors -- Our
Business -- We may not be able to obtain capital sufficient to fund our planned
upgrades and to keep pace with technological developments." 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.
For the three months ended March 31, 1999, we made capital expenditures,
excluding the acquisitions of cable systems, of $109.6 million and $29.0 million
for all of 1998. The majority of the capital expenditures related to rebuilding
existing cable systems.
FINANCING ACTIVITIES
On March 17, 1999, we issued $3.6 billion principal amount of senior notes.
The net proceeds of approximately $2.99 billion, combined with the borrowings
under our credit
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<PAGE> 75
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.
Semi-annual interest payments with respect to the 8.250% notes and the
8.625% notes will be approximately $89.4 million, commencing on October 1, 1999.
No interest on the 9.920% notes will be payable prior to April 1, 2004.
Thereafter, semiannual interest payments will be approximately $162.6 million in
the aggregate, commencing on October 1, 2004.
Concurrently with the issuance of the original notes, we refinanced
substantially all of our previous 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.
Our credit facilities provide 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 on 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 March 31, 1999, approximately
$2.35 billion was available for borrowing under our credit facilities. After
giving effect to our pending acquisitions, there will be approximately $741
million of borrowing availability under our new credit facilities. In addition,
an uncommitted incremental term facility of up to $500 million with terms
similar to the terms of the credit facilities is permitted under the credit
facilities, but will be conditioned on receipt of additional new commitments
from existing and new lenders.
Amounts under our new 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 March 31, 1999 was 7.44%. Furthermore, we have entered into
interest rate protection agreements to reduce the impact of changes in interest
rates on our debt outstanding under our credit facilities. See "-- Interest Rate
Risk."
We acquired Renaissance in April 1999. Renaissance has outstanding publicly
held debt comprised of 10% senior discount notes due 2008 with a $163.2 million
principal amount at maturity and $100.0 million accreted value. 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.
We acquired Helicon in July 1999. Helicon has outstanding $115 million in
principal amount of 11% senior secured notes due 2003. As a result of the
acquisition, we will be required under the change of control covenant contained
in the indenture for these notes to make an offer to purchase these notes at a
price equal to 101% of their principal amount plus accrued interest.
Following the Rifkin acquisition, we will likewise be required to make an
offer to repurchase outstanding publicly held debt issued by Rifkin.
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<PAGE> 76
Our significant amount of debt may adversely affect our ability to obtain
financing in the future and react to changes in our business. Our debt requires
us to comply with various financial and operating covenants that could adversely
impact our ability to operate our business. See "Risk Factors -- Our
Business -- The agreements and instruments governing our debt contain
restrictions and limitations which could significantly impact our ability to
operate our business and repay the notes."
For a more detailed description of our debt and the debt that we will
assume or refinance in connection with our pending acquisitions, see
"Description of Certain Indebtedness."
The following table sets forth the sources and uses as of March 31, 1999,
as discussed above, giving effect to additional borrowings under our credit
facilities and additional equity contributions in connection with refinancing of
our previous credit facilities and funding our pending acquisitions as if such
transactions had occurred on that date. This presentation assumes that the
Helicon notes are called and that we are successful in purchasing all the Rifkin
notes in connection with our tender. This table also assumes that the Rifkin
sellers do not elect to receive membership units in Charter Holdings or of the
parent of Charter Holdings. This assumption is based on the fact that the terms
of the equity have not been finalized and that seller participation has not been
determined. Therefore, the cash portion of the purchase price of Rifkin has not
been reduced.
<TABLE>
<CAPTION>
SOURCES: --------
<S> <C>
Proceeds from issuance of notes:
8.250% notes.................. $ 600
8.625% notes.................. 1,500
9.920% notes.................. 903
Borrowings under our credit
facilities
Tranche A..................... 1,100
Tranche B..................... 1,850
Revolver...................... 509
Renaissance debt................ 83
Helicon preferred limited
liability company interests... 25
Equity contribution............. 1,325
------
$7,895
======
Tender offers to retire:
</TABLE>
<TABLE>
<CAPTION>
USES: -----
(DOLLARS IN MILLIONS)
<S> <C>
14.00% senior discount notes
issued by Charter Southeast
Holdings................... $ 141
11.25% senior notes issued by
Charter Southeast.......... 141
13.50% senior subordinated
discount notes issued by
Marcus Cable Operating..... 432
14.25% senior discount notes
used by Marcus Cable....... 291
Refinance previous credit
facilities.................... 2,535
Payments for pending
acquisitions.................. 4,230
Fees and expenses associated
with issuance of notes........ 125
------
$7,895
======
</TABLE>
Prior to our acquisition by Paul G. Allen, we have received minimal equity
contributions. In order to fund a portion of the pending acquisitions, Paul G.
Allen has committed to contribute $1.325 billion of additional equity to Charter
Holdco. Charter Holdco has committed to contribute the $1.325 billion to us.
CERTAIN TRENDS AND UNCERTAINTIES
SUBSTANTIAL LEVERAGE. As of March 31, 1999, pro forma for our pending
acquisitions and acquisitions completed since that date, our total debt was
approximately $6.6 billion,
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<PAGE> 77
our total members' equity was approximately $4.7 billion, and the deficiency of
our earnings available to cover fixed charges was approximately $197 million. 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, including the notes, and to fund
our planned capital expenditures for upgrading our cable systems 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. Based
upon the current levels of operations, we believe that cash flow from operations
and available cash, together with available borrowings under our credit
facilities, will be adequate to meet our liquidity and capital needs for at
least the next several years. However, there can be no assurance our business
will generate sufficient cash flow from operations, or that future borrowings
will be available to us under our credit 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. If interest
rates rise, our costs relative to those obligations would also rise.
RESTRICTIVE COVENANTS. Our 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, each of our credit facilities requires the particular borrower
to maintain cash 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 permit acceleration of the
debt. Any default under our credit facilities or our indentures 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
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 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
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<PAGE> 78
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 us by Paul G.
Allen, our merger with Marcus Holdings and our recent and pending 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 be acquired and
to attract and retain qualified personnel. Historically, acquired entities have
had minimal employee benefit related cost and all benefit plans have been
terminated with acquired employees transferring to our 401(k) plan. No
significant severance cost is expected in conjunction with the recent and
pending 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 pending 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 customer. 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 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 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 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 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
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<PAGE> 79
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 our 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.
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............... -- -- -- -- -- $ 984,509 $ 984,509 $ 974,327
Average Interest Rate... -- -- -- -- -- 13.5% 13.5%
Variable Rate............ $ 87,950 $110,245 $148,950 $393,838 $295,833 $1,497,738 $2,534,554 $2,534,533
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 LIBOR
rates for the year of maturity based on the yield curve in effect at December
31, 1998 plus the borrowing margin in effect for each credit facility 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.
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<PAGE> 80
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 credit facilities. The following
table set forth the fair values and contract terms of the long-term debt
maintained by us as of March 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE FAIR VALUE AT
-------------------------------------------------- MARCH 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1999
-------- -------- -------- ------- ------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT
Fixed Rate................. -- -- -- -- -- $3,575,000 $3,575,000 $3,004,023
Average Interest Rate..... -- -- -- -- -- 9.0% 9.0%
Variable Rate.............. -- -- -- $13,125 $17,500 $1,719,375 $1,750,000 $1,750,000
Average Interest Rate..... -- -- -- 5.9% 6.0% 6.4% 6.4%
</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 March 31, 1998 plus the borrowing margin in effect for each credit facility
at March 31, 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 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.
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<PAGE> 81
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
reasonably could be expected to be affected by the year 2000 problems.
This initiative has been completed;
(2) remediating or replacing equipment that will fail to operate properly
in the year 2000. We plan to be finished with the remediation by
September 1999; and
(3) testing of the remediation and replacement conducted in stage two. We
plan to complete all testing by September 1999.
Much of our assessment efforts in stage one have involved, and depend on,
inquiries to third party service providers, who are the suppliers and vendors of
various parts or components of our systems. 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 are utilizing 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 are
evaluating the potential impact of third party failure and integration failure
on our systems.
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.
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. The year
2000 taskforce is expected to significantly reduce our level of uncertainty
about the year 2000 problem and, in particular, about the year 2000 compliance
and readiness of our material vendors.
We are in the process of acquiring certain cable televisions systems, and
have negotiated certain contractual rights in the acquisition agreements
relating to the year 2000. We have included the acquired cable television
systems in our year 2000 taskforce's plan. We are monitoring the remediation
process for systems we are acquiring to ensure completion of remediation before
or as we acquire these systems. We have found that these companies are following
a three stage process similar to that outlined above and are on a similar time
line. We are not currently aware of any likely material system failures relating
to the year 2000 affecting the acquired systems.
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. The normal contingency planning is
being reviewed and will be revised by
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<PAGE> 82
August 1999, where appropriate, to specifically address year 2000 exposure with
respect to service to customers.
COST. We have incurred $4.9 million in costs to date 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 program to be
approximately $7 million. Although we will continue to make substantial capital
expenditures in the ordinary course of meeting our telecommunications system
upgrade goals through the year 2000, we will not specifically accelerate those
expenditures to facilitate year 2000 readiness, and accordingly those
expenditures are not included in the above estimate.
OPTIONS
In accordance with an employment agreement between Charter Investment and
Jerald L. Kent, the President and Chief Executive Officer of Charter Investment,
and a related option agreement between Charter Holdco and Mr. Kent, an option to
purchase 3% of the equity value of Charter Holdco was issued to Mr. Kent. The
option exercise price was equal to the fair market value at the date of grant.
The option vests over a four year period and expires ten years from the date of
grant.
In February 1999, Charter Holdings adopted an option plan providing for the
grant of options to purchase up to an aggregate of 10% of the equity value of
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. The option exercise price was equal to the
fair market value at the date of grant. Options granted vest over five years.
However, if there has not been a public offering of the equity interests of
Charter Holdco or an affiliate, vesting will occur only upon termination of
employment for any reason, other than for cause or disability. 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.
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
--------------------------------------------------------- -----------
NUMBER OF EXERCISE TOTAL REMAINING CONTRACT NUMBER OF
OPTIONS PRICE DOLLARS LIFE (IN YEARS) OPTIONS
---------- -------- ------------ ------------------ -----------
<S> <C> <C> <C> <C> <C>
Outstanding as of
January 1, 1999....... 7,044,127 $20.00 $140,882,540 9.4 1,761,032
Granted:
February 2, 1999...... 9,050,881 20.00 181,017,620 9.5 --
March 5, 1999......... 443,200 20.73 9,187,536 9.7 --
---------- ------ ------------ --- ---------
Outstanding as of
June 30, 1999......... 16,538,208 $20.02 $331,087,696 9.5 1,761,032
========== ====== ============ === =========
</TABLE>
We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" to account for the option plans. No compensation expense is
recognized in our consolidated financial statements because the option exercise
price is equal to the fair value of the underlying membership interests on the
date of grant.
ACCOUNTING STANDARD NOT YET IMPLEMENTED
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133
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<PAGE> 83
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. We have not yet
quantified the impacts 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 (loss).
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<PAGE> 84
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
We sold the original notes on March 17, 1999 in a transaction exempt from
the registration requirements of the Securities Act of 1933. The initial
purchasers of the notes subsequently resold the original notes to qualified
institutional buyers in reliance on Rule 144A and under Regulation S under the
Securities Act of 1933.
In connection with the sale of original notes to the initial purchasers
pursuant to the Purchase Agreement, dated March 12, 1999, among us and Goldman,
Sachs & Co., Chase Securities Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Bear, Stearns & Co. Inc., NationsBanc Montgomery Securities LLC,
Salomon Smith Barney Inc., Credit Lyonnais Securities (USA), Inc., First Union
Capital Markets Corp., Prudential Securities Incorporated, TD Securities (USA)
Inc., CIBC Oppenheimer Corp. and Nesbitt Burns Securities Inc., the holders of
the original notes became entitled to the benefits of the exchange and
registration rights agreements dated March 17, 1999, among us and the initial
purchasers.
Under the registration rights agreements, the issuers became obligated to
file a registration statement in connection with an exchange offer within 90
days after the issue date and cause the exchange offer registration statement to
become effective within 150 days after the issue date. The exchange offer being
made by this prospectus, if consummated within the required time periods, will
satisfy our obligations under the registration rights agreements. This
prospectus, together with the letter of transmittal, is being sent to all
beneficial holders known to the issuers.
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, the issuers will accept all
original notes properly tendered and not withdrawn prior to the expiration date.
The issuers will issue $1,000 principal amount of new notes in exchange for each
$1,000 principal amount of outstanding original notes accepted in the exchange
offer. Holders may tender some or all of their original notes pursuant to the
exchange offer.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission to third parties we believe that holders of the new notes
issued in exchange for original notes may offer for resale, resell and otherwise
transfer the new notes, other than any holder that is an affiliate of ours
within the meaning of Rule 405 under the Securities Act, without compliance with
the registration and prospectus delivery provisions of the Securities Act. This
is true as long as the new notes are acquired in the ordinary course of the
holder's business, the holder has no arrangement or understanding with any
person to participate in the distribution of the new notes and neither the
holder nor any other person is engaging in or intends to engage in a
distribution of the new notes. A broker-dealer that acquired original notes
directly from the issuers cannot exchange the original notes in the exchange
offer. Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the new notes cannot rely on the no-action
letters of the staff of the Securities and Exchange Commission and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction.
Each broker-dealer that receives new notes for its own account in exchange
for original notes, where original notes were acquired by such broker-dealer as
a result of
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<PAGE> 85
market-making or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such new notes. See "Plan of
Distribution" for additional information.
We shall be deemed to have accepted validly tendered original notes when,
as and if we have given oral or written notice of the acceptance of such notes
to the exchange agent. The exchange agent will act as agent for the tendering
holders of original notes for the purposes of receiving the new notes from the
issuers and delivering new notes to such holders.
If any tendered original notes are not accepted for exchange because of an
invalid tender or the occurrence of the conditions set forth under
"-- Conditions" without waiver by us, certificates for any such unaccepted
original notes will be returned, without expense, to the tendering holder of any
such original notes as promptly as practicable after the expiration date.
Holders of original notes who tender in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
original notes, pursuant to the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes in connection with the exchange
offer. See "-- Fees and Expenses."
SHELF REGISTRATION STATEMENT
Pursuant to the registration rights agreements, if the exchange offer is
not completed prior to the date on which the earliest of any of the following
events occurs:
(a) applicable interpretations of the staff of the Securities and
Exchange Commission do not permit us to effect the exchange offer,
(b) any holder of notes notifies us that either:
(1) such holder is not eligible to participate in the exchange
offer, or
(2) such holder participates in the exchange offer and does not
receive freely transferable new notes in exchange for tendered original
notes, or
(c) the exchange offer is not completed within 180 days after March
17, 1999,
we will, at our cost:
- file a shelf registration statement covering resales of the original
notes,
- use our reasonable best efforts to cause the shelf registration statement
to be declared effective under the Securities Act at the earliest
possible time, but no later than 90 days after the time such obligation
to file arises, and
- use our reasonable best efforts to keep effective the shelf registration
statement until the earlier of two years after the date as of which the
Securities and Exchange Commission declares such shelf registration
statement effective or the shelf registration otherwise becomes
effective, or the time when all of the applicable original notes are no
longer outstanding.
If any of the events described occurs, we will refuse to accept any
original notes and will return all tendered original notes.
We will, if and when we file the shelf registration statement, provide to
each holder of the original notes copies of the prospectus which is a part of
the shelf registration
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<PAGE> 86
statement, notify each holder when the shelf registration statement has become
effective and take other actions as are required to permit unrestricted resales
of the original notes. A holder that sells original notes pursuant to the shelf
registration statement generally must be named as a selling security-holder in
the related prospectus and must deliver a prospectus to purchasers, a seller
will be subject to civil liability provisions under the Securities Act in
connection with these sales. A seller of the original notes also will be bound
by applicable provisions of the registration rights agreements, including
indemnification obligations. In addition, each holder of original notes must
deliver information to be used in connection with the shelf registration
statement and provide comments on the shelf registration statement in order to
have its original notes included in the shelf registration statement and benefit
from the provisions regarding any liquidated damages in the registration rights
agreement.
INCREASE IN INTEREST RATE
If we are required to file the shelf registration statement and either
(1) the shelf registration statement has not become effective or been
declared effective on or before the 90th calendar day following the
date such obligation to file arises, or
(2) the shelf registration statement has been declared effective and such
shelf registration statement ceases to be effective, except as
specifically permitted in the registration rights agreements, without
being succeeded promptly by an additional registration statement filed
and declared effective,
the interest rate borne by the original notes will be increased by 0.25% per
annum following such default, determined daily, from the date of such default
until the date it is cured, and by an additional 0.25% per annum for each
subsequent 90-day period. However, in no event will the interest rate borne by
the original notes be increased by an aggregate of more than 1.0% per annum.
The sole remedy available to the holders of the original notes will be the
immediate increase in the interest rate on the original notes as described
above. Any amounts of additional interest due as described above will be payable
in cash on the same interest payments dates as the original notes.
EXPIRATION DATE; EXTENSIONS; AMENDMENT
We will keep the exchange offer open for not less than 30 days, or longer
if required by applicable law, after the date on which notice of the exchange
offer is mailed to the holders of the old notes. The term "expiration date"
means the expiration date set forth on the cover page of this prospectus, unless
we extend the exchange offer, in which case the term "expiration date" means the
latest date to which the exchange offer is extended.
In order to extend the expiration date, we will notify the exchange agent
of any extension by oral or written notice and will issue a public announcement
of the extension, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date.
We reserve the right
(a) to delay accepting any original notes, to extend the exchange
offer or to terminate the exchange offer and not accept original notes not
previously accepted if any of the conditions set forth under
"-- Conditions" shall have occurred and shall
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<PAGE> 87
not have been waived by us, if permitted to be waived by us, by giving oral
or written notice of such delay, extension or termination to the exchange
agent, or
(b) to amend the terms of the exchange offer in any manner deemed by
us to be advantageous to the holders of the original notes.
Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice. If the exchange
offer is amended in a manner determined by us to constitute a material change,
we promptly will disclose such amendment in a manner reasonably calculated to
inform the holders of the original notes of such amendment. Depending upon the
significance of the amendment, we may extend the exchange offer if it otherwise
would expire during such extension period.
Without limiting the manner in which we may choose to make a public
announcement of any extension, amendment or termination of the exchange offer,
we will not be obligated to publish, advertise, or otherwise communicate any
such announcement, other than by making a timely release to an appropriate news
agency.
PROCEDURES FOR TENDERING
To tender in the exchange offer, a holder must complete, sign and date the
letter of transmittal, or a facsimile of the letter of transmittal, have the
signatures on the letter of transmittal guaranteed if required by instruction 2
of the letter of transmittal, and mail or otherwise deliver such letter of
transmittal or such facsimile or an agent's message in connection with a book
entry transfer, together with the original notes and any other required
documents. To be validly tendered, such documents must reach the exchange agent
before 5:00 p.m., New York City time, on the expiration date. Delivery of the
original notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of such book-entry transfer must be
received by the exchange agent prior to the expiration date.
The term "agent's message" means a message, transmitted by a book-entry
transfer facility to, and received by, the exchange agent, forming a part of a
confirmation of a book-entry transfer, which states that such book-entry
transfer facility has received an express acknowledgment from the participant in
such book-entry transfer facility tendering the original notes that such
participant has received and agrees to be bound by the terms of the letter of
transmittal and that we may enforce such agreement against such participant.
The tender by a holder of original notes will constitute an agreement
between such holder and us in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal.
Delivery of all documents must be made to the exchange agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect such tender for such
holders.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE 5:00 P.M. NEW
YORK CITY TIME, ON THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR ORIGINAL
NOTES SHOULD BE SENT TO US.
Only a holder of original notes may tender original notes in the exchange
offer. The term "holder" with respect to the exchange offer means any person in
whose name original
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notes are registered on our books or any other person who has obtained a
properly completed bond power from the registered holder.
Any beneficial holder whose original notes are registered in the name of
its broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on its behalf. If such beneficial holder wishes
to tender on its own behalf, such registered holder must, prior to completing
and executing the letter of transmittal and delivering its original notes,
either make appropriate arrangements to register ownership of the original notes
in such holder's name or obtain a properly completed bond power from the
registered holder. The transfer of record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or correspondent in the United States referred to
as an "eligible institution", unless the original notes are tendered
(a) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal or
(b) for the account of an eligible institution. In the event that
signatures on a letter of transmittal or a notice of withdrawal, are
required to be guaranteed, such guarantee must be by an eligible
institution.
If the letter of transmittal is signed by a person other than the
registered holder of any original notes listed therein, such original notes must
be endorsed or accompanied by appropriate bond powers and a proxy which
authorizes such person to tender the original notes on behalf of the registered
holder, in each case signed as the name of the registered holder or holders
appears on the original notes.
If the letter of transmittal or any original notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by us,
evidence satisfactory to us of their authority so to act must be submitted with
the letter of transmittal.
All questions as to the validity, form, eligibility, including time of
receipt, and withdrawal of the tendered original notes will be determined by us
in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all original notes not properly
tendered or any original notes our acceptance of which, in the opinion of
counsel for us, would be unlawful. We also reserve the right to waive any
irregularities or conditions of tender as to particular original notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of original notes must be cured within such time as we shall determine. None of
us, the exchange agent or any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of original
notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of original notes will not be deemed to have been made
until such irregularities have been cured or waived. Any original notes received
by the exchange agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost to
such holder by the exchange agent to the tendering holders of original notes,
unless otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
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In addition, we reserve the right in our sole discretion to
(a) purchase or make offers for any original notes that remain outstanding
subsequent to the expiration date or, as set forth under
"-- Conditions," to terminate the exchange offer in accordance with the
terms of the registration rights agreements and
(b) to the extent permitted by applicable law, purchase original notes in
the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the
exchange offer.
By tendering, each holder will represent to us that, among other things,
(a) the new notes acquired pursuant to the exchange offer are being
obtained in the ordinary course of business of such holder or other
person,
(b) neither such holder nor such other person is engaged in or intends to
engage in a distribution of the new notes,
(c) neither such holder or other person has any arrangement or
understanding with any person to participate in the distribution of
such new notes, and
(d) such holder or other person is not our "affiliate," as defined under
Rule 405 of the Securities Act, or, if such holder or other person is
such an affiliate, will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the original
notes at the Depository Trust Company for the purpose of facilitating the
exchange offer, and subject to the establishment of such accounts, any financial
institution that is a participant in the Depository Trust Company's system may
make book-entry delivery of original notes by causing the Depository Trust
Company to transfer such original notes into the exchange agent's account with
respect to the original notes in accordance with the Depository Trust Company's
procedures for such transfer. Although delivery of the original notes may be
effected through book-entry transfer into the exchange agent's account at the
Depository Trust Company, an appropriate letter of transmittal properly
completed and duly executed with any required signature guarantee, or an agent's
message in lieu of the letter of transmittal, and all other required documents
must in each case be transmitted to and received or confirmed by the exchange
agent at its address set forth below on or prior to the expiration date, or, if
the guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to Depository
Trust Company does not constitute delivery to the exchange agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their original notes and
(a) whose original notes are not immediately available or
(b) who cannot deliver their original notes, the letter of transmittal
or any other required documents to the exchange agent prior to the
expiration date, may effect a tender if:
(1) the tender is made through an eligible institution;
(2) prior to the expiration date, the exchange agent receives from
such eligible institution a properly completed and duly executed Notice
of Guaranteed
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Delivery, by facsimile transmission, mail or hand delivery, setting
forth the name and address of the holder of the original notes, the
certificate number or numbers of such original notes and the principal
amount of original notes tendered, stating that the tender is being made
thereby, and guaranteeing that, within three business days after the
expiration date, the letter of transmittal, or facsimile thereof or
agent's message in lieu of the letter of transmittal, together with the
certificate(s) representing the original notes to be tendered in proper
form for transfer and any other documents required by the letter of
transmittal will be deposited by the eligible institution with the
exchange agent; and
(3) such properly completed and executed letter of transmittal (or
facsimile thereof) together with the certificate(s) representing all
tendered original notes in proper form for transfer and all other
documents required by the letter of transmittal are received by the
exchange agent within three business days after the expiration date.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of original notes
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
expiration date. However, where the expiration date has been extended, tenders
of original notes previously accepted for exchange as of the original expiration
date may not be withdrawn.
To withdraw a tender of original notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at its address set forth in this prospectus prior to 5:00 p.m., New York
City time, on the expiration date. Any such notice of withdrawal must:
(a) specify the name of the depositor, who is the person having
deposited the original notes to be withdrawn,
(b) identify the original notes to be withdrawn, including the
certificate number or numbers and principal amount of such original notes
or, in the case of original notes transferred by book-entry transfer, the
name and number of the account at Depository Trust Company to be credited,
(c) be signed by the depositor in the same manner as the original
signature on the letter of transmittal by which such original notes were
tendered, including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee with respect to the
original notes register the transfer of such original notes into the name
of the depositor withdrawing the tender and
(d) specify the name in which any such original notes are to be
registered, if different from that of the depositor. All questions as to
the validity, form and eligibility, including time of receipt, of such
withdrawal notices will be determined by us, and our determination shall be
final and binding on all parties. Any original notes so withdrawn will be
deemed not to have been validly tendered for purposes of the exchange offer
and no new notes will be issued with respect to the original notes
withdrawn unless the original notes so withdrawn are validly retendered.
Any original notes which have been tendered but which are not accepted for
exchange will be returned to its holder without cost to such holder as soon
as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn original notes may be retendered by
following one of the procedures
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described above under "-- Procedures for Tendering" at any time prior to
the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange, any new notes for any original
notes, and may terminate or amend the exchange offer before the expiration date,
if the exchange offer violates any applicable law or interpretation by the staff
of the Securities and Exchange Commission.
If we determine in our reasonable discretion that the foregoing condition
exists, we may
(1) refuse to accept any original notes and return all tendered
original notes to the tendering holders,
(2) extend the exchange offer and retain all original notes tendered
prior to the expiration of the exchange offer, subject, however, to the
rights of holders who tendered such original notes to withdraw their
tendered original notes, or
(3) waive such condition, if permissible, with respect to the exchange
offer and accept all properly tendered original notes which have not been
withdrawn. If such waiver constitutes a material change to the exchange
offer, we will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the holders, and we will extend the
exchange offer as required by applicable law.
EXCHANGE AGENT
Harris Trust Company of New York has been appointed as exchange agent for
the exchange offer. Questions and requests for assistance and requests for
additional copies of this prospectus or of the letter of transmittal should be
directed to Harris Trust Company of New York addressed as follows:
For Information by Telephone:
(212) 701-7637
By Hand or Overnight Delivery Service:
Harris Trust Company of New York
Wall Street Plaza
88 Pine Street
19th Floor
New York, New York 10005
Attention: Reorganization Trust Department
By Facsimile Transmission:
(212) 701-7637
(Telephone Confirmation)
(212) 701-7624
Harris Trust Company of New York is an affiliate of the trustee under the
indentures governing the notes.
FEES AND EXPENSES
We have agreed to bear the expenses of the exchange offer pursuant to the
exchange and registration rights agreements. We have not retained any
dealer-manager in connection
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with the exchange offer and will not make any payments to brokers, dealers or
others soliciting acceptances of the exchange offer. We, however, will pay the
exchange agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection with providing the
services.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us. Such expenses include fees and expenses of Harris Trust Company
of New York as exchange agent, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the original
notes as reflected in our accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by us.
The expenses of the exchange offer and the unamortized expenses related to the
issuance of the original notes will be amortized over the term of the notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of original notes who are eligible to participate in the exchange
offer but who do not tender their original notes will not have any further
registration rights, and their original notes will continue to be subject to
restrictions on transfer. Accordingly, such original notes may be resold only
- to us, upon redemption of these notes or otherwise,
- so long as the original notes are eligible for resale pursuant to Rule
144A under the Securities Act, to a person inside the United States whom
the seller reasonably believes is a qualified institutional buyer within
the meaning of Rule 144A in a transaction meeting the requirements of
Rule 144A,
- in accordance with Rule 144 under the Securities Act, or under another
exemption from the registration requirements of the Securities Act, and
based upon an opinion of counsel reasonably acceptable to us,
- outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act, or
- under an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any state of
the United States.
REGULATORY APPROVALS
We do not believe that the receipt of any material federal or state
regulatory approval will be necessary in connection with the exchange offer,
other than the effectiveness of the exchange offer registration statement under
the Securities Act.
OTHER
Participation in the exchange offer is voluntary and holders of original
notes should carefully consider whether to accept the terms and condition of
this exchange offer. Holders of the original notes are urged to consult their
financial and tax advisors in making their own decisions on what action to take
with respect to the exchange offer.
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BUSINESS
GENERAL
We offer a full range of traditional cable television services. Our service
offerings include the following programming packages:
- basic programming;
- expanded basic programming;
- premium service; and
- pay-per-view television programming.
As part of our "wired world" vision, we are also beginning to offer an
array of new services including:
- digital television;
- high-speed Internet access; and
- interactive video programming, which allows information to flow in both
directions.
We are also exploring opportunities in telephony.
These new products and services will take advantage of the significant
bandwidth of our cable systems. We are accelerating the upgrade of our cable
systems to more quickly provide these products and services.
As of March 31, 1999, we served approximately 2.3 million cable television
service customers in 22 states. We have entered into agreements to acquire
additional cable systems that would have increased the number of our customers
to 3.7 million as of that date.
For the year ended December 31, 1998, pro forma for our merger with Marcus
Holdings and the acquisitions we completed during 1998, our revenues were
approximately $1.2 billion. For the three months ended March 31, 1999, pro forma
for our merger with Marcus Holdings and the acquisitions we completed during
1999, our revenues were approximately $331 million. Pro forma for our merger
with Marcus Holdings and our recent and pending acquisitions, for the year ended
December 31, 1998, our revenues would have been approximately $1.7 billion. Pro
forma for our merger with Marcus Holdings and our recent and pending
acquisitions, for the three months ended March 31, 1999, our revenues would have
been approximately $445 million.
Paul G. Allen, the principal owner of our ultimate parent company and one
of the computer industry's visionaries, has long believed in a "wired world" in
which cable technology will facilitate the convergence of television, computers
and telecommunications. We believe cable's ability to deliver voice, video and
data at high speeds will enable it to serve as the primary platform for the
delivery of new services to the home and workplace.
BUSINESS STRATEGY
Our objective is to increase our operating cash flow by increasing our
customer base and the amount of cash flow per customer. To achieve this
objective, we are pursuing the following strategies:
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INTEGRATE AND IMPROVE ACQUIRED CABLE SYSTEMS. We seek to rapidly integrate
newly acquired cable systems and apply our core operating strategies to raise
the financial and operating performance of these systems. Our integration
process occurs in three stages:
SYSTEM EVALUATION. We conduct extensive evaluation of each system we
are considering acquiring. This process begins prior to reaching an
agreement to purchase the system and focuses on the system's:
- business plan;
- customer service standards;
- management capabilities; and
- technological capacity and compatibility.
We also evaluate opportunities to consolidate headends and billing and
other administrative functions. Based upon this evaluation, we formulate plans
for customer service centers, plant upgrade, market positioning, new product and
service launches and human resource requirements.
IMPLEMENTATION OF OUR CORE OPERATING STRATEGIES. To achieve high
standards for customer satisfaction and financial and operating
performance, we:
- attract and retain high quality local management;
- empower local managers with a high degree of day-to-day operational
autonomy;
- set key financial and operating benchmarks for management to meet,
such as revenue and cash flow per subscriber, subscriber growth,
customer service and technical standards; and
- provide incentives to all employees through grants of cash bonuses and
stock options.
ONGOING SUPPORT AND MONITORING. We provide local managers with
regional and corporate management guidance, marketing and other support for
implementation of their business plans. We monitor performance of our
acquired cable systems on a frequent basis to ensure that performance goals
can be met.
The turn-around in our Fort Worth system, which our management team began
to manage in October 1998, is an example of our success in integrating newly
acquired cable systems into our operations. We introduced a customer care team
that has worked closely with city governments to improve customer service and
local government relations, and each of our customer service representatives
attended a training program. We also conducted extensive training programs for
our technical and engineering, dispatch, sales and support, and management
personnel. We held a series of sales events and demonstrations to increase
customer awareness and enhance our community exposure and reputation. We reduced
the new employee hiring process from two to three weeks to three to five days.
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OFFER NEW PRODUCTS AND SERVICES. We intend to expand the array of products
and services we offer to our customers to implement our "wired world" vision.
Using digital technology, we plan to offer additional channels on our existing
service tiers, create new service tiers, introduce multiple packages of premium
services and increase the number of pay-per-view channels. We also plan to add
digital music services and interactive program guides, which are comprehensive
guides to television program listings that can be accessed by network, time,
date or genre. In addition to these expanded cable services, we have begun to
roll out advanced services, including interactive video programming and high-
speed Internet access, and we are currently exploring opportunities in
telephony. We have entered into agreements with several providers of high-speed
Internet access and other interactive services, including EarthLink Network,
Inc., High Speed Access Corp., WorldGate Communications, Inc., Wink
Communications, Inc. and Excite@Home.
UPGRADE THE BANDWIDTH CAPACITY OF OUR SYSTEMS. Over the next three years,
we plan to spend approximately $1.2 billion to upgrade to 550 megahertz or
greater the bandwidth of the systems we acquire through our pending
acquisitions. Upgrading to at least 550 megahertz of bandwidth capacity will
allow us to:
- offer advanced services, such as digital television, Internet access and
other interactive services;
- increase channel capacity up to 82 analog channels, or even more
programming channels if some of our bandwidth is used for digital
services; and
- permit two-way communication which will give our customers the ability to
send and receive signals over the cable system so that high speed cable
services, such as the Internet access, will not require a separate
telephone line.
As of March 31, 1999, approximately 60% of our customers were served by
cable systems with at least 550 megahertz bandwidth capacity, and approximately
35% of our customers had two-way communication capability. By year end 2003,
including all recent and pending acquisitions, we expect that approximately 94%
of our customers will be served by cable systems with at least 550 megahertz
bandwidth capacity and two-way communication capability.
Our planned upgrades will reduce the number of headends from 1,243 in 1999
to 779 in 2003 including our pending acquisitions. Reducing the number of
headends will reduce headend equipment and maintenance expenditures and,
together with other upgrades, will provide enhanced picture quality and system
reliability.
MAXIMIZE CUSTOMER SATISFACTION. To maximize customer satisfaction, we
operate our business to provide reliable, high-quality products and service
offerings, superior customer service and attractive programming choices at
reasonable rates. We have implemented stringent internal customer service
standards which we believe meet or exceed those established by the National
Cable Television Association, which is the Washington, D.C.-based trade
association for the cable television industry. We believe that our customer
service efforts have contributed to our superior customer growth, and will
strengthen the Charter brand name and increase acceptance of our new products
and services.
EMPLOY INNOVATIVE MARKETING. We have developed and successfully implemented
a variety of innovative marketing techniques to attract new customers and
increase revenue
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per customer. Our marketing efforts focus on tailoring Charter branded
entertainment and information services that provide value, choice, convenience
and quality to our customers. We use demographic "cluster codes" to address
specific messages to target audiences through direct mail and telemarketing.
Cluster codes identify customers by marketing type, such as young professionals,
retirees or families. In addition, we promote our services on radio, in local
newspapers and by door-to-door selling. In many of our systems, we offer
discounts to customers who purchase multiple premium services such as Home Box
Office or Showtime. We also have a coordinated strategy for retaining customers
that includes televised retention advertising to reinforce the link between
quality service and the Charter brand name and to encourage customers to
purchase higher service levels. We have begun to implement our marketing
programs in all of the systems we have recently acquired.
EMPHASIZE LOCAL MANAGEMENT AUTONOMY WHILE PROVIDING REGIONAL AND CORPORATE
SUPPORT AND CENTRALIZED FINANCIAL CONTROLS. Our local cable systems are
organized into seven operating regions. A regional management team oversees
local system operations in each region. We believe that a strong management
presence at the local system level:
- improves our customer service;
- increases our ability to respond to customer needs and programming
preferences;
- reduces the need for a large centralized corporate staff;
- fosters good relations with local governmental authorities; and
- strengthens community relations.
Our regional management teams work closely with both local managers and
senior management in our corporate office to develop budgets and coordinate
marketing, programming, purchasing and engineering activities. Our centralized
financial management enables us to set financial and operating benchmarks and
monitor them on an ongoing basis. In order to attract and retain high quality
managers at the local and regional operating levels, we provide a high degree of
operational autonomy and accountability and cash and equity-based compensation.
Charter Holdco has adopted a plan to distribute to employees and consultants,
including members of corporate management and to key regional and system-level
management personnel equity-based incentive compensation based on the equity
value of Charter Holdco on a fully-diluted basis.
CONCENTRATE OUR SYSTEMS IN TIGHTER GEOGRAPHICAL CLUSTERS. To improve
operating margins and increase operating efficiencies, we seek to improve the
geographic clustering of our cable systems by selectively swapping our cable
systems for systems of other cable operators or acquiring systems in close
proximity to our systems. We believe that by concentrating our systems in
clusters, we will be able to generate higher growth in revenues and operating
cash flow. Clustering enable us to improve operating efficiencies by
consolidating headends and spread fixed costs over a larger subscriber base.
ACQUISITIONS
Our primary criterion in considering acquisition and swapping opportunities
is the financial return that we expect to ultimately realize. We consider each
acquisition in the context of our overall existing and planned operations,
focusing particularly on the impact on our size and scope and the ability to
reinforce our clustering strategy, either directly or
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through future swaps or acquisitions. Other specific factors we consider in
acquiring a cable system are:
- demographic profile of the market as well as the number of homes passed
and customers within the system;
- per customer revenues and operating cash flow and opportunities to
increase these financial benchmarks;
- proximity to our existing cable systems or the potential for developing
new clusters of systems;
- the technological state of such system; and
- the level of competition within the local market.
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 plant and infrastructure;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
See "Description of Certain Indebtedness" for a description of the material
debt that we have assumed or intend to assume in connection with our recent and
pending acquisitions.
MERGER WITH MARCUS HOLDINGS. On April 7, 1999, the holding company parent
of the Marcus companies, Marcus Holdings, merged into Charter Holdings, which
was the surviving entity of the merger. The subsidiaries of Marcus Holdings
became our subsidiaries. Paul G. Allen had entered into the agreement to
purchase the Marcus cable systems in April 1998. During the period of obtaining
the requisite regulatory approvals for the transaction, the Marcus systems came
under common management with us in October 1998 pursuant to the terms of a
management agreement. The Marcus systems continue to be under common operating
management with us.
RECENTLY COMPLETED ACQUISITIONS
AMERICAN CABLE. In April 1999, we purchased American Cable for
approximately $240 million. American Cable owns cable systems located in
California serving approximately 68,000 customers and is being operated as part
of our Western region. For the three months ended March 31, 1999, American Cable
had revenues of approximately $9.2 million. For the year ended December 31,
1998, American Cable had revenues of approximately $15.7 million. At year-end
1998, none of the American Cable system's customers were served by systems with
at least 550 megahertz bandwidth capacity or greater.
RENAISSANCE. In April 1999, we purchased Renaissance for approximately $459
million, consisting of $348 million in cash and $111 million of debt to be
assumed. See "Description of Certain Indebtedness." As a result of our
acquisition of Renaissance, we recently completed a tender offer for this
publicly held debt due to the change of control. Holders of notes representing
30% of the outstanding principal amount of notes tendered
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their notes. Renaissance owns cable systems located in Louisiana, Mississippi
and Tennessee, has approximately 132,000 customers and is being operated as part
of our Southern region. For the three months ended March 31, 1999, Renaissance
had revenues of approximately $15.3 million. For the year ended December 31,
1998, Renaissance had revenues of approximately $41.5 million. At year end 1998,
approximately 36% of Renaissance's customers were served by systems with at
least 550 megahertz bandwidth capacity.
GREATER MEDIA SYSTEMS. In June 1999, we purchased certain cable systems of
Greater Media for approximately $500 million. The Greater Media systems are
located in Massachusetts, have approximately 174,000 customers and are being
operated as part of our Northeast Region. For the three months ended March 31,
1999, the Greater Media systems had revenues of approximately $20.4 million. For
the year ended December 31, 1998, the Greater Media systems had revenues of
approximately $78.6 million. At year end 1998, approximately 75% of the Greater
Media systems customers were served by systems with at least 550 megahertz
bandwidth capacity.
HELICON. In July 1999, we acquired Helicon and affiliates for approximately
$550 million, consisting of $410 million in cash, $115 million of debt, and $25
million in the form of preferred limited liability company interests. The
holders of the preferred interest have the right to require Mr. Allen to
purchase the interest until the fifth anniversary of the closing of the Helicon
acquisition. The preferred interests will be redeemable at any time following
the fifth anniversary of the Helicon acquisition or upon a change of control,
and it must be redeemed on the tenth anniversary of the Helicon acquisition.
Upon completion of the proposed initial public offering of Charter
Communications, Inc., these limited liability company interests will be
convertible into equity of Charter Communications, Inc. Helicon owns cable
systems located in Alabama, Georgia, New Hampshire, North Carolina, West
Virginia, South Carolina, Tennessee, Pennsylvania, Louisiana and Vermont, has
approximately 172,000 customers and will be operated as part of our Southeast,
Southern and Northeast regions. For the three months ended March 31, 1999,
Helicon had revenues of approximately $21.3 million. For the year ended December
31, 1998, Helicon had revenues of approximately $75.6 million. At year end 1998,
approximately 69% of Helicon's customers were served by systems with at least
550 megahertz bandwidth capacity. The debt we have assumed consists of public
notes of Helicon which we are required to make an offer to repurchase at a price
equal to 101% of their principal amount, plus accrued interest, to the date of
the purchase within 120 days of the acquisition. See "Description of Certain
Indebtedness."
OTHER ACQUISITIONS. In July 1999, we acquired Vista. In August 1999, we
acquired certain cable assets of Cable Satellite. These cable systems are
located in Georgia and southern Florida, and serve a total of approximately
36,000 customers. The total purchase price for these acquisitions was
approximately $148 million. For the three months ended March 31, 1999, these
systems had revenues of approximately $3.4 million. For the year ended December
31, 1998, these systems had revenues of $9.3 million.
PENDING ACQUISITIONS
INTERMEDIA SYSTEMS. In April 1999, two of our subsidiaries, Charter
Communications, LLC, and Charter Properties, entered into agreements to purchase
certain cable systems of InterMedia in exchange for cash in the amount of $873
and certain of our cable systems. The InterMedia systems serve approximately
408,000 customers in North Carolina, South Carolina, Georgia and Tennessee. As
part of this transaction, we will "swap" some of our
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non-strategic cable systems serving approximately 142,000 customers located in
Indiana, Montana, Utah and northern Kentucky. The purchase price of the
InterMedia systems, net of the "swap," is approximately $872 million. This
transaction will result in a net increase of 266,000 customers concentrated in
our Southeast and Southern regions. For the three months ended March 31, 1999,
the InterMedia systems had revenues of approximately $48.3 million. For the year
ended December 31, 1998, the InterMedia systems had revenues of approximately
$176.1 million. At year end 1998, approximately 79% of these customers were
served by systems with at least 550 megahertz bandwidth capacity. Following
regulatory approvals, we anticipate that acquisition of the InterMedia systems
will close during the third or fourth quarter of 1999. There are no material
termination or penalty provisions in the acquisition agreements if we do not
close as of a certain date.
RIFKIN. In April 1999, Charter Investment entered into agreements to
purchase Rifkin for a purchase price of approximately $1.5 billion in cash and
assumed debt. Charter Investment has assigned its rights under such agreements
to our subsidiary, Charter Operating. Certain sellers under the agreements could
elect to receive some or all of their pro rata portion of the purchase price in
the form of preferred or common equity of Charter Holdings or, if mutually
agreed to by the parties, of a parent of Charter Holdings. Depending on the
level of seller interest, this equity, if issued, would be valued between
approximately $25 million and $240 million. The cash portion of the purchase
price would be reduced accordingly. However, because such terms have not been
finalized, and seller participation has not been determined, we cannot be
certain that any such equity will be issued or that the cash portion of the
purchase price will be reduced below $1.46 billion. The debt to be assumed
consists of public notes of Rifkin. See "Description of Certain Indebtedness."
Rifkin owns cable systems primarily in Florida, Georgia, Illinois, Indiana,
Tennessee, Virginia and West Virginia serving approximately 463,000 customers.
For the three months ended March 31, 1999, Rifkin had revenues of approximately
$50.9 million. For the year ended December 31, 1998, Rifkin had revenues of
approximately $124.4 million. At year end 1998, approximately 36% of Rifkin's
customers were served by systems with at least 550 megahertz bandwidth capacity.
Following regulatory approvals, we anticipate that this transaction will close
during the third or fourth quarter of 1999. There are no material termination or
penalty provisions in the acquisition agreements if we do not close as of a
certain date. However, each party can require specific performance.
OUR CABLE SYSTEMS
As of March 31, 1999, our systems consisted of approximately 65,900 miles
of coaxial cable and approximately 8,500 sheath miles of fiber optic cable
passing approximately 4.0 million households and serving approximately 2.3
million customers. A sheath mile is the actual length of cable in route miles.
Coaxial cable is a type of cable used for broadband data and cable systems. This
type of cable has excellent broadband frequency characteristics, noise immunity
and physical durability. The cable is connected from each node to individual
homes or buildings. A node is a single connection to a cable system's main
high-capacity fiber optic cable that is shared by a number of customers. Fiber
optic cable is a communication medium that uses hair-thin glass fibers to
transmit signals over long distances with minimum signal loss or distortion. As
of March 31, 1999, approximately 60% of our customers are served by systems with
at least 550 megahertz bandwidth capacity, approximately 40% have at least 750
megahertz bandwidth capacity and approximately 35% were served by systems
capable of providing two-way interactive communication capability, such as
two-way Internet connections, Wink services and
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interactive program guides. These amounts do not reflect the impact of our
recent or pending acquisitions.
CORPORATE MANAGEMENT. We are managed from the corporate offices of Charter
Investment in St. Louis, Missouri. The senior management of Charter Investment
at these offices consist of approximately 175 people led by Jerald L. Kent. They
are responsible for coordinating and overseeing our operations, including
certain critical functions such as marketing and engineering, that are conducted
by personnel at the regional and local system level. The corporate office also
performs certain financial control functions such as accounting, finance and
acquisitions, payroll and benefit administration, internal audit, purchasing and
programming contract administration on a centralized basis.
OPERATING REGIONS. To manage and operate our systems, we have established
two divisions that contain a total of seven operating regions: Western; Central;
MetroPlex (Dallas/Fort Worth); North Central; Northeast; Southeast; and
Southern. Each of the two divisions is managed by a Senior Vice President who
reports directly to Mr. Kent and is responsible for overall supervision of the
operating regions within. Each region is managed by a team consisting of a
Senior Vice President or a Vice President, supported by operational, marketing
and engineering personnel. Within each region, certain groups of cable systems
are further organized into clusters. We believe that much of our success is
attributable to our operating philosophy which emphasizes decentralized
management, with decisions being made as close to the customer as possible.
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The following table provides an overview of selected technical, operating
and financial data for each of our operating regions for the three months ended
March 31, 1999. The following table does not reflect the impact of our recent or
pending acquisitions. Upon completion of our recent and pending acquisitions,
our systems will pass approximately 6.1 million homes serving approximately 3.7
million customers.
SELECTED TECHNICAL, OPERATING AND FINANCIAL DATA BY OPERATING REGION
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
NORTH
WESTERN CENTRAL METROPLEX CENTRAL NORTHEAST SOUTHEAST SOUTHERN TOTAL
------- ------- --------- ------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TECHNICAL DATA:
Miles of coaxial cable........ 7,500 8,800 5,700 10,000 4,600 16,700 12,600 65,900
Density(a).................... 132 67 85 60 32 39 40 60
Headends...................... 21 34 16 86 7 60 59 283
Planned headend
eliminations................ 3 3 1 30 0 11 8 56
Plant bandwidth(b):
450 megahertz or less......... 21.9% 53.7% 28.0% 41.9% 51.2% 37.9% 58.2% 42.7%
550 megahertz................. 8.0% 10.2% 14.4% 12.9% 33.5% 25.6% 13.8% 16.9%
750 megahertz or greater...... 70.1% 36.1% 57.6% 45.2% 15.4% 36.5% 28.0% 40.4%
Two-way capability............ 55.6% 45.5% 62.2% 56.2% 15.4% 15.5% 19.8% 35.1%
OPERATING DATA:
Homes passed.................. 993,000 592,000 486,000 603,000 148,000 648,000 507,000 3,977,000
Basic customers............... 502,000 363,000 186,000 399,000 124,000 451,000 319,000 2,344,000
Basic penetration............. 50.6% 61.3% 38.3% 66.2% 83.8% 69.6% 62.9% 58.9%
Premium units................. 316,000 203,000 133,000 146,000 118,000 254,000 152,000 1,322,000
Premium penetration........... 62.9% 55.9% 71.5% 36.6% 95.2% 56.3% 47.6% 56.4%
FINANCIAL DATA:
Revenues, in millions(c)...... $65.7 $47.9 $25.6 $44.6 $15.9 $49.2 $37.2 $286.1
Average monthly total revenue
per customer(d)............. $43.63 $43.99 $45.88 $37.26 $42.74 $36.36 $38.87 $40.69
</TABLE>
- -------------------------
(a) Represents homes passed divided by miles of coaxial cable.
(b) Represents percentage of basic customers within a region served by the
indicated plant bandwidth.
(c) Gives effect to all acquisitions and dispositions as if they had occurred on
January 1, 1999. See "Unaudited Pro Forma Financial Statement and Operating
Data."
(d) Represents total revenues divided by three divided by the number of
customers at period end.
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WESTERN REGION. The Western region consists of cable systems serving
approximately 502,000 customers located entirely in the state of California,
with approximately 401,000 customers located within the Los Angeles metropolitan
area. These customers reside primarily in the communities of Pasadena, Alhambra,
Glendale, Long Beach and Riverside. We also have approximately 101,000 customers
in central California, principally located in the communities of San Luis
Obispo, West Sacramento and Turlock. The Western region will also be responsible
for managing the approximately 68,000 customers associated with the recent
acquisition of American Cable and 4,000 customers associated with the pending
acquisition of Rifkin. According to National Decision Systems, the projected
median household growth in the counties currently served by this region's
systems is 5.2% for the period ending 2003, which the projected U.S. median
household growth for the same period.
The Western region's cable systems have been significantly upgraded with
approximately 78% of the region's customers served by cable systems with at
least 550 megahertz bandwidth capacity as of March 31, 1999. The planned upgrade
of the Western region's cable systems will reduce the number of headends from 21
to 18 by December 31, 2001. We expect that by December 31, 2001, 99% of this
region's customers will be served by systems with at least 550 megahertz
bandwidth capacity and two-way communication capability.
CENTRAL REGION. The Central region consists of cable systems serving
approximately 363,000 customers of which approximately 246,000 customers reside
in and around St. Louis County or in adjacent areas in Illinois, and over 94%
are served by two headends. The remaining approximately 117,000 of these
customers reside in Indiana, and these systems are primarily classic cable
systems serving small to medium-sized communities. The Indiana systems will be
"swapped" as part of the InterMedia transaction. See "-- Recent Events." The
Central region will also be responsible for managing approximately 112,000
customers associated with the pending acquisition of Rifkin. According to
National Decision Systems, the projected median household growth in the counties
currently served by this region's systems is 4.7% for the period ending 2003,
versus the projected U.S. median household growth of 5.2% for the same period.
At March 31, 1999, approximately 46% of the Central region's customers were
served by cable systems with at least 550 megahertz bandwidth capacity. The
majority of the cable plants in the Illinois systems have been upgraded to 750
megahertz bandwidth capacity. The planned upgrade of the Central region's cable
systems will reduce the number of headends from 34 to 31 by December 31, 2001.
We have begun a three-year project, scheduled for completion in 2001, to upgrade
the cable plant in St. Louis County, serving approximately 175,000 customers, to
870 megahertz bandwidth capability. We expect that by December 31, 2001,
approximately 89% of this region's customers will be served by cable systems
with at least 550 megahertz bandwidth capacity and two-way communication
capability.
METROPLEX REGION. The MetroPlex region consists of cable systems serving
approximately 186,000 customers of which approximately 129,000 are served by the
Fort Worth system. The systems in this region serve one of the fastest growing
areas of Texas. The anticipated population growth combined with the existing low
basic penetration rate of approximately 43% offers significant potential to
increase the total number of customers and the associated revenue and cash flow
in this region. According to National Decision Systems, the projected median
household growth in the counties served by this region's
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systems is 8.4% for the period ending 2003, versus the projected U.S. median
household growth of 5.2% for the same period.
The MetroPlex region's cable systems have been significantly upgraded with
approximately 72% of the region's customers served by cable systems with at
least 550 megahertz bandwidth capacity as of March 31, 1999. In 1997, we began
to upgrade the Fort Worth system to 870 megahertz of bandwidth capacity. We
expect to complete this project during 1999. The planned upgrade of the
MetroPlex region's cable systems will reduce the number of headends from 16 to
15 by December 31, 2001. We expect that by December 31, 2001, approximately 98%
of this region's customers will be served by cable systems with at least 550
megahertz bandwidth capacity and two-way communication capability.
NORTH CENTRAL REGION. The North Central region consists of cable systems
serving approximately 399,000 customers. These customers are primarily located
throughout the state of Wisconsin, along with a small system of approximately
27,000 customers in Rosemont, Minnesota, a suburb of Minneapolis. Within the
state of Wisconsin, the four largest operating clusters are located in and
around Eau Claire, Fond du Lac, Janesville and Wausau. According to National
Decision Systems, the projected median household growth in the counties served
by this region's systems is 5.4% for the period ending 2003, versus the
projected U.S. median household growth of 5.2% for the same period.
At March 31, 1999, approximately 31.8% of the North Central region's
customers were served by cable systems with at least 550 megahertz bandwidth
capacity. The planned upgrade of the North Central region's cable systems will
reduce the number of headends from 86 to 56 by December 31, 2001. We plan to
rebuild much of the region's cable plant, and expect that by December 31, 2001,
approximately 93% of this region's customers will be served by cable systems
with capacity between 550 megahertz and 750 megahertz of bandwidth capacity and
two-way communication capability.
NORTHEAST REGION. The Northeast region consists of cable systems serving
approximately 124,000 customers residing in the states of Connecticut and
Massachusetts. These systems serve the communities of Newtown and Willimantic,
Connecticut, and areas in and around Pepperell, Massachusetts, and are included
in the New York, Hartford, and Boston areas of demographic influence. The
Northeast region will be responsible for managing the approximately 170,000
customers associated with the recent acquisition of cable systems from Greater
Media and approximately 56,000 customers associated with the pending acquisition
of Helicon. According to National Decision Systems, the projected median
household growth in the counties currently served by this region's systems is
3.7% for the period ending 2003, versus the projected U.S. median household
growth of 5.2% for the same period.
At March 31, 1999, approximately 49% of the Northeast region's customers
were served by cable systems with at least 550 megahertz of bandwidth capacity.
We have begun to rebuild this region's cable plant, and expect that by December
31, 2001, all of this region's customers will be served by cable systems with at
least 750 megahertz bandwidth capacity and two-way communication capability.
SOUTHEAST REGION. The Southeast region consists of cable systems serving
approximately 451,000 customers residing primarily in small to medium-sized
communities in North Carolina, South Carolina, Georgia and eastern Tennessee.
There are significant clusters of cable systems in and around the cities and
counties of Greenville/Spartanburg, South Carolina; Hickory and Asheville, North
Carolina; Henry County, Georgia, a suburb
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of Atlanta; and Johnson City, Tennessee. These areas have experienced rapid
population growth over the past few years, contributing to the high rate of
internal customer growth for these systems. According to National Decision
Systems, the projected median household growth in the counties currently served
by this region's systems is 6.9% for the period ending 2003, versus the
projected U.S. median household growth of 5.2% for the same period. In addition,
the Southeast region will be responsible for managing an aggregate of 541,000
customers associated with the Helicon, InterMedia, Rifkin, Vista and Cable
Satellite acquisitions.
At March 31, 1999, approximately 62% of the Southeast region's customers
were served by cable systems with at least 550 megahertz bandwidth capacity. The
planned upgrade of the Southeast region's cable systems will reduce the number
of headends from 60 to 49 by December 31, 2001. The rebuild program for this
region is anticipated to result in approximately 94% of this region's customer
base being served by December 31, 2001 served by cable systems with at least 550
megahertz bandwidth capacity and two-way communication capability.
SOUTHERN REGION. The Southern region consists of cable systems serving
approximately 319,000 customers located primarily in the states of Louisiana,
Alabama, Kentucky, Mississippi and central Tennessee. In addition, the Southern
region includes systems in Kansas, Colorado, Utah and Montana. The Southern
region has significant clusters of cable systems in and around the cities of
Birmingham, Alabama; Nashville, Tennessee; and New Orleans, Louisiana. According
to National Decision Systems, the projected median household growth in the
counties currently served by this region's systems is 6.3% for the period ending
2003, versus the projected U.S. median household growth of 5.2% for the same
period. In addition, the Southern region will be responsible for managing an
aggregate of 335,000 customers associated with the Helicon, InterMedia and
Rifkin acquisitions.
At March 31, 1999, approximately 42% of the Southern region's customers
were served by cable systems with at least 550 megahertz bandwidth capacity. The
planned upgrade of the Southeast region's cable systems will reduce the number
of headends from 59 to 51 by December 31, 2001. The rebuild program for this
region is anticipated to result in approximately 75% of this region's customer
base being served by cable systems with at least 550 megahertz bandwidth
capacity and two-way communication capability by December 31, 2001.
PLANT AND TECHNOLOGY OVERVIEW. We have engaged in an aggressive program to
upgrade our existing cable plant over the next three years. As such, we intend
to invest approximately $1.8 billion through December 31, 2001, with
approximately one-half of that amount used to rebuild and upgrade our existing
cable plant. The remaining capital will be spent on plant extensions, new
services, converters and system maintenance.
The following table describes the current technological state of our
systems and the anticipated progress of planned upgrades through 2001, based on
the percentage of our customers who will have access to the bandwidth and other
features shown:
<TABLE>
<CAPTION>
LESS THAN 750 MEGAHERTZ TWO-WAY
550 MEGAHERTZ 550 MEGAHERTZ OR GREATER CAPABILITY
------------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
March 31, 1999.............. 42.7% 16.9% 40.4% 35.1%
December 31, 1999........... 23.9% 20.1% 56.0% 65.2%
December 31, 2000........... 12.9% 22.2% 64.9% 81.4%
December 31, 2001........... 7.7% 21.5% 70.8% 91.8%
</TABLE>
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We have adopted the hybrid fiber optic/coaxial architecture, a type of
distribution network generally referred to as the HFC architecture, as the
standard for our ongoing systems upgrades. The HFC architecture combines the use
of fiber optic cable, which can carry hundreds of video, data and voice channels
over extended distances, with coaxial cable, which requires a more extensive
signal amplification in order to obtain the desired transmission levels for
delivering channels. In most systems, we connect fiber optic cable to individual
nodes serving an average of 800 homes or commercial buildings. We believe that
this network design provides high capacity and superior signal quality, and will
enable us to provide the newest forms of telecommunications services to our
customers. The primary advantages of HFC architecture over traditional coaxial
cable networks include:
- increased channel capacity of cable systems;
- reduced number of amplifiers, which are devices to compensate for signal
loss caused by coaxial cable, needed to deliver signals from the headend
to the home, resulting in improved signal quality and reliability;
- reduced number of homes that need to be connected to an individual node,
improving the capacity of the network to provide high-speed Internet
access and reducing the number of households affected by disruptions in
the network; and
- sufficient dedicated bandwidth for two-way services, which avoids reverse
signal interference problems that can otherwise occur when you have
two-way communication capability.
The HFC architecture will enable us to offer new and enhanced services,
including additional channels and tiers, expanded pay-per-view options,
high-speed Internet access, wide area network, which permits a network of
computers to be connected together beyond an area, point-to-point data services,
which can switch data links from one point to another, and digital advertising
insertion. The upgrades will facilitate our new services in two primary ways:
- greater bandwidth allows us to send more information through our systems.
This provides us with the capacity to provide new services in addition to
our current services. As a result, we will be able to roll out digital
cable programming in addition to existing analog channels offered to
customers who do not wish to subscribe to a package of digital services.
- enhanced design configured for two-way communication with the customer
allows us to provide cable Internet services without telephone support
and other interactive services, such as an interactive program guide,
impulse pay-per-view that gives the subscriber the ability to select
pay-per-view programming through the cable system without placing a
separate call, video-on-demand and Wink, that cannot be offered without
upgrading the bandwidth capacity of our systems.
This HFC architecture will also position us to offer cable telephony
services in the future, using either Internet protocol technology or
switch-based technology, another method of linking communications.
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,
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including adding new programming and other telecommunications services, and will
continue to position cable television as an essential service.
TRADITIONAL CABLE TELEVISION SERVICES. More than 85% of our customers
subscribe to both "basic" and "expanded basic" service and generally, receive a
line-up of between 33 to 85 channels of television programming, depending on the
bandwidth capacity of the system. Customers who pay additional amounts can also
subscribe for additional channels, either individually or in packages of several
channels, as add-ons to the basic channels. Approximately 25% of our customers
subscribe for premium channels, with additional customers subscribing for other
special add-on packages. We tailor both our basic line-up and our additional
channel offerings to each system in response to demographics, programming
preferences, competition, price sensitivity and local regulation.
Our traditional cable television service offerings include the following:
- BASIC CABLE. All of our customers receive basic cable services, which
generally consist of local broadcast television, local community
programming, including governmental and public access, and limited
satellite programming. As of March 31, 1999, the average monthly fee was
$11.07 for basic service.
- EXPANDED BASIC CABLE. This expanded tier includes a group of
satellite-delivered or non-broadcast channels, such as Entertainment and
Sports Programming Network (ESPN), Cable News Network (CNN) and Lifetime
Television in addition to the basic channel line. As of March 31, 1999,
the average monthly fee was $18.80 for expanded basic service.
- PREMIUM CHANNELS. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming. Home
Box Office, Cinemax and Showtime are typical examples. We offer
subscriptions to these channels either individually or in premium channel
packages. As of March 31, 1999, the average monthly fee was $6.47 per
premium subscription.
- PAY-PER-VIEW. These channels allow customers to pay to view a single
showing of a recently released movie, a one-time special sporting event
or music concerts on an unedited, commercial-free basis. We currently
charge a fee that ranges from $3 to $9 for movies. For special events,
such as championship boxing matches, we have charged a fee of up to
$49.99.
We have employed a variety of targeted marketing techniques to attract new
customers by focusing on delivering value, choice, convenience and quality. We
employ direct mail and telemarketing, utilizing demographic "cluster codes" to
target specific messages to target audiences. In many of our systems, we offer
discounts to customers who purchase premium services on a limited trial basis in
order to encourage a higher level of service subscription. We also have a
coordinated strategy for retaining customers that includes televised retention
advertising to reinforce the decision to subscribe and to encourage customers to
purchase higher service levels.
NEW PRODUCTS AND SERVICES. 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 commercial market penetration. As a result, we are in the process of
introducing a variety of new or expanded services beyond
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the traditional offerings of analog television programming for the benefit of
both our residential and commercial customers. These new products include:
- digital television and its related enhancements;
- high-speed Internet access, through television set-top converter boxes,
cable modems installed in personal computers and traditional telephone
Internet access;
- interactive services, such as Wink; and
- telephony and data transmission services which are private network
services interconnecting locations for a customer.
We believe that we are well positioned to compete with other providers of
these services due to the high bandwidth of cable technology and our ability to
access homes and businesses.
DIGITAL TELEVISION. As part of upgrading our systems, we are installing
headend equipment capable of delivering digitally encoded cable transmissions to
a two-way digital-capable set-top converter box in the customer's home. This
digital connection offers significant advantages. For example, we can compress
the digital signal to allow the transmission of up to twelve digital channels in
the bandwidth normally used by one analog channel. This will allow us to
increase both programming and service offerings, including near video-on-demand
for pay-per-view customers which is a service that allows many users to request
the same videos at the same time or anytime. We expect to increase the amount of
services purchased by our customers.
Digital services customers may receive a mix of additional television
programming, an electronic program guide and up to 40 channels of digital music.
The additional programming falls into four categories which are targeted toward
specific markets:
- additional basic channels, which are marketed in systems primarily
serving rural communities;
- additional premium channels, which are marketed in systems serving both
rural and suburban communities;
- "multiplexes" of premium channels to which a customer previously
subscribed, which allows multiple channels of programming to be carried
over a common transmission medium. Consequently, programming provided by
HBO or Showtime can be varied as to time of broadcast or varied based on
programming content, and then marketed in systems serving both rural and
suburban communities; and
- additional pay-per-view programming, such as more pay-per-view options
and/or frequent showings of the most popular films to provide near
video-on-demand, which are more heavily marketed in systems primarily
serving both rural and suburban communities.
As part of our current pricing strategy for digital services, we have
established a retail rate of $4.95 to $8.95 per month for the digital set-top
converter and the delivery of "multiplexes" of premium services, additional
pay-per-view channels, digital music and an electronic programming guide. Some
of our systems also offer additional basic and expanded basic tiers of service.
These tiers of services retail for $6.95 per month. As of March 31, 1999, we had
in excess of 3,000 customers subscribing to digital services offered by eight of
our cable systems, which serve approximately 318,000 basic cable customers. By
December 31, 1999, we anticipate that approximately 734,000 of our customers
will be served by cable systems capable of delivering digital services.
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INTERNET ACCESS. We currently provide Internet access to our customers by
two principal means:
(1) through cable modems attached to personal computers, either directly or
through an outsourcing contract with an Internet service provider; and
(2) through television access, via a service such as WorldGate.
We also provide Internet access in some markets through traditional dial-up
telephone modems, using a service provider. Modems convert digital signals to
analog signals and vice-versa and are used to send digital data signals over the
telephone network, which is usually analog.
The principal advantage of cable Internet connections is the high speed of
data transfer over a cable system. We currently offer these services to our
residential customers over coaxial cable at speeds that can range up to
approximately 50 times the speed of a conventional 28.8 kilobits per second
telephone modem. Furthermore, a two-way communication cable system using the HFC
architecture can support the entire connection at cable modem speeds without any
need for a separate telephone line. If the cable system only supports one-way
signals from the headend to the customer, the customer must use a separate
telephone line to send signals to the provider, although such customer still
receives the benefit of high speed cable access when downloading information,
which is the primary reason for using cable as an Internet connection. In
addition to Internet access over our traditional coaxial cable system, we also
provide our commercial customers fiber optic cable access at a price that we
believe is less than 25% of the price offered by the telephone companies.
In the past, cable Internet connections have provided customers with widely
varying access speeds because each customer accessed the Internet by sending and
receiving data through a node. Users connecting simultaneously through a single
node share the bandwidth of that node, so that a users' connection speeds may
diminish as additional users connect through the same node. To induce users to
switch to our Internet services, however, we guarantee our cable modem customers
the minimum access speed selected from several speed options we offer. We also
provide higher guaranteed access speeds for customers willing to pay an
additional cost. In order to meet these guarantees, we are increasing the
bandwidth of our systems and "splitting" nodes easily and cost-effectively to
reduce the number of customers per node.
We currently offer cable modem-based Internet access services in Lanett,
Alabama; Los Angeles and Riverside, California; Newtown, Connecticut; Newnan,
Georgia; St. Louis, Missouri; Fort Worth, Texas; and Eau Claire, Wisconsin. As
of March 31, 1999, we provided Internet access service to approximately 9,300
homes and 130 businesses. The following table indicates the historical and
projected availability of Internet access services to our existing customer base
as of the dates indicated. These numbers reflect the number
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of our customers who have access to these services provided through us. The
percentage of these customers who have subscribed for these services is
currently a small percentage.
<TABLE>
<CAPTION>
BASIC CUSTOMERS WITH ADVANCED
SERVICES AVAILABLE AS OF
----------------------------------
MARCH 31, 1999 DECEMBER 31, 1999
-------------- -----------------
(PROJECTED)
<S> <C> <C>
High-speed internet access via cable modems:
EarthLink/Charter Pipeline..................... 413,000 740,000
High Speed Access.............................. 15,000 640,000
Excite@Home.................................... 159,000 270,000
---------- ---------
Total cable modems.......................... 559,000 1,534,000
========== =========
Internet Access via WorldGate.................... 230,000 854,000
---------- ---------
</TABLE>
- CABLE MODEM-BASED INTERNET ACCESS. Generally, we offer Internet access
through cable modems to our customers in systems that have been upgraded to at
least 550 megahertz bandwidth capacity. We have an agreement with EarthLink, an
independent Internet service provider, to provide as a private label service
Charter Pipeline(TM), which is a cable modem-based, high-speed Internet access
service we offer. We currently charge a monthly usage fee of between $24.95 and
$34.95. Our customers have the option to lease a cable modem for $10 to $15 a
month or to purchase a modem for between $300 and $400. As of March 31, 1999, we
offered EarthLink Internet access to approximately 421,000 of our homes passed
and have approximately 5,300 customers.
We have a relationship with High Speed Access to offer Internet access in
some of our smaller systems. High Speed Access also provides Internet access
services to our customers under the Charter Pipeline(TM) brand name. Although
the Internet access service is provided by High Speed Access, the Internet
"domain name" of our customer's e-mail address and web site, if any, is
"Charter.net," allowing the customer to switch or expand to our other Internet
services without a change of e-mail address. High Speed Access provides turnkey
service, bears all capital, operating and marketing costs of providing the
service, and seeks to build economies of scale in our smaller systems that we
cannot efficiently build ourselves by simultaneously contracting to provide the
same services to other small geographically contiguous systems. Turnkey service
is a complete service, including sales, marketing, installation, service and
support. We receive 50% of the monthly $39.95 service fee. As of March 31, 1999,
High Speed Access offers Internet access to approximately 225,000 of our homes
passed and approximately 3,000 customers have signed up for the service. During
1999, High Speed Access plans to launch this service in an additional 29
systems, covering approximately 415,000 additional homes passed. Vulcan
Ventures, Inc., a company controlled by Paul G. Allen, has an equity investment
in High Speed Access. See "Certain Relationships and Related Transactions."
We also have a revenue sharing agreement with Excite@Home, under which
Excite@Home currently provides Internet service to customers in our systems
serving Fort Worth, University Park and Highland Park, Texas. The Excite@Home
network provides high-speed, cable modem-based Internet access using the cable
infrastructure. As of March 31, 1999, we offered the @Home broadband Internet
service to approximately 159,000 of our homes passed and have approximately
2,000 customers.
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As of March 31, 1999, we provided Internet access to approximately 100
commercial customers. We actively market our cable modem service to businesses
in every one of our systems where we have the capability to offer such service.
Our marketing efforts are often door-to-door, and we have established a separate
division whose function is to make businesses aware that this type of Internet
access is available through us. We also provide several virtual local area
networks, which permit networks of computers to be connected within a given area
and are more commonly referred to as LANs. These LANs are established for
municipal and educational facilities, including Cal Tech, the City of Pasadena
and the City of West Covina in our Los Angeles cluster.
- TV-BASED INTERNET ACCESS THROUGH WORLDGATE. We have a non-exclusive
agreement with WorldGate to provide its TV-based e-mail and Internet access to
our cable customers. WorldGate's technology is only available to cable systems
with two-way capability. WorldGate offers easy, low-cost Internet access to
customers at connection speeds ranging up to 128 kilobits per second. For a
monthly fee, we provide our customers e-mail and Internet access without using a
PC, obtaining an additional telephone line or tying up an existing line, or
purchasing any additional equipment. Instead, the customer accesses the Internet
through the set-top box, which the customer already has on his television set,
and a wireless keyboard, that is provided with the service, which interfaces
with the box. WorldGate works on both advanced analog and digital platforms and,
therefore, can be installed utilizing the analog converters already deployed.
Analog converters are devices to convert analog signals to digital signals. In
contrast, other converter-based, non-PC Internet access products require a
digital platform and a digital converter prior to installation.
Customers who opt for television-based Internet access are generally
first-time users who prefer this more user-friendly interface. Of these users,
41% use WorldGate at least once a day, and 77% use it at least once a week.
Although the WorldGate service bears the WorldGate brand name, the Internet
"domain name" of the customers who use this service is "Charter.net." This
allows the customer to switch or expand to our other Internet services without a
change of e-mail address.
We first offered WorldGate to customers on the upgraded portion of our
systems in St. Louis in April 1998. We are also currently offering this service
in our systems in Logan, Utah, Maryville, Illinois and Newtown, Connecticut, and
plan to introduce it in eight additional systems by December 31, 1999. Charter
Investment owns a minority interest in WorldGate. See "Certain Relationships and
Related Transactions." As of March 31, 1999, we provided WorldGate Internet
service to approximately 1,800 customers.
WINK-ENHANCED PROGRAMMING. We have formed a relationship with Wink, which
sells technology to embed interactive features, such as additional information
and statistics about a program or the option to order an advertised product,
into programming and advertisements. A customer with a Wink-enabled set-top
converter box and a Wink-enabled cable provider sees an icon flash on the screen
when additional Wink features are available to enhance a program or
advertisement. By pressing the select button on a standard remote control, a
viewer of a Wink-enhanced program is able to access additional information
regarding such program, including, for example, information on prior episodes or
the program's characters. A viewer watching an advertisement would be able to
access additional information regarding the advertised product and may also be
able to utilize the two-way transmission features to order a product. We have
bundled Wink service with our traditional cable services in both our advanced
analog and digital platforms. Wink services
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are provided free of charge. Vulcan Ventures, Inc., a company controlled by Paul
G. Allen, has made an equity investment in Wink. See "Certain Relationships and
Related Transactions."
Various programming networks, including CNN, NBC, ESPN, HBO, Showtime,
Lifetime, VH1, the Weather Channel, and Nickelodeon, are currently producing
over 1,000 hours of Wink-enhanced programming per week. Under certain
revenue-sharing arrangements, we will modify our headend technology to allow
Wink-enabled programming to be offered on our systems. Each time one of our
customers uses Wink to request certain additional information or order an
advertised product we receive fees from Wink.
TELEPHONE SERVICES. We expect to be able to offer cable telephony services
in the near future using our systems' direct, two-way connections to homes and
other buildings. We are exploring technologies using Internet protocol
telephony, as well as traditional switching technologies that are currently
available, to transmit digital voice signals over our systems. Traditional
switching technologies include standard technologies used to connect public
switch telephone networks. AT&T and other telephone companies have already begun
to pursue strategic partnering and other programs which make it attractive for
us to acquire and develop this alternative Internet protocol technology. For the
last two years, we have sold telephony services as a competitive access provider
in the state of Wisconsin through Marcus FiberLink LLC, one of our subsidiaries.
A competitive access provider provides telecommunication connection to the
Internet. We are currently looking to expand our services as a competitive
access provider into other states.
MISCELLANEOUS SERVICES. We also offer paging services to our customers in
certain markets. As of March 31, 1999, we had approximately 9,300 paging
customers. We also lease our fiber-optic cable plant and equipment to commercial
and non-commercial users of data and voice telecommunications services.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
Providing a high level of service to our customers has been a central
driver of our historical success. Our emphasis on system reliability,
engineering support and superior customer satisfaction is key to our management
philosophy. In support of our commitment to customer satisfaction, we operate a
24-hour customer service hotline in most systems and offer on-time installation
and service guarantees. It is our policy that if an installer is late for a
scheduled appointment the customer receives free installation, and if a service
technician is late for a service call the customer receives a $20 credit. Our
on-time service call rate was 99.8% in 1997, and 99.7% in 1998.
As of March 31, 1999, we maintained eight call centers located in our seven
regions, which are responsible for handling call volume for more than 58% of our
customers. They are staffed with dedicated personnel who provide service to our
customers 24 hours a day, seven days a week. We believe operating regional call
centers allows us to provide "localized" service, which also reduces overhead
costs and improves customer service. We have invested significantly in both
personnel and in equipment to ensure that these call centers are professionally
managed and employ state-of-the-art technology. We also maintain approximately
143 field offices, and employ approximately 1,200 customer service
representatives throughout the systems. Our customer service representatives
receive extensive training to develop customer contact skills and product
knowledge critical to successful sales and high rates of customer retention. We
have approximately 2,300 technical employees who are encouraged to enroll in
courses and attend regularly scheduled on-site seminars conducted by equipment
manufacturers to keep pace with the
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latest technological developments in the cable television industry. We utilize
surveys, focus groups and other research tools as part of our efforts to
determine and respond to customer needs. We believe that all of this improves
the overall quality of our services and the reliability of our systems,
resulting in fewer service calls from customers.
We are also committed to fostering strong community relations in the towns
and cities our systems serve. We support many local charities and community
causes in various ways, including marketing promotions to raise money and
supplies for persons in need and in-kind donations that include production
services and free air-time on major cable networks. Recent charity affiliations
include campaigns for "Toys for Tots," United Way, local theatre, children's
museums, local food banks and volunteer fire and ambulance corps. We also
participate in the "Cable in the Classroom" program, whereby cable television
companies throughout the United States provide schools with free cable
television service. In addition, we install and provide free basic cable service
to public schools, government buildings and non-profit hospitals in many of the
communities in which we operate. We also provide free cable modems and
high-speed Internet access to schools and public libraries in our franchise
areas. We place a special emphasis on education, and regularly award
scholarships to employees who intend to pursue courses of study in the
communications field.
SALES AND MARKETING
PERSONNEL RESOURCES. We have a centralized team responsible for
coordinating the marketing efforts of our individual systems. For most of our
systems with over 30,000 customers we have a dedicated marketing manager, while
smaller systems are handled regionally. We believe our success in marketing
comes in large part from new and innovative ideas, and good interaction between
our corporate office, which handles programs and administration, and our field
offices, which implement the various programs. We are also continually
monitoring the regulatory arena, customer perception, competition, pricing and
product preferences to increase our responsiveness to our customer base. Our
customer service representatives are given the incentive to use their daily
contacts with customers as opportunities to sell our new service offerings.
MARKETING STRATEGY. Our long-term marketing objective is to increase cash
flow through deeper market penetration and growth in revenue per household. To
achieve this objective and to position our service as an indispensable consumer
service, we are pursuing the following strategies:
- - increase the number of rooms per household with cable;
- - introduce new cable products and services;
- - design product offerings to enable greater opportunity for customer choices;
- - create a variety of service packages to promote the sale of premium services
and niche programming;
- - offer customers more value through discounted bundling of products;
- - deepen the penetration of the advanced digital platform within the home;
- - target households based on demographic data;
- - develop specialized programs to attract former customers, those that have
never subscribed and illegal users of the service; and
- - employ Charter branding of products to promote customer awareness and loyalty.
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We have innovative marketing programs which utilize market research on
selected systems, compare the data to national research and tailor a marketing
program for individual markets. We gather detailed customer information through
our regional marketing representatives and use Claritas Corporation's
geodemographic data program and consulting services to create unique packages of
services and marketing programs. These marketing efforts and the follow-up
analysis provide consumer information down to the city block or suburban
subdivision level, which allows us to create very targeted marketing programs.
We seek to maximize our revenue per customer through the use of "tiered"
packaging strategies to market premium services and to develop and promote niche
programming services.
We regularly use targeted direct mail campaigns to sell these tiers and
services to our existing customer base. We are developing an in-depth profile
database that goes beyond existing and former customers to include all homes
passed. This database information is expected to improve our targeted direct
marketing efforts, bringing us closer toward our objective of increasing total
customers as well as sales per customer for both new and existing customers. For
example, using customer profile data currently available, we are able to
identify those customers that have children under a specified age who do not
currently subscribe to The Disney Channel, which then enables us to target our
marketing efforts with respect to The Disney Channel to specific addresses. In
1998, we were chosen by Claritas, sponsor of a national marketing competition
across all industries, as the first place winner in their media division, which
includes cable systems operations, telecommunications and newspapers, for our
national segmenting and targeted marketing program.
Our marketing professionals have also received numerous industry awards
within the last two years, including the Cable and Telecommunication Association
of Marketers' awards for consumer research and best advertising and marketing
programs.
In 1998, we introduced a new package of premium services. Customers receive
a substantial discount on bundled premium services of HBO, Showtime, Cinemax and
The Movie Channel. We were able to negotiate favorable terms with premium
networks, which allowed minimal impact on margins and provided substantial
volume incentives to grow the premium category. The MVP package has increased
premium household penetration, premium revenue and cash flow. As a result of
this package, HBO recognized us as a top performing customer. We are currently
introducing this same premium strategy in the systems we have recently acquired.
We expect to continue to invest significant amounts of time, effort and
financial resources in the marketing and promotion of new and existing services.
To increase customer penetration and increase the level of services used by our
customers, we utilize a coordinated array of marketing techniques, including
door-to-door solicitation, telemarketing, media advertising and direct mail
solicitation. We believe we have one of the cable television industry's highest
success rates in attracting and retaining customers who have never before
subscribed to cable television. Historically, "nevers" are the most difficult
customer to attract. Furthermore, we have succeeded in retaining these "nevers."
PROGRAMMING SUPPLY
GENERAL. We believe that offering a wide variety of conveniently scheduled
programming is an important factor influencing a customer's decision to
subscribe to and
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retain our cable services. We devote considerable resources to obtaining access
to a wide range of programming that we believe will appeal to both existing and
potential customers of basic and premium services. We rely on extensive market
research, customer demographics and local programming preferences to determine
channel offerings in each of our markets. See "-- Sales and Marketing."
PROGRAMMING SOURCES. We obtain basic and premium programming from a number
of suppliers, usually pursuant to a written contract. We obtain approximately
50% of our programming through contracts entered into directly with a
programming supplier. We obtain the rest of our programming through TeleSynergy,
Inc. which offers its partners contract benefits in buying programming by virtue
of volume discounts available to a larger buying base. Programming tends to be
made available to us for a flat fee per customer. However, some channels are
available without cost to us. In connection with the launch of a new channel, we
may receive a distribution fee to support the channel launch, a portion of which
is applied to marketing expenses associated with the channel launch. The amounts
we receive in distribution fees are not significant. For home shopping channels,
we may receive a percentage of the amount spent in home shopping purchases by
our customers on channels we carry. In 1998, pro forma for our merger with
Marcus Holdings such revenues totalled approximately $5 million.
Our programming contracts generally continue for a fixed period of time,
usually from three to ten years. Although longer contract terms are available,
we prefer to limit contracts to three years so that we retain flexibility to
change programming and include new channels as they become available. Some
program suppliers offer marketing support or volume discount pricing structures.
Some of our programming agreements with premium service suppliers offer cost
incentives under which premium service unit prices decline as certain premium
service growth thresholds are met.
PROGRAMMING COSTS. Our cable programming costs have increased in recent
years and are expected to continue to increase due to factors including:
- system acquisitions;
- additional programming being provided to customers;
- increased cost to produce or purchase cable programming; and
- inflationary increases.
The combined programming cost of Charter Holdings, CCA Group and CharterComm
Holdings were equal to approximately 21% of revenues in 1998. In every year we
have operated, our costs to acquire programming have exceeded customary
inflationary and cost-of-living type increases. Sports programming costs have
increased significantly over the past several years. In addition, contracts to
purchase sports programming sometimes contain built-in cost increases for
programming added during the term of the contract which we may or may not have
the option to add to our service offerings.
Under rate regulation of the Federal Communications Commission, cable
operators may increase their rates to customers to cover increased costs for
programming, subject to certain limitations. See "Regulation and Legislation."
We now contract through TeleSynergy for more approximately 50% of our
programming. We believe our partnership in TeleSynergy limits increases in our
programming costs relative to what the increases would otherwise be, although
given our increased size and purchasing ability, the effect may not be material.
This is because some programming suppliers offer advantageous pricing terms to
cable operators whose number of customers exceeds threshholds
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established by such programming suppliers. Our increase in size in 1999 should
provide increased bargaining power resulting in an ability to limit increases in
programming costs. Management believes it will, as a general matter, be able to
pass increases in its programming costs through to customers, although we cannot
assure you that it will be possible.
RATES
Pursuant to the FCC's rules, we have set rates for cable-related equipment,
such as converter boxes and remote control devices, and installation services.
These rates are based on actual costs plus a 11.25% rate of return and have
unbundled these charges from the charges for the provision of cable service.
Rates charged to customers vary based on the market served and service
selected, and are typically adjusted on an annual basis. As of March 31, 1999,
the average monthly fee was $11.07 for basic service and $18.80 for expanded
basic service. Regulation of the expanded basic service was eliminated by
federal law as of March 31, 1999 and such rates are now based on market
conditions. A one-time installation fee, which may be waived in part during
certain promotional periods, is charged to new customers. We believe our rate
practices are in accordance with Federal Communications Commission Guidelines
and are consistent with those prevailing in the industry generally. See
"Regulation and Legislation."
THEFT PROTECTION
The unauthorized tapping of cable plant and the unauthorized receipt of
programming using cable converters purchased through unauthorized sources are
problems which continue to challenge the entire cable industry. We have adopted
specific measures to combat the unauthorized use of our plant to receive
programming. For instance, in several of our regions, we have instituted a
"perpetual audit" whereby each technician is required to check at least four
other nearby residences during each service call to determine if there are any
obvious signs of piracy, namely, a drop line leading from the main cable line
into other homes. Addresses where the technician observes drop lines are then
checked against our customer billing records. If the address is not found in the
billing records, a sales representative calls on the unauthorized user to
correct the "billing discrepancy" and persuade the user to become a formal
customer. In our experience, approximately 25% of unauthorized users who are
solicited in this fashion become customers. Billing records are then closely
monitored to guard against these new customers reverting to their status as
unauthorized users. Unauthorized users who do not convert are promptly
disconnected and, in certain instances, flagrant violators are referred for
prosecution. In addition, we have prosecuted individuals who have sold cable
converters programmed to receive our signals without proper authorization.
FRANCHISES
As of March 31, 1999, our systems operated pursuant to an aggregate of
1,158 franchises, permits and similar authorizations issued by local and state
governmental authorities. Each franchise is awarded by a governmental authority
and is usually not transferable unless the granting governmental authority
consents. Most franchises are subject to termination proceedings in the event of
a material breach. In addition, most franchises require us to pay the granting
authority a franchise fee of up to 5.0% of gross revenues generated by cable
television services under the franchise (i.e., the maximum amount that may be
charged under the Communications Act).
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Our franchises have terms which range from 4 years to more than 32 years.
Prior to the scheduled expiration of most franchises, we initiate renewal
proceedings with the granting authorities. This process usually takes three
years but can take a longer period of time and often involves substantial
expense. The Communications Act provides for an orderly franchise renewal
process in which granting authorities may not unreasonably withhold renewals. If
a renewal is withheld and the granting authority takes over operation of the
affected cable system or awards it to another party, the granting authority must
pay the existing cable operator the "fair market value" of the system. The
Communications Act also established comprehensive renewal procedures requiring
that an incumbent franchisee's renewal application be evaluated on its own merit
and not as part of a comparative process with competing applications. In
connection with the franchise renewal process, many governmental authorities
require the cable operator make certain commitments, such as technological
upgrades to the system, which may require substantial capital expenditures. We
cannot assure you, however, that any particular franchise will be renewed or
that it can be renewed on commercially favorable terms. Our failure to obtain
renewals of our franchises, especially those in major metropolitan areas where
we have the most customers, would have a material adverse effect on our
business, results of operations and financial condition. See "Risk Factors--Our
Industry--Our franchises are subject to non-renewal or termination." The
following table summarizes our systems' franchises by year of expiration, and
approximate number of basic customers as of March 31, 1999, and does not reflect
acquisitions completed in 1999 or our pending acquisitions.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
NUMBER OF OF TOTAL TOTAL BASIC OF TOTAL
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES CUSTOMERS CUSTOMERS
- ---------------------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Prior to December 31, 1999...... 127 11% 328,000 14%
2000 to 2002.................... 214 18% 516,000 22%
2003 to 2005.................... 239 21% 445,000 19%
2006 or after................... 578 50% 1,055,000 45%
Total...................... 1,158 100% 2,344,000 100%
</TABLE>
Under the 1996 Telecom Act, cable operators are not required to obtain
franchises in order to provide telecommunications services, and granting
authorities are prohibited from limiting, restricting or conditioning the
provision of such services. In addition, granting authorities may not require a
cable operator to provide telecommunications services or facilities, other than
institutional networks, as a condition of an initial franchise grant, a
franchise renewal, or a franchise transfer. The 1996 Telecom Act also limits
franchise fees to an operator's cable-related revenues and clarifies that they
do not apply to revenues that a cable operator derives from providing new
telecommunications services.
We believe our relations with the franchising authorities under which our
systems are operated are generally good. Substantially all of the material
franchises relating to our systems eligible for renewal have been renewed or
extended at or prior to their stated expiration dates.
COMPETITION
We face competition in the areas of price, service offerings, and service
reliability. We compete with other providers of television signals and other
sources of home entertainment. In addition, as we expand into additional
services such as digital television, Internet access, interactive services and
Internet protocol telephony, we face competition from other cable
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systems operators providing such services as well as from other providers of
each type of service we will provide.
To date, we believe that we have not lost a significant number of
customers, or a significant amount of revenue, to our competitors' systems.
However, competition from other providers of the technologies we expect to offer
in the future may have a negative impact on our business in the future.
Through mergers such as the recent merger of Tele-Communications, Inc. and
AT&T, customers will come to expect a variety of services from a single
provider. While the TCI/AT&T merger has no direct or immediate impact on our
business, it encourages providers of cable and telecommunications services to
expand their service offerings. It also encourages consolidation in the cable
industry as cable operators recognize the competitive benefits of a large
customer base and expanded financial resources.
Key competitors today include:
- BROADCAST TELEVISION. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using a traditional "off-air" antenna. The extent of such
competition is dependent upon the quality and quantity of broadcast signals
available through "off-air" reception compared to the services provided by the
local cable system. The recent licensing of digital spectrum by the Federal
Communications Commission will provide incumbent television broadcast licensees
with the ability to deliver high definition television pictures and multiple
digital-quality program streams, as well as advanced digital services such as
subscription video.
- DBS. Direct broadcast satellite, known as DBS, is a satellite service of
one or more entertainment or information program channels that can be received
directly using an antenna on the subscriber's premises. DBS has emerged as
significant competition to cable systems. The DBS industry has grown rapidly
over the last several years, far exceeding the growth rate of the cable
television industry, and now serves approximately 10 million subscribers
nationwide. DBS service allows the subscriber to receive video services directly
via satellite using a relatively small dish antenna. Moreover, video compression
technology allows DBS providers to offer more than 100 digital channels, thereby
surpassing the typical cable system. DBS, however, is limited in the local
programming it can provide because of the current capacity limitations of
satellite technology. In addition, existing copyright rules restrict the ability
of DBS providers to offer local broadcast programming. Congress is now
considering legislation that would remove these legal obstacles. After recent
mergers, the two primary DBS providers are DirecTV, Inc., and EchoStar
Communications Corporation. America Online Inc., the nation's leading provider
of Internet services has recently announced a plan to invest $1.5 billion in
Hughes Electronics Corp., DirecTV, Inc.'s parent company, and these companies
intend to jointly market America Online's prospective Internet television
service to DirecTV's DBS customers.
- TRADITIONAL OVERBUILDS. Cable television systems are operated under
non-exclusive franchises granted by local authorities. More than one cable
system may legally be built in the same area. Although still relatively
uncommon, it is possible that a franchising authority, which is the government
entity that grants a cable operator a franchise to construct and operate a cable
television system within the bounds of that entity's governmental authority,
might grant a second franchise to another cable operator. That franchise might
contain terms and conditions more favorable than those afforded us. In addition,
entities willing to establish an open video system, under which they offer
unaffiliated programmers non-discriminatory access to a portion of the system's
cable
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system, may be able to avoid local franchising requirements. Well financed
businesses from outside the cable industry, such as the public utilities which
already possess fiber optic and other transmission lines in the areas they serve
may over time become competitors. There has been a recent increase in the number
of cities that have constructed their own cable systems, in a manner similar to
city-provided utility services. Constructing a competing cable system is a
capital intensive process which involves a high degree of risk. We believe that
in order to be successful, a competitor's overbuild would need to be able to
serve the homes and businesses in the overbuilt area on a more cost-effective
basis than us. Any such overbuild operation would require either significant
access to capital or access to facilities already in place that are capable of
delivering cable television programming.
We are aware of overbuild situations in six of our systems located in
Newnan, Columbus and West Point, Georgia; Barron, Wisconsin; and Lanett and
Valley, Alabama. Approximately 44,000 basic customers, approximately 1.9% of our
total basic customers, are passed by these overbuilds. Additionally, we have
been notified that franchises have been awarded, and present potential overbuild
situations, in four of our systems located in Southlake, Roanoke and Keller,
Texas and Willimantic, Connecticut. These potential overbuild areas service an
aggregate of approximately 45,000 basic customers or approximately 1.9% of our
total basic customers. In response to such overbuilds, these systems have been
designated priorities for the upgrade of cable plant and the launch of new and
enhanced services. We have upgraded each of these systems to at least 750
megahertz two-way HFC architecture, with the exceptions of our systems in
Columbus, Georgia, and Willimantic, Connecticut. Upgrades to at least 750
megahertz two-way HFC architecture with respect to these two systems are
expected to be completed by December 31, 2000 and December 31, 2001,
respectively.
- TELEPHONE COMPANIES. The competitive environment has been significantly
affected both by technological developments and regulatory changes enacted in
The Telecommunications Act of 1996 which were designed to enhance competition in
the cable television and local telephone markets. Federal cross-ownership
restrictions historically limited entry by local telephone companies into the
cable television business. The 1996 Telecom Act modified this cross-ownership
restriction, making it possible for local exchange carriers who have
considerable resources to provide a wide variety of video services competitive
with services offered by cable systems.
As we expand our offerings to include telecommunications services, we will
be subject to competition from other telecommunications providers. The
telecommunications industry is highly competitive and includes competitors with
greater financial and personnel resources, who have brand name recognition and
long-standing relationships with regulatory authorities. Moreover, mergers,
joint ventures and alliances among franchised, wireless or private cable
television operators, local exchange carriers and others may result in providers
capable of offering cable television, Internet and telecommunications services
in direct competition with us.
Several telephone companies have obtained or are seeking cable television
franchises from local governmental authorities and are constructing cable
systems. Cross-subsidization by local exchange carriers of video and telephony
services poses a strategic advantage over cable operators seeking to compete
with local exchange carriers that provide video services. In addition, local
exchange carriers provide facilities for the transmission and distribution of
voice and data services, including Internet services, in competition with our
existing or potential interactive services ventures and businesses, including
Internet service, as well as data and other non-video services. We cannot
predict the likelihood of success of the
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broadband services offered by our competitors or the impact on us of such
competitive ventures. The entry of telephone companies as direct competitors in
the video marketplace, however, is likely to become more widespread and could
adversely affect the profitability and valuation of the systems.
- SMATV. Additional competition is posed by satellite master antenna
television systems, known as "SMATV systems," serving multiple dwelling units.
SMATV systems are systems using one central antenna to receive signals and
deliver them to a concentrated grouping of television sets. Multiple dwelling
units are units that include condominiums, apartment complexes and private
residential communities. These private cable systems may enter into exclusive
agreements with multiple dwelling units, which may preclude us from serving
residents of these private complexes. These private cable systems can offer both
improved reception of local television stations and many of the same
satellite-delivered program services which are offered by cable systems. SMATV
systems currently benefit from operating advantages not available to franchised
cable systems, including fewer regulatory burdens and no requirement to service
low density or economically depressed communities. In addition, some of our
current and potential competitors may be exempt from some or all of the
regulations that we are subject to, and this could provide these competitors
with a competitive advantage to certain of our current and potential
competitors.
- WIRELESS DISTRIBUTION. Cable television systems also compete with
wireless program distribution services such as multi-channel multipoint
distribution systems or "wireless cable," known as MMDS. MMDS is a collection of
various distribution services and microwave radio authorizations that can be
combined to provide up to 28 channels of entertainment, education and
information. MMDS uses low-power microwave frequencies to transmit television
programming over-the-air to paying customers. Wireless distribution services
generally provide many of the programming services provided by cable systems,
and digital compression technology is likely to increase significantly the
channel capacity of their systems both analog and digital MMDS services require
unobstructed "line of sight" transmission paths. While no longer as significant
a competitor, analog MMDS has impacted our customer growth in Riverside and
Sacramento, California and Missoula, Montana. Digital MMDS is a more significant
competitor, presenting potential challenges to us in Los Angeles, California and
Atlanta, Georgia.
PROPERTIES
Our principal physical assets consist of cable television plant and
equipment, including signal receiving, encoding and decoding devices, headend
reception facilities, distribution systems and customer drop equipment for each
of its cable television systems. Our cable television plant and related
equipment are generally attached to utility poles under pole rental agreements
with local public utilities and telephone companies, and in certain locations
are buried in underground ducts or trenches. The physical components of our
cable television systems require maintenance and periodic upgrading to keep pace
with technological advances. We own or lease real property for signal reception
sites and business offices in many of the communities served by its systems and
for its principal executive offices. We own most of our service vehicles.
We own the real property housing our regional data center in Town &
Country, Missouri, as well as the regional office for the Northeast Region in
Newtown, Connecticut and additional owned real estate located in Hickory, North
Carolina; Hammond, Louisiana; and West Sacramento and San Luis Obispo,
California. In addition, we lease
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space for our regional data center located in Dallas, Texas and additional
locations for business offices throughout our operating regions. Our headend
locations are generally located on owned or leased parcels of land, and we
generally own the towers on which our equipment is located.
All of our properties and assets are subject to liens securing payment of
indebtedness under the existing credit facilities. We believe that our
properties are in good operating condition and are suitable and adequate for our
business operations.
EMPLOYEES
Neither Charter Holdings nor Charter Capital has any employees. As of March
31, 1999, our operating subsidiaries had approximately 4,770 full-time
equivalent employees of which 265 were represented by the International
Brotherhood of Electrical Workers. We believe we have a good relationship with
such employees and have never experienced a work stoppage.
INSURANCE
We have insurance to cover risks incurred in the ordinary course of
business, including general liability, property coverage, business interruption
and workers' compensation insurance in amounts typical of similar operators in
the cable industry and with reputable insurance providers. As is typical in the
cable industry, we do not insure our underground plant. We believe our insurance
coverage is adequate.
LEGAL PROCEEDINGS
We are involved from time to time in routine legal matters incidental to
our business. We believe that the resolution of such matters will not have a
material adverse impact on our financial position or results of operations.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 to register this exchange offer. This prospectus, which
forms a part of the registration statement, does not contain all the information
included in that registration statement. For further information about us and
the new notes offered in this prospectus, you should refer to the registration
statement and its exhibits. You may read and copy any document we file with the
Securities and Exchange Commission at the public reference facilities maintained
by the Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Securities and Exchange Commission's regional
offices at 3475 Lenox Road, N.E., Suite 1000, Atlanta, Georgia 30326-1232.
Copies of such material may be obtained from the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. You can also review such material by accessing the
Securities and Exchange Commission's internet web site at http://www.sec.gov.
This site contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Securities and
Exchange Commission.
We intend to furnish to each holder of the new notes annual reports
containing audited financial statements and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year. We will also furnish to each holder of the new notes such other reports as
may be required by law.
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REGULATION AND LEGISLATION
The following summary addresses the key regulatory developments and
legislation affecting the cable television industry.
The operation of a cable system is extensively regulated by the Federal
Communications Commission, some state governments and most local governments.
The 1996 Telecom Act has altered the regulatory structure governing the nation's
communications providers. It removes barriers to competition in both the cable
television market and the local telephone market. Among other things, it also
reduces the scope of cable rate regulation and encourages additional competition
in the video programming industry by allowing local telephone companies to
provide video programming in their own telephone service areas.
The Telecommunications Act of 1996 requires the Federal Communications
Commission to undertake a host of implementing rulemakings. Moreover, Congress
and the Federal Communications Commission have frequently revisited the subject
of cable regulation. Future legislative and regulatory changes could adversely
affect our operations, and there have been calls in Congress and at the Federal
Communications Commission to maintain or even tighten cable regulation in the
absence of widespread effective competition.
CABLE RATE REGULATION. The 1992 Cable Act imposed an extensive rate
regulation regime on the cable television industry, which limited the ability of
cable companies to increase subscriber fees. Under that regime, all cable
systems are subject to rate regulation, unless they face "effective competition"
in their local franchise area. Federal law now defines "effective competition"
on a community-specific basis as requiring satisfaction of conditions rarely
satisfied in the current marketplace.
Although the Federal Communications Commission has established the
underlying regulatory scheme, local government units, commonly referred to as
local franchising authorities, are primarily responsible for administering the
regulation of the lowest level of cable -- the basic service tier, which
typically contains local broadcast stations and public, educational, and
government access channels. Before a local franchising authority begins basic
service rate regulation, it must certify to the Federal Communications
Commission that it will follow applicable federal rules. Many local franchising
authorities have voluntarily declined to exercise their authority to regulate
basic service rates. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services.
As of March 31, 1999, local franchising authorities covering approximately
42% of our systems' subscribers were certified to regulate basic tier rates. The
1992 Cable Act permits communities to certify and regulate rates at any time, so
that it is possible that additional localities served by the systems may choose
to certify and regulate rates in the future.
The Federal Communications Commission itself directly administers rate
regulation of cable programming service tiers, which is expanded basic
programming offering more services than basic programming, which typically
contain satellite-delivered programming. Under the 1996 Telecom Act, the Federal
Communications Commission can regulate cable programming service tier rates only
if a local franchising authority first receives at least two rate complaints
from local subscribers and then files a formal complaint with the Federal
Communications Commission. When new cable programming service tier rate
complaints are filed, the Federal Communications Commission considers only
whether the
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incremental increase is justified and it will not reduce the previously
established cable programming service tier rate. We currently have 45 rate
complaints relating to approximately 400,000 subscribers pending at the Federal
Communications Commission. Significantly, the Federal Communications
Commission's authority to regulate cable programming service tier rates expired
on March 31, 1999. The Federal Communications Commission has taken the position
that it will still adjudicate cable programming service tier complaints filed
after this sunset date, but no later than 180 days after the last cable
programming service tier rate increase imposed prior to March 31, 1999, and will
strictly limit its review, and possibly refund orders, to the time period
predating the sunset date. We do not believe any adjudications regarding these
pre-sunset complaints will have a material adverse effect on our business. The
elimination of cable programming service tier regulation, which is the rate
regulation of a particular level of packaged programming services, typically
referring to the expanded basic level of services, in a prospective basis
affords us substantially greater pricing flexibility.
Under the rate regulations of the Federal Communications Commission, most
cable systems were required to reduce their basic service tier and cable
programming service tier rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carriage. The Federal Communications Commission
has modified its rate adjustment regulations to allow for annual rate increases
and to minimize previous problems associated with regulatory lag. Operators also
have the opportunity to bypass this "benchmark" regulatory scheme in favor of
traditional "cost-of-service" regulation in cases where the latter methodology
appears favorable. Cost of service regulation is a traditional form of rate
regulation, under which a utility is allowed to recover its costs of providing
the regulated service, plus a reasonable profit. The Federal Communications
Commission and Congress have provided various forms of rate relief for smaller
cable systems owned by smaller operators. Premium cable services offered on a
per-channel or per-program basis remain unregulated, as do affirmatively
marketed packages consisting entirely of new programming product. However,
federal law requires that the basic service tier be offered to all cable
subscribers and limits the ability of operators to require purchase of any cable
programming service tier if a customer seeks to purchase premium services
offered on a per-channel or per-program basis, subject to a technology exception
which sunsets in 2002.
As noted above, FCC regulation of cable programming service tier rates for
all systems, regardless of size, sunset pursuant to the 1996 Telecom Act on
March 31, 1999. Certain legislators, however, have called for new rate
regulations if unregulated cost rates increase dramatically. The 1996 Telecom
Act also relaxes existing "uniform rate" requirements by specifying that uniform
rate requirements do not apply where the operator faces "effective competition,"
and by exempting bulk discounts to multiple dwelling units, although complaints
about predatory pricing still may be made to the Federal Communications
Commission.
CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Telecom Act creates a more
favorable environment for us to provide telecommunication services beyond
traditional video delivery. It provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. A cable
operator is authorized under the 1996 Telecom Act to provide telecommunication
services without obtaining a separate local franchise. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local
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governments also retain their authority to manage the public rights-of-way and
may require reasonable, competitively neutral compensation for management of the
public rights-of-way when cable operators provide telecommunications service.
The favorable pole attachment rates afforded cable operators under federal law
can be gradually increased by utility companies owning the poles, beginning in
2001, if the operator provides telecommunications service, as well as cable
service, over its plant. The Federal Communications Commission recently
clarified that a cable operator's favorable pole rates are not endangered by the
provision of Internet access.
Cable entry into telecommunications will be affected by the regulatory
landscape now being developed by the Federal Communications Commission and state
regulators. One critical component of the 1996 Telecom Act to facilitate the
entry of new telecommunications providers, including cable operators, is the
interconnection obligation imposed on all telecommunications carriers. In July
1997, the Eighth Circuit Court of Appeals vacated certain aspects of the Federal
Communications Commission initial interconnection order but most of that
decision was reversed by the U.S. Supreme Court in January 1999. The Supreme
Court effectively upheld most of the Federal Communications Commission
interconnection regulations. Although these regulations should enable new
telecommunications entrants to reach viable interconnection agreements with
incumbent carriers, many issues, including whether the Federal Communications
Commission ultimately can mandate that incumbent carriers make available
specific network elements, remains subject to further Federal Communications
Commission review. Aggressive regulation by the Federal Communications
Commission in this area, if upheld by the courts, would make it easier for us to
provide telecommunications service.
INTERNET SERVICE. Although there is at present no significant federal
regulation of cable system delivery of Internet services, and the Federal
Communications Commission recently issued a report to Congress finding no
immediate need to impose such regulation, this situation may change as cable
systems expand their broadband delivery of Internet services. In particular,
proposals have been advanced at the Federal Communications Commission and
Congress that would require cable operators to provide access to unaffiliated
Internet service providers and online service providers. Certain Internet
service providers also are attempting to use existing commercial leased access
provisions to gain access to cable system delivery. A petition on this issue is
now pending before the Federal Communications Commission. Finally, some local
franchising authorities are considering the imposition of mandatory Internet
access requirements as part of cable franchise renewals or transfers. A federal
district court in Portland, Oregon recently upheld the legal ability of local
franchising authority to impose such conditions, but an appeal has been filed.
Other local authorities have imposed or may impose mandatory Internet access
requirements on cable operators. These developments could, if they become
widespread, burden the capacity of cable systems and complicate our own plans
for providing Internet service.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Telecom Act allows
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable cross-ownership ban. Local exchange carriers,
including the regional telephone companies, can now compete with cable operators
both inside and outside their telephone service areas with certain regulatory
safeguards. Because of their resources, local exchange carriers could be
formidable competitors to traditional cable operators, and certain local
exchange carriers have begun offering cable service.
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Various local exchange carriers currently are seeking to provide video
programming services within their telephone service areas through a variety of
distribution methods, including both the deployment of broadband wire facilities
and the use of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers or any other cable
competitor providing video programming to subscribers through broadband wire
should be regulated as a traditional cable operator, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband plant as an
open video system. To qualify for favorable open video system status, the
competitor must reserve two-thirds of the system's activated channels for
unaffiliated entities. The Fifth Circuit Court of Appeals recently reversed
certain of the Federal Communications Commission's open video system rules,
including its preemption of local franchising. That decision may be subject to
further appeal. It is unclear what effect this ruling will have on the entities
pursuing open video system operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of co-located cable systems. Co-located cable
systems are cable systems serving an overlapping territory. Cable operator
buyouts of co-located local exchange carrier systems, and joint ventures between
cable operators and local exchange carriers in the same market. The 1996 Telecom
Act provides a few limited exceptions to this buyout prohibition, including a
carefully circumscribed "rural exemption." The 1996 Telecom Act also provides
the Federal Communications Commission with the limited authority to grant
waivers of the buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The 1996
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services, including cable television,
notwithstanding the Public Utility Holding Company Act. Electric utilities must
establish separate subsidiaries, known as "exempt telecommunications companies"
and must apply to the Federal Communications Commission for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several such utilities have been granted broad authority by the Federal
Communications Commission to engage in activities which could include the
provision of video programming.
ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecom Act eliminates
statutory restrictions on broadcast/cable cross-ownership, including broadcast
network/cable restrictions, but leaves in place existing Federal Communications
Commission regulations prohibiting local cross-ownership between co-located
television stations and cable systems.
Pursuant to the 1992 Cable Act, the Federal Communications Commission
adopted rules precluding a cable system from devoting more than 40% of its
activated channel capacity to the carriage of affiliated national video program
services. Although the 1992 Cable Act also precluded any cable operator from
serving more than 30% of all U.S. domestic cable subscribers, this provision has
been stayed pending further judicial review and Federal Communications
Commission rulemaking.
MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast
signal carriage requirements. Broadcast signal carriage is the transmission of
broadcast television signals over a cable system to cable customers. These
requirements, among other things, allow local commercial television broadcast
stations to elect once every three years between
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a "must carry" status or a "retransmission consent" status. Less popular
stations typically elect must carry, which is the broadcast signal carriage
requirement that allows local commercial television broadcast stations to
require a cable system to carry the station. More popular stations, such as
those affiliated with a national network, typically elect retransmission
consent, which is the broadcast signal carriage requirement that allows local
commercial television broadcast stations to negotiate for payments for granting
permission to the cable operator to carry the stations. Must carry requests can
dilute the appeal of a cable system's programming offerings because a cable
system with limited channel capacity may be required to forego carriage of
popular channels in favor of less popular broadcast stations electing must
carry. Retransmission consent demands may require substantial payments or other
concessions. Either option has a potentially adverse effect on our business. The
burden associated with must carry may increase substantially if broadcasters
proceed with planned conversion to digital transmission and the Federal
Communications Commission determines that cable systems must carry all analog
and digital broadcasts in their entirety. This burden would reduce capacity
available for more popular video programming and new internet and
telecommunication offerings. A rulemaking is now pending at the Federal
Communications Commission regarding the imposition of dual digital and analog
must carry.
ACCESS CHANNELS. Local franchising authorities can include franchise
provisions requiring cable operators to set aside certain channels for public,
educational and governmental access programming. Federal law also requires cable
systems to designate a portion of their channel capacity, up to 15% in some
cases, for commercial leased access by unaffiliated third parties. The Federal
Communications Commission has adopted rules regulating the terms, conditions and
maximum rates a cable operator may charge for commercial leased access use. We
believe that requests for commercial leased access carriages have been
relatively limited. A new request has been forwarded to the Federal
Communications Commission, however, requesting that unaffiliated Internet
service providers be found eligible for commercial leased access. Although we do
not believe such use is in accord with the governing statute, a contrary ruling
could lead to substantial leased activity by Internet service providers and
disrupt our own plans for Internet service.
ACCESS TO PROGRAMMING. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes video programmers affiliated with cable companies from
favoring their cable operators over new competitors and requires such
programmers to sell their programming to other multichannel video distributors.
This provision limits the ability of vertically integrated cable programmers to
offer exclusive programming arrangements to cable companies. Recently, there has
been increased interest in further restricting the marketing practices of cable
programmers, including subjecting programmers who are not affiliated with cable
operators to all of the existing program access requirements, and subjecting
terrestrially delivered programming to the program access requirements.
Terrestrially delivered programming is programming delivered other than by
satellite. These changes should not have a dramatic impact on us, but would
limit potential competitive advantages we now enjoy.
INSIDE WIRING; SUBSCRIBER ACCESS. In a 1997 Order, the Federal
Communications Commission established rules that require an incumbent cable
operator upon expiration of a multiple dwelling unit service contract to sell,
abandon, or remove "home run" wiring that was installed by the cable operator in
a multiple dwelling unit building. These inside wiring rules are expected to
assist building owners in their attempts to replace existing
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cable operators with new programming providers who are willing to pay the
building owner a higher fee, where such a fee is permissible. The Federal
Communications Commission has also proposed abrogating all exclusive multiple
dwelling unit service agreements held by incumbent operators, but allowing such
contracts when held by new entrants. In another proceeding, the Federal
Communications Commission has preempted restrictions on the deployment of
private antenna on rental property within the exclusive use of a tenant, such as
balconies and patios. This Federal Communications Commission ruling may limit
the extent to which we along with multiple dwelling unit owners may enforce
certain aspects of multiple dwelling unit agreements which otherwise prohibit,
for example, placement of digital broadcast satellite receiver antennae in
multiple dwelling unit areas under the exclusive occupancy of a renter. These
developments may make it even more difficult for us to provide service in
multiple dwelling unit complexes.
OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION. In addition to
the Federal Communications Commission regulations noted above, there are other
regulations of the Federal Communications Commission covering such areas as:
- equal employment opportunity,
- subscriber privacy,
- programming practices, including, among other things,
(1) syndicated program exclusivity, which is a Federal Communications
Commission rule which requires a cable system to delete particular
programming offered by a distant broadcast signal carried on the
system which duplicates the programming for which a local broadcast
station has secured exclusive distribution rights,
(2) network program nonduplication,
(3) local sports blackouts,
(4) indecent programming,
(5) lottery programming,
(6) political programming,
(7) sponsorship identification,
(8) children's programming advertisements, and
(9) closed captioning,
- registration of cable systems and facilities licensing,
- maintenance of various records and public inspection files,
- aeronautical frequency usage,
- lockbox availability,
- antenna structure notification,
- tower marking and lighting,
- consumer protection and customer service standards,
- technical standards,
- consumer electronics equipment compatibility, and
- emergency alert systems.
The Federal Communications Commission recently ruled that cable customers
must be allowed to purchase cable converters from third parties and established
a multi-year phase-in during which security functions, which would remain in the
operator's exclusive
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control, would be unbundled from basic converter functions, which could then be
satisfied by third party vendors. The Federal Communications Commission has the
authority to enforce its regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of Federal Communications
Commission licenses needed to operate certain transmission facilities used in
connection with cable operations.
COPYRIGHT. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool, that varies depending on the size
of the system, the number of distant broadcast television signals carried, and
the location of the cable system, cable operators can obtain blanket permission
to retransmit copyrighted material included in broadcast signals. The possible
modification or elimination of this compulsory copyright license is the subject
of continuing legislative review and could adversely affect our ability to
obtain desired broadcast programming. We cannot predict the outcome of this
legislative activity. Copyright clearances for nonbroadcast programming services
are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the Association of Songwriters, Composers, Artists and Producers
and Broadcast Music, Inc.. The cable industry and Broadcast Music have reached a
standard licensing agreement, and negotiations with the Association of
Songwriters are ongoing. Although we cannot predict the ultimate outcome of
these industry negotiations or the amount of any license fees we may be required
to pay for past and future use of association-controlled music, we do not
believe such license fees will be significant to our business and operations.
STATE AND LOCAL REGULATION. Cable television systems generally are
operated pursuant to nonexclusive franchises granted by a municipality or other
state or local government entity in order to cross public rights-of-way. Federal
law now prohibits local franchising authorities from granting exclusive
franchises or from unreasonably refusing to award additional franchises. Cable
franchises generally are granted for fixed terms and in many cases include
monetary penalties for non-compliance and may be terminable if the franchisee
failed to comply with material provisions.
The specific terms and conditions of franchises vary materially between
jurisdictions. Each franchise generally contains provisions governing cable
operations, service rates, franchising fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states,
including Connecticut, subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. Although local franchising authorities have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, local franchising authorities cannot insist on
franchise fees exceeding 5% of the system's gross cable-related revenues, cannot
dictate the particular technology used by the system, and cannot specify video
programming other than identifying broad categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal.
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Similarly, if a local franchising authority's consent is required for the
purchase or sale of a cable system or franchise, such local franchising
authority may attempt to impose more burdensome or onerous franchise
requirements in connection with a request for consent. Historically, most
franchises have been renewed for and consents granted to cable operators that
have provided satisfactory services and have complied with the terms of their
franchise.
Under the 1996 Telecom Act, cable operators are not required to obtain
franchises for the provision of telecommunications services, and local
franchising authorities are prohibited from limiting, restricting, or
conditioning the provision of such services. In addition, local franchising
authorities may not require a cable operator to provide any telecommunications
service or facilities, other than institutional networks under certain
circumstances, as a condition of an initial franchise grant, a franchise
renewal, or a franchise transfer. The 1996 Telecom Act also provides that
franchising fees are limited to an operator's cable-related revenues and do not
apply to revenues that a cable operator derives from providing new
telecommunications services.
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MANAGEMENT
Charter Holdings is a holding company with no operations. Charter Capital
is a direct wholly owned finance subsidiary of Charter Holdings that exists
solely for the purpose of serving as co-obligor of the notes and has no
operations. Neither Charter Holdings nor Charter Capital has any employees. We
are managed by Charter Investment pursuant to a management agreement between
Charter Investment and Charter Operating, covering all of our operating
subsidiaries. See "Certain Relationships and Related Transactions."
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors who are responsible for providing significant services
with respect to our management and operations. There are two directors of
Charter Holdings, one director of Charter Capital and three directors of Charter
Investment.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION
- -------------------------------- --- --------
<S> <C> <C>
Paul G. Allen............................. 46 Chairman of the Board of Charter Investment
William D. Savoy.......................... 34 Director of Charter Holdings and Charter
Investment
Jerald L. Kent............................ 43 President, Chief Executive Officer and Director
of Charter Holdings, Charter Capital and Charter
Investment
Barry L. Babcock.......................... 52 Vice Chairman of Charter Investment
Howard L. Wood............................ 60 Vice Chairman of Charter Investment
David G. Barford.......................... 40 Senior Vice President Operations of Charter
Investment -- Western Division
Mary Pat Blake............................ 44 Senior Vice President -- Marketing and
Programming of Charter Investment
Eric A. Freesmeier........................ 46 Senior Vice President -- Administration of
Charter Investment
Thomas R. Jokerst......................... 50 Senior Vice President -- Advanced Technology
Development of Charter Investment
Kent D. Kalkwarf.......................... 39 Senior Vice President and Chief Financial Officer
of Charter Holdings, Charter Capital and Charter
Investment
Ralph G. Kelly............................ 42 Senior Vice President -- Treasurer of Charter
Holdings, Charter Capital and Charter Investment
David L. McCall........................... 44 Senior Vice President Operations of Charter
Investment -- Eastern Division
John C. Pietri............................ 49 Senior Vice President -- Engineering of Charter
Investment
Steven A. Schumm.......................... 46 Executive Vice President, Assistant to the
President of Charter Holdings, Charter Capital
and Charter Investment
Curtis S. Shaw............................ 50 Senior Vice President, General Counsel and
Secretary of Charter Holdings, Charter Capital
and Charter Investment
</TABLE>
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The following sets forth certain biographical information with respect to
the executive officers named in the chart above.
PAUL G. ALLEN is the Chairman of the board of directors of Charter
Investment. Mr. Allen has been a private investor for more than five years, with
interests in a wide variety of companies, many of which focus on multimedia
digital communications. Such companies include Interval Research Corporation, of
which Mr. Allen is a director, Vulcan Ventures, Inc., of which Mr. Allen is the
President, Chief Executive Officer and Chairman of the Board, Vulcan Northwest,
Inc., of which Mr. Allen is the Chairman of the Board, and Vulcan Programming,
Inc. In addition, Mr. Allen is the owner and the Chairman of the Board of the
Portland Trail Blazers of the National Basketball Association, and is the owner
and the Chairman of the Board of the Seattle Seahawks of the National Football
League. Mr. Allen currently serves as a director of Microsoft Corporation and
USA Networks, Inc. and also serves as a director of various private
corporations.
WILLIAM D. SAVOY is a director of Charter Holdings and Charter Investment.
Mr. Savoy is also Vice President and a director of Vulcan Ventures, President of
Vulcan Northwest and President and a director of Vulcan Programming, since 1990.
From 1987 until November 1990, Mr. Savoy was employed by Layered, Inc. and
became its President in 1988. Mr. Savoy serves on the Advisory Board of
DreamWorks SKG and also serves as director of Harbinger Corporation, High Speed
Access Corp., Metricom, Inc., Telescan, Inc., Ticketmaster Online -- CitySearch,
U.S. Satellite Broadcasting Co., Inc., and USA Networks, Inc. Mr. Savoy holds a
B.S. in Computer Science, Accounting and Finance from Atlantic Union College.
JERALD L. KENT is a co-founder of Charter Investment, and President and
Chief Executive Officer and director of Charter Holdings, Charter Capital and
Charter Investment and has previously held the position of Chief Financial
Officer of Charter Investment. Prior to co-founding Charter Investment, Mr. Kent
was associated with Cencom Cable Associates, Inc., where he served as Executive
Vice President and Chief Financial Officer. Mr. Kent also served Cencom as
Senior Vice President of Finance from May 1987, Senior Vice President of
Acquisitions and Finance from July 1988, and Senior Vice President and Chief
Financial Officer from January 1989. Mr. Kent is a member of the board of
directors of High Speed Access Corp. and Cable Television Laboratories. Prior to
that time, Mr. Kent was employed by Arthur Andersen LLP, certified public
accountants, where he attained the position of tax manager. Mr. Kent, a
certified public accountant, received his undergraduate and M.B.A. degrees with
honors from Washington University (St. Louis).
BARRY L. BABCOCK is a co-founder of Charter Investment and Vice Chairman of
Charter Investment and has been involved in the cable industry since 1979. Prior
to founding Charter Investment in 1994, Mr. Babcock was associated with Cencom,
where he served as the Executive Vice President from February 1986 to September
1991, and was named Chief Operating Officer in May of 1986. Mr. Babcock was one
of the founders of Cencom Cable Associates, Inc. and, prior to the duties he
assumed in early 1986, was responsible for all of Cencom's in-house legal work,
contracts and governmental relations. Mr. Babcock serves as the Chairman of the
board of directors of Community Telecommunications Association. He also serves
as a director of the National Cable Television Association, Cable in the
Classroom and Mercantile Bank -- St. Louis. Mr. Babcock, an attorney, received
his undergraduate and J.D. degrees from the University of Oklahoma.
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<PAGE> 131
HOWARD L. WOOD is a co-founder of Charter Investment and Vice Chairman of
Charter Investment. Prior to founding Charter Investment, Mr. Wood was
associated with Cencom. Mr. Wood joined Cencom as President, Chief Financial
Officer and Director and assumed the additional position of Chief Executive
Officer effective January 1, 1989. Prior to that time, Mr. Wood was a partner in
Arthur Andersen LLP, certified public accountants, where he served as
Partner-in-Charge of the St. Louis Tax Division from 1973 until joining Cencom.
Mr. Wood is a certified public accountant and a member of the American Institute
of Certified Public Accountants. He also serves as a director of VanLiner Group,
Inc., First State Bank and Gaylord Entertainment Company. Mr. Wood also serves
as Commissioner for the Missouri Department of Conservation. He is also a past
Chairman of the Board and former director of the St. Louis College of Pharmacy.
Mr. Wood graduated with honors from Washington University (St. Louis) School of
Business.
DAVID G. BARFORD is Senior Vice President Operations of Charter
Investment -- Western Division, where he has primary responsibility for all
cable operations in the Central, Western, North Central and MetroPlex Regions.
Prior to joining Charter Investment, he served as Vice President of Operations
and New Business Development for Comcast Cable, where he held various senior
marketing and operating roles over an eight-year period. Mr. Barford received a
B.A. degree from California State University, Fullerton and an M.B.A. from
National University in La Jolla, California.
MARY PAT BLAKE is Senior Vice President -- Marketing and Programming of
Charter Investment and is responsible for all aspects of marketing, sales and
programming and advertising sales. Prior to joining Charter Investment in August
1995, Ms. Blake was active in the emerging business sector, and formed Blake
Investments, Inc. in September 1993, which created, operated and sold a branded
coffeehouse and bakery. From September 1990 to August 1993, Ms. Blake served as
Director -- Marketing for Brown Shoe Company. Ms. Blake has 18 years of
experience with senior management responsibilities in marketing, sales, finance,
systems, and general management with companies such as The West Coast Group,
Pepsico Inc.-Taco Bell Division, General Mills, Inc. and ADP Network Services,
Inc. Ms. Blake received a B.S. degree from the University of Minnesota, and an
M.B.A. degree from the Harvard Business School.
ERIC A. FREESMEIER joined Charter Investment as Senior Vice President --
Administration in April 1998 and is responsible for human resources, public
relations and communications, corporate facilities and aviation. From 1986 until
joining Charter Investment, he served in various executive management positions
at Edison Brothers Stores, Inc., a specialty retail company. His most recent
position was Executive Vice President -- Human Resources and Administration.
From 1974 to 1986, Mr. Freesmeier held management and executive positions with
Montgomery Ward, a national mass merchandise retailer, and its various
subsidiaries. Mr. Freesmeier holds Bachelor of Business degrees in marketing and
industrial relations from the University of Iowa and a Masters of Management
degree in finance from Northwestern University's Kellogg Graduate School of
Management.
THOMAS R. JOKERST is Senior Vice President -- Advanced Technology
Development of Charter Investment. Prior to his appointment to this position,
Mr. Jokerst held the position of Senior Vice President -- Engineering since
December 1993. Prior to joining Charter Investment, from March 1991 to March
1993, Mr. Jokerst served as Vice President -- Office of Science and Technology
for CableTelevision Laboratories in Boulder, Colorado. From June 1976 to March
1993, Mr. Jokerst was Director of Engineering for the midwest
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region of Continental Cablevision. Mr. Jokerst participates in professional
activities with the NCTA, SCTE and Cable Television Laboratories. Mr. Jokerst is
a graduate of Ranken Technical Institute in St. Louis with a degree in
Communications Electronics and Computer Technology and of Southern Illinois
University in Carbondale, Illinois with a degree in Electronics Technology.
KENT D. KALKWARF is Senior Vice President and Chief Financial Officer of
Charter Holdings, Charter Capital and Charter Investment. Prior to joining
Charter Investment, Mr. Kalkwarf was a senior tax manager for Arthur Andersen
LLP, from 1982 to July 1995. Mr. Kalkwarf has extensive experience in cable,
real estate and international tax issues. Mr. Kalkwarf has a B.S. degree from
Illinois Wesleyan University and is a certified public accountant.
RALPH G. KELLY is Senior Vice President -- Treasurer of Charter Holdings,
Charter Capital and Charter Investment. Mr. Kelly joined Charter Investment in
1993 as Vice President -- Finance, a position he held until early 1994 when he
became Chief Financial Officer of CableMaxx, Inc., a wireless cable television
operator. Mr. Kelly returned to Charter Investment as Senior Vice
President -- Treasurer in February 1996, and has responsibility for treasury
operations, investor relations and financial reporting. From 1984 to 1993, Mr.
Kelly was associated with Cencom where he held the positions of Controller from
1984 to 1989 and Treasurer from 1990 to 1993. Mr. Kelly is a certified public
accountant and was in the audit division of Arthur Andersen LLP from 1979 to
1984. Mr. Kelly received his undergraduate degree in accounting from the
University of Missouri -- Columbia and his M.B.A. from Saint Louis University.
DAVID L. MCCALL is Senior Vice President Operations of Charter
Investment -- Eastern Division. Mr. McCall joined Charter Investment in January
1995 as Regional Vice President Operations and he has primary responsibility for
all cable system operations managed by Charter Investment in the Southeast,
Southern and Northeast Regions of the United States. Prior to joining Charter
Investment, Mr. McCall was associated with Crown Cable and its predecessor
company, Cencom, from 1983 to 1994. As a Regional Manager of Cencom, Mr.
McCall's responsibilities included supervising all aspects of operations for
systems located in North Carolina, South Carolina and Georgia, consisting of
over 142,000 customers. From 1977 to 1982, Mr. McCall was System Manager of
Coaxial Cable Developers (known as Teleview Cablevision) in Simpsonville, South
Carolina. Mr. McCall has served as a director of the South Carolina Cable
Television Association for the past ten years.
JOHN C. PIETRI joined Charter Investment in November 1998 as Senior Vice
President -- Engineering. Prior to joining Charter Investment, Mr. Pietri was
with Marcus in Dallas, Texas for eight years, most recently serving as Senior
Vice President and Chief Technical Officer. Prior to Marcus, Mr. Pietri served
as Regional Technical Operations Manager for West Marc Communications in Denver,
Colorado, and before that he served as Operations Manager with Minnesota Utility
Contracting. Mr. Pietri attended the University of Wisconsin-Oshkosh.
STEVEN A. SCHUMM is Executive Vice President, Assistant to the President of
Charter Holdings, Charter Capital and Charter Investment. Mr. Schumm joined
Charter Investment in December 1998 and currently directs the MIS Regulatory and
Financial Controls Groups. Prior to joining Charter Investment, Mr. Schumm was
managing partner of the St. Louis office of Ernst & Young LLP. Mr. Schumm was
with Ernst & Young LLP for 24 years and was a partner of the firm for 14 of
those years. Mr. Schumm held various management positions with Ernst & Young
LLP, including the Director of Tax
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Services for the three-city area of St. Louis, Kansas City and Wichita and then
National Director of Industry Tax Services. He served as one of 10 members
comprising the Firm's National Tax Committee. Mr. Schumm earned a B.S. degree
from St. Louis University with a major in accounting.
CURTIS S. SHAW is Senior Vice President, General Counsel and Secretary of
Charter Holdings, Charter Capital and Charter Investment and is responsible for
all legal aspects of their businesses, government relations and the duties of
the corporate secretary. Mr. Shaw joined Charter Investment in February 1997.
Prior to joining Charter Investment, Mr. Shaw served as corporate Counsel to
NYNEX since 1988. From 1983 until 1988 Mr. Shaw served as Associate General
Counsel for Occidental Chemical Corporation, and, from 1986 until 1988, also as
Vice President and General Counsel of its largest operating division. Mr. Shaw
has 25 years of experience as a corporate lawyer, specializing in mergers and
acquisitions, joint ventures, public offerings, financings, and federal
securities and antitrust law. Mr. Shaw received a B.A. with honors from Trinity
College and a J.D. from Columbia University School of Law.
DIRECTOR COMPENSATION
The directors of Charter Holdings and Charter Capital are not entitled to
any compensation for serving as a director, nor are they paid any fees for
attendance at any meeting of the board of directors. Directors may be reimbursed
for the actual reasonable costs incurred in connection with attendance at such
board meetings.
EXECUTIVE COMPENSATION
None of the executive officers listed above has ever received any
compensation from Charter Holdings or Charter Capital, nor do such individuals
expect to receive compensation from Charter Holdings or Charter Capital at any
time in the future. Such executive officers receive their compensation from
Charter Investment, except for Mr. McCall, who is compensated by an operating
subsidiary. Charter Investment is entitled to receive management fees from us
for providing its management and consulting services. See "Certain Relationships
and Related Transactions."
The following table sets forth information regarding the compensation paid
by Charter Investment during its last completed fiscal year to the President and
Chief Executive Officer and each of the other four most highly compensated
executive officers as of December 31, 1998. This compensation was paid to these
executive officers by certain of our subsidiaries and affiliates for their
services to these entities.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARD
--------------------------------------- ------------
YEAR OTHER SECURITIES
ENDED ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION DEC. 31 SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- --------------------------- ------- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Jerald L. Kent............ 1998 790,481 641,353 -- 7,044,127(1) 4,918(2)
President and Chief
Executive Officer
Barry L. Babcock.......... 1998 575,000 925,000(3) -- -- 6,493(4)
Vice Chairman
Howard L. Wood............ 1998 575,000 675,000(5) -- -- 8,050(6)
Vice Chairman
David G. Barford.......... 1998 220,000 225,000(7) -- -- 4,347(8)
Senior Vice President of
Operations -- Western
Division
Curtis S. Shaw............ 1998 190,000 80,000 -- -- 3,336(9)
Senior Vice President,
General Counsel and
Secretary
</TABLE>
- ---------------
(1) Options for Charter Holdco units granted pursuant to an employment
agreement and related option agreement.
(2) Includes $4,000 in 401(k) plan matching contribution and $918 in life
insurance premiums.
(3) Includes $500,000 earned as a one-time bonus upon signing of an employment
agreement.
(4) Includes $4,000 in 401(k) plan matching contributions and $2,493 in life
insurance premiums.
(5) Includes $250,000 earned as a one-time bonus upon signing of an employment
agreement.
(6) Includes $4,000 in 401(k) plan matching contributions and $4,050 in life
insurance premiums.
(7) Includes $150,000 received as a one-time bonus after completion of three
years of employment.
(8) Includes $4,000 in 401(k) plan matching contribution and $347 in life
insurance premiums.
(9) Includes $2,529 in 401(k) plan matching contribution and $807 in life
insurance premiums.
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1998 OPTION GRANTS
The following table shows individual grants of options made to certain
executive officers during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
MEMBERSHIP % OF TOTAL OF MEMBERSHIP INTEREST
INTERESTS OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(1)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------------
NAME GRANTED IN 1998 PRICE DATE 5% 10%
- ---- ---------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jerald L. Kent....... 7,044,127(2) 100% $20.00 12/22/08 $88,600,272 $224,530,486
Barry L. Babcock..... -- -- -- -- -- --
Howard L. Wood....... -- -- -- -- -- --
David G. Barford..... -- -- -- -- -- --
Curtis S. Shaw....... -- -- -- -- -- --
</TABLE>
- ---------------
(1) This column shows the hypothetical gains on the options granted based on
assumed annual compound price appreciation of 5% and 10% over the full
ten-year term of the options. The assumed rates of appreciation are mandated
by the Securities and Exchange Commission and do not represent our estimate
or projection of future prices.
(2) Options for Charter Holdco units granted pursuant to an employment agreement
and a related option agreement which amends the options granted under the
employment agreement. The agreements provide that Mr. Kent receive an option
to purchase 3% of the equity value of all of the cable systems managed by
Charter Investment. Accordingly, Mr. Kent has an option to purchase 3% of
the membership interests of Charter Holdco. The option has a term of 10
years and vests one fourth on December 23, 1998, with the remaining vesting
monthly at a rate of 1/36th on the first of each month for months 13 through
48.
1998 AGGREGATED OPTION EXERCISES AND OPTION VALUE TABLE
The following table sets forth for certain executive officers information
concerning the options granted during the fiscal year ended December 31, 1998,
and the value of unexercised options as of December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT DECEMBER 31, 1998 DECEMBER 31, 1998(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jerald L. Kent.................. 1,761,032 5,283,095 -- --
Barry L. Babcock................ -- -- -- --
Howard L. Wood.................. -- -- -- --
David G. Barford................ -- -- -- --
Curtis S. Shaw.................. -- -- -- --
</TABLE>
- ---------------
(1) No options were in-the-money as of December 31, 1998.
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1999 OPTION GRANTS
The following table shows individual grants of options made to certain
executive officers during 1999, as of June 30, 1999. All such grants were made
under the option plan.
<TABLE>
<CAPTION>
NUMBER OF
MEMBERSHIP
INTERESTS
UNDERLYING
OPTIONS EXERCISE EXPIRATION
NAME GRANTED PRICE DATE
- ---- ---------- ----------- ----------
<S> <C> <C> <C>
Jerald L. Kent..................................... -- --
Barry L. Babcock................................... 65,000 $20.00 2/9/09
Howard L. Wood..................................... 65,000 20.00 2/9/09
David G. Barford................................... 200,000 20.00 2/9/09
Curtis S. Shaw..................................... 200,000 20.00 2/9/09
</TABLE>
OPTION PLAN
Charter Holdings adopted a plan, which was assumed by Charter Holdco,
providing for the grant of options to purchase up to 25,009,798 Charter Holdco
membership units, which is equal to 10% of the aggregate equity value of Charter
Holdco on February 9, 1999, the date of adoption of the plan. The plan provides
for grants of options to employees, officers and consultants of Charter Holdco
and its affiliates. The plan is intended to promote the long-term financial
interest of Charter Holdco and its affiliates by encouraging eligible
individuals to acquire an ownership position in Charter Holdco and its
affiliates and providing incentives for performance. As of June 30, 1999, there
were a total of 9,494,081 options granted under the plan. Of those, 9,050,881
options were granted on February 9, 1999 with an exercise price of $20.00 and
443,200 options were granted on April 5, 1999 with an exercise price of $20.73.
One-fourth of the options granted on February 9, 1999 vest on April 3, 2000 and
the remainder vest 1/45 on each monthly anniversary following April 3, 2000.
One-fourth of the options granted on April 5, 1999 vest on the 15 month
anniversary from April 5, 1999, with the remainder vesting 1/45 on each monthly
anniversary for 45 months following the 15 month anniversary. However, if there
has not been a public offering of the equity interests of Charter Holdco or an
affiliate, vesting will occur only upon termination of employment for any reason
other than for cause, upon death or disability, or immediately prior to the
expiration of an option. The options expire after ten years from the date of
grant. Under the terms of the plan, following the consummation of the initial
public offering of Charter Communications, Inc., each membership unit held as a
result of exercise of options will be exchanged automatically for shares of
Class A common stock of Charter Communications, Inc. on a one-for-one basis.
Any unvested options issued under the plan vest immediately upon a change
of control of Charter Holdco. Options will not vest upon a change of control,
however, to the extent that any such acceleration of vesting would result in the
disallowance of specified tax deductions that would otherwise be available to
Charter Holdco or any of its affiliates or to the extent that any optionee would
be liable for any excise tax under a specified section of the tax code. In the
plan, a change of control includes
(1) a sale of more than 49.9% of the outstanding membership interests in
the Charter Holdco,
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(2) a merger or consolidation of Charter Holdco with or into any other
corporation or entity, except where Mr. Allen and his affiliates retain
effective voting control of Charter Holdco, or
(3) any other transactions or event, including a sale of the assets of
Charter Holdco, that results in Mr. Allen holding less than 50.1% of the voting
power of the surviving entity, except where Mr. Allen and his affiliates retain
effective voting control of the Charter Holdco.
If an optionee's employment with or service to Charter Holdco or its
affiliates is terminated other than for cause prior to an initial public
offering, the optionee has the right, for a period of thirty (30) days, to put
to Charter Holdco or Mr. Allen at Mr. Allen's option,
(1) all vested options, and
(2) all membership interests in Charter Holdco owned by such optionee
(whether or not obtained by the exercise of options granted under the plan),
in each case at a purchase price calculated based on the fair market value of
Charter Holdco. If an optionee does not exercise his put right as described
above, Charter Holdco has the right for a period of sixty (60) days to purchase
from the optionee all vested options at a price equal to an option spread
calculated based on fair market value or, with respect to membership interests,
the fair market value of the membership interests obtained by the exercise of
any options. Any such payments would be paid to the optionee in the form of cash
or a ten-year note, at the option of Mr. Allen or Charter Holdco.
If an optionee's employment with or service to Charter Holdco or its
affiliates is terminated other than for cause prior to an initial public
offering, the optionee has the right for a period of sixty (60) days to exercise
any vested options. Any options not so exercised terminate after this 60-day
period. For all purposes under the plan, an initial public offering includes a
public offering of the common stock of Charter Holdco's parent.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS
The limited liability company agreement of Charter Holdings and the
certificate of incorporation of Charter Capital limit the liability of their
respective directors to the maximum extent permitted by Delaware law. The
Delaware General Corporation Law provides that a limited liability company and a
corporation may eliminate or limit the personal liability of a director for
monetary damages for breach of fiduciary duty as a director, except for
liability for:
(1) any breach of the director's duty of loyalty to the corporation
and its stockholders;
(2) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) unlawful payments of dividends or unlawful stock purchases or
redemptions; or
(4) any transaction from which the director derived an improper
personal benefit.
The limited liability company agreement of Charter Holdings and the by-laws
of Charter Capital provide that directors and officers shall be indemnified for
acts or omissions performed or omitted that are determined, in good faith, to be
in our best
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interest. No such indemnification is available for actions constituting bad
faith, willful misconduct or fraud.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Charter Holdings
and Charter Capital pursuant to the foregoing provisions, we have been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
MANAGEMENT AGREEMENT WITH CHARTER INVESTMENT
We have a management agreement with Charter Investment. The management
agreement provides that Charter Investment will manage us and all of our
subsidiaries on a day-to-day basis, in exchange for fees. See "Certain
Relationship and Related Transactions."
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PRINCIPAL EQUITY HOLDERS
Charter Holdings is a direct, wholly owned subsidiary of Charter Holdco
which, in turn, is a direct, wholly owned subsidiary of Charter Investment. The
beneficial ownership of the equity of Charter Investment is as set forth in the
table below. Charter Capital is a direct, wholly owned finance subsidiary of
Charter Holdings.
<TABLE>
<CAPTION>
NAME AND ADDRESS CLASS HELD AMOUNT HELD PERCENTAGE HELD
- ---------------- ------------ ----------- ---------------
<S> <C> <C> <C>
Paul G. Allen..................... Common stock 165,347.9488 96.78%
110 110th Street, N.E.
Suite 500
Bellevue, WA 98004
Jerald L. Kent.................... Common stock 2,748.1044 1.61%
c/o Charter Investment, Inc.
12444 Powerscourt Drive
St. Louis, MO 63131
Barry L. Babcock.................. Common stock 1,962.9574 1.15%
c/o Charter Investment, Inc.
12444 Powerscourt Drive
St. Louis, MO 63131
Howard L. Wood.................... Common stock 785.1830 0.46%
c/o Charter Investment, Inc.
12444 Powerscourt Drive
St. Louis, MO 63131
</TABLE>
There are several events that may occur in the future. If these events
occur, they will modify the ownership of Charter Holdco, which would no longer
be a wholly owned subsidiary of Charter Investment. These events include the
completion of the initial public offering of Class A common stock by Charter
Communications, Inc. and the contribution of $750 million to Charter Holdco by
Vulcan Cable III for which Vulcan Cable III will receive Charter Holdco
membership interests. As a result of these events, Charter Investment's
ownership of Charter Holdco will be diluted. In addition, Jerald L. Kent, our
President and Chief Executive Officer, has an option to purchase 3% of the
equity value of Charter Holdco. This will also result in a dilution of Charter
Investment's ownership of Charter Holdco. Until such time as market valuation of
Charter Communications, Inc. is established, we are unable to determine the
extent of this dilution that will result from any of these events.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following sets forth certain transactions in which we and our
directors, executive officers and affiliates, including the directors and
executive officers of Charter Investment, are involved in. We believe that each
of the transactions described below was on terms no less favorable to us than
could have been obtained from independent third parties.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
MERGER WITH MARCUS
On April 23, 1998, Paul G. Allen acquired approximately 99% of the
non-voting economic interests in Marcus Cable, and agreed to acquire the
remaining interests in Marcus Cable. The aggregate purchase price was
approximately $1.4 billion, excluding $1.8 billion in debt assumed. On March 31,
1999, Mr. Allen completed the acquisition of all remaining interests of Marcus
Cable. On February 22, 1999, Marcus Holdings was formed and all of Mr. Allen's
interests in Marcus Cable were transferred to Marcus Holdings.
On December 23, 1998, Mr. Allen acquired approximately 94% of the equity of
Charter Investment for an aggregate purchase price of approximately $2.2
billion, excluding $2.0 billion in debt assumed. On February 9, 1999, Charter
Holdings was formed as a wholly owned subsidiary of Charter Investment. On
February 10, 1999, Charter Operating was formed as a wholly owned subsidiary of
Charter Holdings. All of Charter Investment's equity interests in its operating
subsidiaries were subsequently transferred to Charter Operating. On May 25,
1999, Charter Holdco was formed as a wholly owned subsidiary of Charter
Investment. All of Charter Investment's equity interests in Charter Holdings
were transferred to Charter Holdco.
In March 1999, we paid $20 million to Vulcan Northwest, an affiliate of Mr.
Allen, for reimbursement of direct costs incurred in connection with Mr. Allen's
acquisition of Marcus Cable. Such costs were principally comprised of financial,
advisory, legal and accounting fees.
On April 7, 1999, Mr. Allen merged Marcus Holdings into Charter Holdings.
Charter Holdings survived the merger, and the operating subsidiaries of Marcus
Holdings became subsidiaries of Charter Holdings.
At the time we issued the original notes, this merger had not yet occurred.
Consequently, Marcus Holdings was a party to the indentures governing the notes
as a guarantor of our obligations. Charter Holdings loaned some of the proceeds
from the sale of the original notes to Marcus Holdings, which amounts were used
to complete the cash tender offers for then-outstanding notes of subsidiaries of
Marcus Holdings. Marcus Holdings issued a promissory note in favor of Charter
Holdings. The promissory note was in the amount of $1,548,630,855, with an
interest rate of 9.92% and a maturity date of April 1, 2007. Marcus Holdings
guaranteed its obligations under the promissory note by entering into a pledge
agreement in favor of Charter Holdings pursuant to which Marcus Holdings pledged
all of its equity interests in Marcus Cable as collateral for the payment and
performance of the promissory note. Charter Holdings pledged this promissory
note to the trustee under the indentures as collateral for the equal and ratable
benefit of the
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holders of the notes. Upon the closing of the merger, and in accordance with the
terms of the notes and the indentures:
- the guarantee issued by Marcus Holdings was automatically terminated;
- the promissory note issued by Marcus Holdings was automatically
extinguished, with no interest having accrued or being paid; and
- the pledge in favor of Charter Holdings of the equity interests in Marcus
Cable as collateral under the promissory note and the pledge in favor of
the trustee of the promissory note as collateral for the notes were
automatically released.
MANAGEMENT AGREEMENTS
PREVIOUS MANAGEMENT AGREEMENTS. Prior to March 18, 1999, pursuant to a
series of management agreements with certain of our subsidiaries, Charter
Investment provided management and consulting services to us. In exchange for
these services, Charter Investment was entitled to receive management fees of 3%
to 5% of the gross revenues of all of our systems plus reimbursement of
expenses. However, our previous credit facilities limited such management fees
to 3% of gross revenues. The balance of management fees payable under the
previous management agreements were accrued. Payment is at the discretion of
Charter Investment. Certain deferred portions of management fees bore interest
at the rate of 8% per annum. Following the closing of our current credit
facilities, the previous management agreements were replaced by a new management
agreement. The other material terms of our previous management agreements are
substantially similar to the material terms of the new management agreement.
PREVIOUS MANAGEMENT AGREEMENT WITH MARCUS. On October 6, 1998, Marcus
entered into a management consulting agreement with Charter Investment pursuant
to which Charter Investment agreed to provide certain management and consulting
services to Marcus Cable and its subsidiaries, in exchange for a fee equal to 3%
of the gross revenues of Marcus Cable's systems plus reimbursement of expenses.
Management fees expensed by Marcus Cable during the period from October 1998 to
December 31, 1998 were approximately $3.3 million. Upon our merger with Marcus
Holdings and the closing of our current credit facilities, this agreement was
terminated and the subsidiaries of Marcus Cable now receive management and
consulting services from Charter Investment under the new management agreement.
THE NEW MANAGEMENT AGREEMENT. On February 23, 1999, Charter Investment
entered into a new management agreement with Charter Operating, which was
amended and restated as of March 17, 1999. Upon the closing of our current
credit facilities on March 18, 1999, our previous management agreements and the
management consulting agreement with Marcus Cable terminated and the new
management agreement became operative. Pursuant to the new management agreement,
Charter Investment has agreed to manage and operate the cable television systems
owned by our subsidiaries, as well as any cable television systems we may
subsequently acquire in the future. The term of the new management agreement is
ten years.
The new management agreement provides that we will reimburse Charter
Investment for all expenses, costs, losses, liabilities or damages incurred by
it in connection with our ownership or operation of our cable television
systems. If Charter Investment pays or incurs any such expenses, costs, losses,
liabilities or damages, it will be reimbursed. In addition to any reimbursement
of expenses, Charter Investment is paid a yearly management fee equal to 3.5% of
our gross revenues. Gross revenues include all revenues
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from the operation of our cable systems, including, without limitation,
subscriber payments, advertising revenues, and revenues from other services
provided by our cable systems. Gross revenues do not include interest income or
income from investments unrelated to our cable systems.
Payment of the management fee to Charter Investment is permitted under our
current credit facilities, but ranks below our payment obligations under our
current credit facilities. In the event any portion of the management fee due
and payable is not paid by us, it is deferred and accrued as a liability. Any
deferred amount of the management fee will bear interest at the rate of 10% per
annum, compounded annually, from the date it was due and payable until the date
it is paid. As of March 31, 1999, no interest had been accrued.
The management fee is payable to Charter Investment quarterly in arrears.
If the current management agreement is terminated, Charter Investment is
entitled to receive the fee payable for an entire quarter, even if termination
occurred before the end of that quarter. Additionally, Charter Investment is
entitled to receive payment of any deferred amount.
Pursuant to the terms of the new management agreement, we have agreed to
indemnify and hold harmless Charter Investment and its shareholders, directors,
officers and employees. This indemnity extends to any and all claims or
expenses, including reasonable attorneys' fees, incurred by them in connection
with any action not constituting gross negligence or willful misconduct taken by
them in good faith in the discharge of their duties to us.
The total management fees, including expenses, earned by Charter Investment
under all management agreements were as follows:
<TABLE>
<CAPTION>
TOTAL FEES
YEAR FEES PAID EARNED
- ---- --------- ----------
(IN THOUSANDS)
<S> <C> <C>
Three Months Ended March 31, 1999................ $13,610 $ 9,938
Year Ended December 31, 1998..................... 17,073 27,500
Year Ended December 31, 1997..................... 14,772 20,290
Year Ended December 31, 1996..................... 11,792 15,443
</TABLE>
As of March 31, 1999, $15,924 remains unpaid for all management agreements.
MANAGEMENT AGREEMENT WITH CHARTER COMMUNICATIONS, INC. Upon the closing of
the initial public offering by Charter Communications, Inc. of its Class A
common stock, Charter Communications, Inc. intends to enter into a management
agreement with Charter Holdco. This management agreement will provide that
Charter Communications, Inc. will manage and operate the cable television
systems owned or to be acquired by Charter Holdco and its subsidiaries.
The terms of the Charter Communications, Inc. management agreement will be
substantially similar to the terms of the Charter Operating management
agreement, except that Charter Communications, Inc. will not be paid a yearly
3.5% management fee. Charter Communications, Inc. will be entitled to
reimbursement from Charter Holdco for all expenses, costs, losses, liabilities
and damages incurred by Charter Communications, Inc. under the service agreement
described below.
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SERVICES AGREEMENT WITH CHARTER INVESTMENT. Upon the closing of Charter
Communications, Inc.'s initial public offering, Charter Communications, Inc.
intends to enter into a services agreement with Charter Investment. The services
agreement will provide that Charter Investment will provide to Charter
Communications, Inc. the personnel and services it requires to fulfill Charter
Communications, Inc.'s obligations as the sole manager of Charter Holdco and its
subsidiaries pursuant to the Charter Communications, Inc. management agreement
and the Charter Operating management agreement. Charter Investment will not
receive a fee for providing the personnel and services, but it will be entitled
to reimbursement of all of its expenses in connection with its performance under
the services agreements.
CONSULTING AGREEMENT
On March 10, 1999, Charter Holdings entered into a consulting agreement
with Vulcan Northwest and Charter Investment. Pursuant to the terms of the
consulting agreement, we retained Vulcan Northwest and Charter Investment to
provide advisory, financial and other consulting services with respect to
acquisitions of the business, assets or stock of other companies by us or by any
of our subsidiaries. Such services include participation in the evaluation,
negotiation and implementation of these acquisitions. The agreement expires on
December 31, 2000, and automatically renews for successive one-year terms unless
otherwise terminated.
All reasonable out-of-pocket expenses incurred by Vulcan Northwest and
Charter Investment are our responsibility and must be reimbursed. We must also
pay Vulcan Northwest and Charter Investment a fee for their services rendered
for each acquisition made by us or any of our subsidiaries. This fee equals 1%
of the aggregate value of such acquisition. Neither Vulcan Northwest nor Charter
Investment will receive a fee in connection with the American Cable,
Renaissance, Greater Media, Helicon, Vista and Cable Satellite acquisitions. We
have also agreed to indemnify and hold harmless Vulcan Northwest and Charter
Investment, and their respective officers, directors, stockholders, agents,
employees and affiliates, for all claims, actions, demands and expenses that
arise out of this consulting agreement and the services they provide us.
Mr. Allen owns 100% of Vulcan Northwest and is the Chairman of the Board.
William D. Savoy, another of our directors, is the President and a director of
Vulcan Northwest.
TRANSACTIONS WITH PAUL G. ALLEN
On December 21, 1998, Mr. Allen contributed approximately $431 million to
Charter Investment and received non-voting common stock of Charter Investment.
Such non-voting common stock was converted to voting common stock on December
23, 1998.
On December 23, 1998, Mr. Allen contributed approximately $1.3 billion to
Charter Investment and received voting common stock of Charter Investment.
Additionally, Charter Investment borrowed approximately $6.2 million in the form
of a bridge loan from Mr. Allen. This bridge loan was contributed by Mr. Allen
to Charter Investment in March 1999. No interest on such bridge loan was accrued
or paid by Charter Investment. On the same date, Mr. Allen also contributed
approximately $223.5 million to Vulcan Cable II, Inc., a company owned by Mr.
Allen. Vulcan II was merged with and into Charter Investment.
On January 5, 1999, Charter Investment borrowed approximately $132.2
million in the form of a bridge loan from Mr. Allen. This bridge loan was
contributed by Mr. Allen
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to Charter Investment in March 1999. No interest on such bridge loan was accrued
or paid by Charter Investment. On the same date, Mr. Allen also acquired
additional voting common stock of Charter Investment from Jerald L. Kent, Howard
L. Wood and Barry L. Babcock for an aggregate purchase price of approximately
$176.7 million.
On January 11, 1999, Charter Investment borrowed $25 million in the form of
a bridge loan from Mr. Allen. This bridge loan was contributed by Mr. Allen to
Charter Investment in March 1999. No interest on such bridge loan was accrued or
paid by Charter Investment.
On March 16, 1999, Charter Investment borrowed approximately $124.8 million
in the form of a bridge loan from Mr. Allen. This bridge loan was contributed by
Mr. Allen to Charter Investment in March 1999. No interest on such bridge loan
was accrued or paid by Charter Investment.
The $431 million contribution was used to purchase Charter Investment,
including its wholly owned subsidiary Charter Properties and its minority
ownership interest in CCA Group and CharterComm Holdings. The $1.3 billion,
$223.5 million and $176.7 million contributions by Mr. Allen were used by
Charter Investment to purchase the remaining interest in CCA Group and
CharterComm Holdings. All other contributions to Charter Investment by Mr. Allen
were used in operations of Charter Investment and were not contributed to
Charter Holdings.
On July 22, 1999, Charter Holdco and Mr. Allen entered into a membership
interests purchase agreement pursuant to which Mr. Allen has committed to
purchase membership interests of Charter Holdco for a total of $1.325 billion.
Mr. Allen will contribute $500 million on or before August 13, 1999, and $825
million on or before September 1, 1999. Charter Holdco has committed to
contribute this $1.325 billion to us. In return, Mr. Allen will receive
58,533,199 membership interests in Charter Holdco, and the right to use up to
eight digital channels in each of our cable systems. We have agreed and are in
the process of finalizing a contract to license these channels to Mr. Allen. The
number of channels licensed in each system will depend on the bandwidth of the
particular system. We believe that this transaction will be on terms at least as
favorable to us as Mr. Allen would negotiate with other cable operators.
ALLOCATION OF BUSINESS OPPORTUNITIES WITH MR. ALLEN
As described under "-- Business Relationships," Mr. Allen and a number of
his affiliates have interests in various entities that provide services or
programming to a number of our subsidiaries. Given the diverse nature of Mr.
Allen's investment activities and interests, and to avoid the possibility of
future disputes as to potential business opportunities which both Mr. Allen or
his affiliates and we might otherwise wish to pursue, effective upon the
completion of the initial public offering by Charter Communications, Inc. of its
Class A common stock, Charter Holdco and Charter Communications, Inc. will have
agreed, until all of its shares of Class B common stock held by Mr. Allen have
automatically converted into shares of Class A common stock, not to engage in
any business transaction outside the cable transmission business. Charter
Communications, Inc. will also agree with Mr. Allen that, should we wish to
pursue a business transaction outside of this scope, we must first offer Mr.
Allen the opportunity to pursue the particular business transaction. If he
decides not to do so and consents to our engaging in the business transaction,
we will be able to do so and the Charter Communications, Inc. certificate of
incorporation and Charter Holdco's operating agreement would be amended
accordingly. The cable transmission business means the business of transmitting
video,
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audio and data on cable television systems owned, operated or managed by us from
time to time. As long as Mr. Allen is a director of Charter Communications,
Inc., he will be required to present to Charter Communications, Inc. any
opportunity he may have to acquire, directly or indirectly, a majority ownership
interest in any cable television system or any company whose principal business
is the ownership, operation or management of cable television systems. However,
except for the foregoing, Charter Holdco and Charter Communications, Inc. will
agree that Mr. Allen does not have an obligation to present to Charter
Communications, Inc. business opportunities in which both Mr. Allen and we might
have an interest and that he may exploit such opportunities for his own account.
The Charter Communications, Inc. certificate of incorporation and Charter
Holdco's operating agreement will contain provisions to that effect.
ASSIGNMENTS OF ACQUISITIONS
On January 1, 1999, Charter Investment entered into a membership purchase
agreement with ACEC Holding Company, LLC for the acquisition of American Cable.
On February 23, 1999, Charter Investment assigned its rights and obligations
under this agreement to one of our subsidiaries, Charter Communications
Entertainment II, LLC, effective as of March 8, 1999, or such earlier date as
mutually agreed to by the parties. The acquisition of American Cable was
completed in April 1999.
On February 17, 1999, Charter Investment entered into an asset purchase
agreement with Greater Media, Inc. and Greater Media Cablevision, Inc. for the
acquisition of the Greater Media systems. On February 23, 1999, Charter
Investment assigned its rights and obligations under this agreement to one of
our subsidiaries, Charter Communications Entertainment I, LLC. The acquisition
of the Greater Media systems was completed in April 1999.
On April 26, 1999, Charter Investment entered into,
- a purchase and sale agreement with Rifkin Acquisition Partners, L.L.L.P.
and the sellers listed in such purchase and sale agreement,
- a purchase and sale agreement with Interlink Communications Partners,
LLLP and the sellers listed in such purchase and sale agreement. and
- an indemnity agreement with the sellers listed in such indemnity
agreement,
for the acquisition of Rifkin. On June 30, 1999, Charter Investment assigned is
rights and obligations under each of these agreements to Charter Operating. Both
Charter Investment and Charter Operating remain liable to the Rifkin sellers for
the performance and fulfillment of the covenants, duties and obligations of the
buyer under these agreements.
EMPLOYMENT AGREEMENTS
Jerald L. Kent. Effective as of August 28, 1998, Jerald L. Kent entered
into an employment agreement with Paul G. Allen for a three-year term with
automatic one-year renewals. Under this agreement, Mr. Kent agrees to serve as
President and Chief Executive Officer of Charter Investment, with responsibility
for the nationwide general management, administration and operation of all
present and future business of Charter Investment and its subsidiaries. During
the initial term of the agreement, Mr. Kent will receive a base salary of
$1,250,000, or such higher rate as may from time to time be determined by the
board of directors in its discretion. In addition, Mr. Kent will be eligible to
receive an annual bonus in an aggregate amount not to exceed $625,000, to be
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determined by the board based on an assessment of the performance of Mr. Kent as
well as the achievement of certain financial targets.
Under the agreement, Mr. Kent is entitled to participate in any disability
insurance, pension, or other benefit plan afforded to employees generally or
executives of Charter Investment. Mr. Kent will be reimbursed by Charter
Investment for life insurance premiums up to $30,000 per year. Also under this
agreement and a related agreement, Mr. Kent received options to purchase three
percent (3%) of the net equity value of Charter Holdco. The options have a term
of ten years and will vest twenty-five percent (25%) on December 23, 1998. The
remaining seventy-five percent (75%) will vest 1/36 on the first day of each of
36 months commencing on the first day of the thirteenth month following December
23, 1998.
Charter Investment agrees to indemnify and hold harmless Mr. Kent to the
maximum extent permitted by law from and against any claims, damages,
liabilities, losses, costs or expenses in connection with or arising out of the
performance by Mr. Kent of his duties.
In the event of the expiration of the agreement in accordance with its
terms as a result of Charter Investment giving Mr. Kent notice of its intention
not to extend the initial term, or a termination of the agreement by Mr. Kent
for good reason or by Charter Investment without cause, (a) Charter Investment
will pay to Mr. Kent an amount equal to the aggregate base salary due to Mr.
Kent and the board shall consider additional amounts, if any, to be paid to Mr.
Kent and (b) any unvested options of Mr. Kent shall immediately vest.
Barry L. Babcock. Effective as of December 23, 1998, Barry L. Babcock
entered into an employment agreement with Paul G. Allen for a one-year term with
automatic one-year renewals. Under this agreement, Mr. Babcock agrees to serve
as Vice Chairman of Charter Investment with responsibilities including the
government and public relations of Charter Investment. During the initial term
of the agreement, Mr. Babcock will receive a base salary of $625,000, or such
higher rate as may be determined by the Chief Executive Officer in his
discretion. In addition, Mr. Babcock will be eligible to receive an annual bonus
to be determined by the board of directors in its discretion. Mr. Babcock
received a one time payment as part of his employment agreement of $500,000.
Under the agreement, Mr. Babcock is entitled to participate in any
disability insurance, pension or other benefit plan afforded to employees
generally or executives of Charter Investment. Charter Investment agrees to
grant options to Mr. Babcock to purchase its stock as determined by the board of
directors in its discretion, pursuant to an option plan to be adopted by Charter
Investment.
Charter Investment agrees to indemnify and hold harmless Mr. Babcock to the
maximum extent permitted by law from and against any claims, damages,
liabilities, losses, costs or expenses in connection with or arising out of the
performance by Mr. Babcock of his duties.
In the event of the termination of the agreement by Charter Investment
without cause or by Mr. Babcock for good reason, (a) Charter Investment will pay
to Mr. Babcock an amount equal to the aggregate base salary due to Mr. Babcock
for the remainder of the term of the agreement and (b) vested options, if any,
of Mr. Babcock, will be redeemed for cash for the amount of the spread. Unvested
options will be treated as set forth in the option plan to be adopted as
discussed above.
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Howard L. Wood. Effective as of December 23, 1998, Howard L. Wood entered
into an employment agreement with Paul G. Allen for a one-year term with
automatic one-year renewals. Under this agreement, Mr. Wood agrees to be
employed as an officer of Charter Investment. During the initial term of the
agreement, Mr. Wood will receive a base salary of $312,500, or such higher rate
as may be determined by the Chief Executive Officer in his discretion. In
addition, Mr. Wood will be eligible to receive an annual bonus to be determined
by the board of directors in its discretion. Mr. Wood received a one time
payment as part of his employment agreement of $250,000. Under the agreement,
Mr. Wood is entitled to participate in any disability insurance, pension or
other benefit plan afforded to employees generally or executives of Charter
Investment.
Charter Investment agrees to indemnify and hold harmless Mr. Wood to the
maximum extent permitted by law from and against any claims, damages,
liabilities, losses, costs or expenses in connection with or arising out of the
performance by Mr. Wood of his duties.
In the event of the termination of the agreement by Charter Investment
without cause or by Mr. Wood for good reason, Charter Investment will pay to Mr.
Wood an amount equal to the aggregate base salary due to Mr. Wood for the
remainder of the term of the agreement.
INSURANCE
We receive insurance and workers' compensation coverage through Charter
Investment. Charter Investment's insurance policies provide coverage for Charter
Investment and its
- subsidiaries, and associated, affiliated and inter-related companies,
- majority (51% or more) owned partnerships and joint ventures,
- interest in (or its subsidiaries' interest in) any other partnerships,
joint ventures or limited liability companies,
- interest in (or its subsidiaries' interest in) any company or
organization coming under its active management or control, and
- any entity or party required to be insured under any contract or
agreement,
which may now exist, may have previously existed, or may hereafter be created or
acquired.
During the three-months ended March 31, 1999 and the years-ended December
31, 1998, 1997 and 1996, Charter Investment expensed $3,295,000, $603,000,
$172,100 and $108,000, respectively, relating to insurance allocations.
BUSINESS RELATIONSHIPS
Paul G. Allen or certain affiliates of Mr. Allen, own equity interests or
warrants to purchase equity interests in various entities which provide a number
of our subsidiaries with services or programming. Among these entities are High
Speed Access, WorldGate, Wink, ZDTV, LLC, USA Networks and Oxygen Media, Inc.
These affiliates include Charter Investment and Vulcan Ventures. Mr. Allen owns
100% of the equity of Vulcan Ventures, and is the President, Chief Executive
Officer and Chairman of the Board. Mr. Savoy is also a Vice President and a
director of Vulcan Ventures.
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HIGH SPEED ACCESS. High Speed Access is a provider of high-speed Internet
access over cable modems. In November 1998, Charter Investment entered into a
systems access and investment agreement with Vulcan Ventures and High Speed
Access and a related network services agreement with High Speed Access.
Additionally, Vulcan Ventures and High Speed Access entered into a programming
content agreement. Under these agreements, High Speed Access will have exclusive
access to at least 750,000 of our homes with an installed cable drop from our
cable system or which is eligible for a cable drop by virtue of our cable system
passing the home. The term of the systems access and investment agreement
continues until midnight of the day High Speed Access ceases to provide High
Speed Access services to cable subscribers in any geographic area or region. The
term of the network services agreement is, as to a particular cable system, five
years from the date revenue billing commences for that cable system and,
following this initial term, the network services agreement automatically renews
itself on a year-to-year basis. Additionally, we can terminate our exclusivity
rights, on a system-by-system basis, if High Speed Access fails to meet
performance benchmarks or otherwise breaches the agreements including their
commitment to provide content designated by Vulcan Ventures. The programming
content agreement is effective until terminated for any breach and will
automatically terminate upon the expiration of the systems access and investment
agreement. During the term of the agreements, High Speed Access has agreed not
to deploy WorldGate, Web TV, digital television or related products in the
market areas of any committed system or in any area in which we operate a cable
system. All of Charter Investment's operations take place at the subsidiary
level and it is through Charter Investment that we derive our rights and
obligations with respect to High Speed Access. Under the terms of the network
services agreement, we split revenue with High Speed Access based on set
percentages of gross revenues in each category of service. The programming
content agreement provides each of Vulcan Ventures and High Speed Access with a
license to use certain content and materials of the other on a non-exclusive,
royalty-free basis. Operations began in the first quarter of 1999 with resulting
payments to High Speed Access of $76,000 for the quarter.
Concurrently with entering into these agreements, High Speed Access issued
8 million shares of Series B convertible preferred stock to Vulcan Ventures at a
purchase price of $2.50 per share. Vulcan Ventures also subscribed to purchase
2.5 million shares of Series C convertible preferred stock at a purchase price
of $5.00 per share on or before November 25, 2000, and received an option to
purchase an additional 2.5 million shares of Series C convertible preferred
stock at a purchase price of $5.00 per share. In April 1999, Vulcan Ventures
purchased the entire 5 million shares of Series C convertible preferred stock
for $25 million in cash. The shares of Series B and Series C convertible
preferred stock issued to Vulcan Ventures automatically converted at a price of
$3.23 per share into 20.15 million shares of common stock upon completion of
High Speed Access' initial public offering in June 1999. Additionally, High
Speed Access granted Vulcan Ventures warrants to purchase up to 5 million shares
of common stock at a purchase price of $5.00 per share. These warrants were
converted to warrants to purchase up to approximately 7,739,938 shares of common
stock at a purchase price of $3.23 per share upon completion of High Speed
Access' initial public offering. Vulcan Ventures subsequently assigned the
warrants to Charter Investment.
In addition, Jerald L. Kent, our President and Chief Executive Officer and
a director of Charter Holdings, Mr. Savoy and another individual, who performs
management services for the issuers, are also directors of High Speed Access
Corp.
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WORLDGATE. WorldGate is a provider of Internet access through cable
television systems. On November 7, 1997, Charter Investment signed an
affiliation agreement with WorldGate pursuant to which WorldGate's services will
be offered to some of our customers. The term of the agreement is five years
unless terminated by either party for failure of the other party to perform any
of its obligations or undertakings required under the agreement. The agreement
automatically renews for additional successive two year periods upon expiration
of the initial five year term. All of Charter Investment's operations take place
at the subsidiary level and it is through Charter Investment that we derive our
rights and obligations with respect to WorldGate. Pursuant to the agreement, we
have agreed to use our reasonable best efforts to deploy the WorldGate Internet
access service within a portion of our cable television systems and to install
the appropriate headend equipment in all of our major markets in those systems.
Major markets for purposes of this agreement include those in which we have more
than 25,000 customers. We incur the cost for the installation of headend
equipment. In addition, we have agreed to use our reasonable best efforts to
deploy such service in all non-major markets that are technically capable of
providing interactive pay-per-view service, to the extent we determine that it
is economically practical. When WorldGate has a telephone return path service
available, we will, if economically practical, use all reasonable efforts to
install the appropriate headend equipment and deploy the WorldGate service in
our remaining markets. We have also agreed to market the WorldGate service
within our market areas. We pay a monthly subscriber access fee to WorldGate
based on the number of subscribers to the WorldGate service. We have the
discretion to determine what fees, if any, we will charge our subscribers for
access to the WorldGate service. We started offering WorldGate service in 1998.
For the three-months ended March 31, 1999, we paid to WorldGate $279,000. For
the year ended December 31, 1998, we paid to WorldGate $276,000. We charged our
subscribers $19,000 for the three-months ended March 31, 1999, and $22,000 for
the year ended December 31, 1998.
On November 24, 1997, Charter Investment acquired 70,423 shares of
WorldGate's Series B preferred stock at a purchase price of $7.10 per share. On
February 3, 1999, a subsidiary of Charter Holdings acquired 90,909 shares of
Series C preferred stock at a purchase price of $11.00 per share. As a result of
a stock split, each share of Series B preferred stock will convert into
two-thirds of a share of WorldGate's common stock, and each share of Series C
preferred stock will convert into two-thirds of a share of WorldGate's common
stock. Upon completion of WorldGate's initial public offering, each series of
preferred stock will automatically convert into common stock.
WINK. Wink offers an enhanced broadcasting system that adds interactivity
and electronic commerce opportunities to traditional programming and
advertising. Viewers can, among other things, find news, weather and sports
information on-demand and order products through use of a remote control. On
October 8, 1997, Charter Investment signed a cable affiliation agreement with
Wink to deploy this enhanced broadcasting technology in our systems. The term of
the agreement is three years. Either party has the right to terminate the
agreement for the other party's failure to comply with any of its respective
material obligations under the agreement. All of Charter Investment's operations
take place at the subsidiary level and it is through Charter Investment that we
derive our rights and obligations with respect to Wink. Pursuant to the
agreement, Wink granted us the non-exclusive license to use their software to
deliver the enhanced broadcasting to all of our cable systems. For the first
year of the agreement, we pay a monthly license fee to Wink which is based on
the number of our subscribers in our operating areas. After the first year of
the agreement we pay a fixed monthly license fee to Wink regardless of the
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number of our subscribers in our operating areas. We also supply all server
hardware required for deployment of Wink services. In addition, we agreed to
promote and market the Wink service to our customers within the area of each
system in which such service is being provided. We share in the revenue Wink
generates from all fees collected by Wink for transactions generated by our
customers. The amount of revenue shared is based on the number of transactions
per month. As of March 31, 1999, no revenue or expenses have been recognized as
a result of this agreement.
On November 30, 1998, Vulcan Ventures acquired 1,162,500 shares of Wink's
Series C preferred stock for approximately $9.3 million. In connection with such
acquisition, Wink issued to Vulcan Ventures warrants to purchase shares of
common stock. Additionally, Microsoft Corporation, of which Mr. Allen is a
director, also owns an equity interest in Wink.
ZDTV. ZDTV operates a cable television channel which broadcasts shows
about technology and the Internet. Pursuant to a carriage agreement which
Charter Investment intends to enter into with ZDTV, ZDTV has agreed to provide
us with their programming for broadcast via our cable television systems. The
term of the proposed carriage agreement, with respect to each of our cable
systems, is from the date of launch of ZDTV on that cable system until April 30,
2008. The term expires on the same day for each of our cable systems, regardless
of when any individual cable system launches ZDTV. All of Charter Investment's
operations take place at the subsidiary level and it is through Charter
Investment that we derive our rights and obligations with respect to ZDTV. The
carriage agreement grants us a limited non-exclusive right to receive and to
distribute ZDTV to our subscribers in digital or analog format. The carriage
agreement does not grant us the right to distribute ZDTV over the Internet. We
pay a monthly subscriber fee to ZDTV for the ZDTV programming based on the
number of our subscribers subscribing to ZDTV. Additionally, we agreed to use
commercially reasonable efforts to publicize the programming schedule of ZDTV in
each of our cable systems that offers or will offer ZDTV. Upon reaching a
specified threshold number of ZDTV subscribers, then, in the event ZDTV inserts
any infomercials, advertorials and/or home shopping into in the ZDTV
programming, we receive from ZDTV a percentage of net product revenues resulting
from our distribution of these services. ZDTV may not offer its services to any
other cable operator which serves the same or fewer number of subscribers at a
more favorable rate or on more favorable carriage terms. As of March 31, 1999,
no revenues or expenses have been recognized as a result of these agreements.
On February 5, 1999, Vulcan Programming acquired an approximate one-third
interest in ZDTV. Mr. Allen owns 100% of Vulcan Programming. Mr. Savoy is the
President and a director of Vulcan Programming. The remaining approximate
two-thirds interest in ZDTV is owned by Ziff-Davis Inc. Vulcan Ventures acquired
approximately 3% of the interests in Ziff-Davis. The total investment made by
Vulcan Programming and Vulcan Ventures was $54 million.
USA NETWORKS. USA Networks operates USA Network and The Sci-Fi Channel,
which are cable television networks. USA Networks also operates Home Shopping
Network, which is a retail sales program available via cable television systems.
On May 1, 1994, Charter Investment signed an affiliation agreement with USA
Networks. Pursuant to this affiliation agreement, USA Networks has agreed to
provide their programming for broadcast via our cable television systems. The
term of the affiliation agreement is until December 30, 1999. All of Charter
Investment's operations take place at the subsidiary level and it is through
Charter Investment that we derive our rights and obligations with
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respect to USA Networks. The affiliation agreement grants us the nonexclusive
right to cablecast the USA Network programming service. We pay USA Networks a
monthly fee for the USA Network programming service number based on the number
of subscribers in each of our systems and the number and percentage of such
subscribers receiving the USA Network programming service. Additionally, we
agreed to use best efforts to publicize the schedule of the USA Network
programming service in the television listings and program guides which we
distribute. We have paid to the USA Networks $3,035,000 for the three months
ended March 31, 1999, $556,000 for the year ended December 31, 1998, $204,000
for the year ended December 31, 1997, and $134,000 for the year ended December
31, 1996.
Mr. Allen and Mr. Savoy are also directors of USA Networks. As of April
1999, Mr. Allen also owned approximately 12.4%, and Mr. Savoy owned less than
1%, of the common stock of USA Networks.
OXYGEN MEDIA, INC. Oxygen expects to begin providing content aimed at the
female audience for distribution over the Internet and cable television systems.
Vulcan Ventures has agreed to invest up to $100 million in Oxygen. In addition,
Charter Investment has agreed to enter into a carriage agreement with Oxygen
pursuant to which we intend to carry Oxygen programming content on our cable
systems. As of March 31, 1999, no revenues or expenses have been recognized as a
result of these agreements.
Mr. Allen and his affiliates have, and in the future likely will make,
numerous investments outside of Charter Holdco. We cannot assure you that in the
event that we or any of our subsidiaries enter into transactions in the future
with any affiliate of Mr. Allen, that such transactions will be on terms as
favorable to us as terms we might have obtained from an unrelated third party.
Also, conflicts could arise with respect to the allocation of corporate
opportunities between us and Mr. Allen and his affiliates. Upon completion of
the initial public offering by Charter Communications, Inc. of its Class A
common stock, Charter Communications, Inc. will have entered into an agreement
with Mr. Allen governing the allocation of corporate opportunities as they
arise.
We have not instituted any formal plan or arrangement to address potential
conflicts of interest.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following description is qualified in its entirety by reference to the
credit facilities and related documents governing such debt.
CHARTER OPERATING CREDIT FACILITIES
On March 18, 1999, all of our then-existing senior debt, consisting of
seven separate credit facilities, was refinanced with proceeds of the sale of
the original notes and proceeds of our initial senior secured credit facilities.
The borrower under our initial senior secured credit facilities is Charter
Operating. The initial senior secured credit facilities were arranged by The
Chase Manhattan Bank, NationsBank, N.A., Toronto Dominion (Texas), Inc., Fleet
Bank, N.A. and Credit Lyonnais New York Branch. The initial senior secured
credit facilities provided for borrowings of up to $2.75 billion.
The initial senior secured credit facilities were increased on April 30,
1999 by $1.35 billion of additional senior secured credit facilities.
Obligations under the credit facilities are guaranteed by Charter Operating's
parent, Charter Holdings, and by Charter Operatings' subsidiaries. The
obligations under the credit facilities are secured by pledges by Charter
Operating of inter-company obligations and the ownership interests of Charter
Operating and its subsidiaries, but are not secured by the other assets of
Charter Operating or its subsidiaries. The guarantees are secured by pledges of
inter-company obligations and the ownership interests of Charter Holdings in
Charter Operating, but are not secured by the other assets of Charter Holdings
or Charter Operating.
The initial senior secured credit facilities of $4.1 billion consist of:
- an eight and one-half year reducing revolving loan in the amount of $1.25
billion;
- an eight and one-half year Tranche A term loan in the amount of $1.0
billion; and
- a nine-year Tranche B term loan in the amount of $1.85 billion.
The credit facilities provide for the amortization of the principal amount
of the Tranche A term loan facility and the reduction of the revolving loan
facility beginning on June 30, 2002 with respect to the Tranche A term loan and
on March 31, 2004 with respect to the revolving credit facility, with a final
maturity date of September 18, 2007. The amortization of the principal amount of
the Tranche B term loan facility is substantially "back-ended," with more than
ninety percent of the principal balance due in the year of maturity. The credit
facilities also provide for an incremental term facility, of up to $500 million
which is conditioned upon receipt of additional new commitments from lenders. If
the incremental term facility becomes available, up to 50% of the borrowings
under it may be repaid on terms substantially similar to that of the Tranche A
term loan and the remaining portion on terms substantially similar to the
Tranche B term loan. The credit facilities also contain provisions requiring
mandatory loan prepayments under certain circumstances, such as when significant
amounts of assets are sold and the proceeds are not promptly reinvested in
assets useful in the business.
Interest rate margins depend upon performance measured by a "leverage
ratio," or, the ratio of indebtedness to annualized operating cash flow.
Annualized operating cash flow is defined as the immediately preceding quarter's
operating cash flow, before management fees, multiplied by four. This leverage
ratio is based on the debt of Charter Operating and its subsidiaries, exclusive
of the outstanding notes and other debt for money borrowed, of Charter Holdings.
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The Charter Operating credit facilities provide Charter Operating with two
interest rate options, to which a margin is added: a base rate option,
generally, the "prime rate" of interest, and an interest rate option based on
the London InterBank Offered Rate. The Charter Operating credit facilities
contain representations and warranties, affirmative and negative covenants,
information requirements, events of default and financial covenants. The
financial covenants, which are generally tested on a quarterly basis, measure
performance against standards set for leverage, debt service coverage, and
operating cash flow coverage of cash interest expense.
Under most circumstances, acquisitions and investments may be made without
the consent of the lenders as long as our operating cash flow for the four
complete quarters preceding the acquisition or investment equals or exceeds 1.75
times the sum of our cash interest expense plus any restricted payments, on a
pro forma basis after giving effect to the acquisition or investment.
The Charter Operating credit facilities also contain a change of control
provision, making it an event of default, and permitting acceleration of the
indebtedness, in the event that either:
(1) Mr. Allen, including his estate, heirs and certain other related
entities, fails to maintain a 51% direct or indirect voting and economic
interest in Charter Operating, provided that after the consummation of an
initial public offering by Charter Holdings or an affiliate of Charter Holdings,
the economic interest percentage may be reduced to 25%, or
(2) a change of control occurs under the indentures governing the notes.
The various negative covenants place limitations on our ability and the
ability of our subsidiaries to, among other things, incur debt, pay dividends,
incur liens, make acquisitions, investments or asset sales, or enter into
transactions with affiliates. Distributions by Charter Operating under the
credit facilities to Charter Holdings to pay interest on the notes are generally
permitted, except during the existence of a default under such credit
facilities. If the 8.250% notes are not refinanced prior to six months before
their maturity date, the entire amount outstanding of the Charter Operating
credit facilities will become due and payable.
RENAISSANCE NOTES
The original Renaissance notes and new Renaissance notes were issued by
Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation, with Renaissance Media Group LLC as the
guarantor, and the United States Trust Company of New York as the trustee. The
Renaissance notes and the Renaissance guarantee are unsecured, unsubordinated
debt of the issuers and the guarantor, respectively. In October 1998, the
issuers exchanged $163.175 million of the original issued and outstanding 10%
senior discount notes due 2008 for an equivalent value of 10% senior discount
notes due April 15, 2008. Renaissance Media Group LLC, which is the direct or
indirect parent company of each other issuer, is a now subsidiary of Charter
Operating. The form and terms of the new Renaissance notes are the same in all
material respects as the form and terms of the original Renaissance notes except
that the issuance of the new Renaissance notes have been registered under the
Securities Act.
There will not be any payment of interest in respect of the Renaissance
notes prior to October 15, 2003. Interest on the new Renaissance notes shall be
paid semi-annually in
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cash at a rate of 10% per annum beginning on October 15, 2003. The new
Renaissance notes are redeemable at the option of the issuer, 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 issuers may redeem up to
35% of the original aggregate principal amount at maturity of the new
Renaissance notes with the proceeds of one or more sales of capital stock at
110% of their accreted value on the redemption date, provided that after any
such redemption at least $106 million aggregate principal amount at maturity of
Renaissance notes remains outstanding.
Upon a change of control, the issuers will be required to make an offer to
purchase the new Renaissance notes at a purchase price equal to 101% of their
accreted value on the date of the purchase, plus accrued interest, if any. Our
acquisition of Renaissance triggered this requirement. In May 1999, we made an
offer to repurchase the Renaissance notes, and the holders of Renaissance,
representing 30% of the total principal amount outstanding tendered their
Renaissance notes for repurchase. As of June 30, 1999, $114.4 million aggregate
principal amount of Renaissance notes with a carrying value of $82.7 million
remain outstanding.
The indenture contains certain covenants that restrict the ability of the
issuers and their restricted subsidiaries to:
- incur additional debt;
- create liens;
- engage in sale-leaseback transactions;
- pay dividends or make contributions in respect of their capital stock;
- redeem capital stock;
- make investments or certain other restricted payments;
- sell assets;
- issue or sell stock of restricted subsidiaries;
- enter into transactions with stockholders or affiliates; or
- effect a consolidation or merger.
HELICON NOTES
On November 3, 1993, Helicon Group, L.P. and Helicon Capital Corp. jointly
issued $115,000,000 aggregate principal amount of 11% senior secured notes due
2003. On February 3, 1994, the issuers exchanged the original Helicon notes for
an equivalent value of new Helicon notes. The form and terms of the new Helicon
notes are the same as the form and terms of the corresponding original Helicon
notes, except that the new Helicon notes were registered under the Securities
Act of 1933 and, therefore, the new Helicon notes do not bear legends
restricting their transfer.
The Helicon notes are senior obligations of the issuers and are secured by
substantially all of the cable assets, subject to a number of exceptions. The
Helicon notes may be redeemed at the option of the issuers specified in whole or
in part at any time at specified redemption prices plus accrued interest to the
date of redemption. Notwithstanding the foregoing, at any time on or before
November 1, 1996, the issuers
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may redeem up to 33 1/3% of the aggregate principal amount of the Helicon notes
with the proceeds of one or more equity offerings within 120 days of such equity
offering at a redemption price equal to 111% of the accreted value of the
Helicon notes, plus accrued interest to the date of redemption. The Helicon
notes were issued with original issue discount.
The issuers are required to redeem $25 million principal amount of the
Helicon notes on each of November 1, 2001 and November 1, 2002. Upon specified
change of control events, the issuers are required to make an offer to purchase
all of the Helicon notes at a price equal to 101% of their accreted value until
November 1, 1996, and at a price equal to 101% of their principal amount
thereafter, plus, in each case, accrued interest to the date of purchase. Our
acquisition of Helicon triggered this obligation. We are required under the
terms of our credit facilities to use our best efforts to repurchase the Helicon
notes within 120 days of the acquisition.
The indenture governing the Helicon notes restrict, among other things, the
ability of the issuers and some of their subsidiaries to:
- incur additional debt;
- make specified distributions;
- redeem equity interests;
- enter into transactions with affiliates; and
- merge or consolidate with or sell substantially all of the assets of the
issuers.
DEBT TO BE ASSUMED IN CONNECTION WITH OUR PENDING ACQUISITIONS.
RIFKIN NOTES
The Rifkin notes were issued by Rifkin Acquisition Partners, L.L.L.P. and
Rifkin Acquisition Capital Corp. as issuers, subsidiaries of the partnership
other than Rifkin Acquisition Capital Corp. as guarantors, and Marine Midland
Bank as trustee. In March 1996, the issuers exchanged $125 million aggregate
principal amount of the originally issued and outstanding 11 1/8% senior
subordinated notes due 2006 for an equivalent value of new 11 1/8% senior
subordinated notes due 2006. The form and terms of the new Rifkin notes are
substantially identical to the form and terms of the original Rifkin notes
except that the new Rifkin notes have been registered under the Securities Act
and, therefore, do not bear legends restricting the transfer thereof. Interest
on the Rifkin notes accrues at the rate of 11 1/8% per annum and is payable in
cash semi-annually in arrears on January 15 and July 15 of each year, commencing
July 15, 1996.
The Rifkin notes are redeemable at the issuers' option, in whole or in
part, at any time on or after January 15, 2001, at 105.563% of the principal
amount together with accrued and unpaid interest, if any, to the date of the
redemption. This redemption premium declines over time to 100% of the principal
amount, plus accrued and unpaid interest, if any, on or after 2005. In addition,
at any time prior to January 15, 1999, the issuers, at their option, may redeem
up to 25% of the aggregate principal amount of the Rifkin notes with the net
proceeds of one or more public equity offerings or strategic equity investments
in which the issuers receive proceeds of not less than $25 million, at a
redemption price equal to 111 1/8% of the principal amount thereof, together
with accrued and unpaid interest, if any, to the date of redemption. Following
any such redemption, the aggregate principal amount of the Rifkin notes
outstanding must equal at least 75% of the aggregate principal amount of the
Rifkin notes originally issued.
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Upon the occurrence of a change of control, each holder of Rifkin notes
will have the right to require the issuers to purchase all or a portion of such
holder's notes at 101% of the principal amount thereof, together with accrued
and unpaid interest, to the date of purchase. Our acquisition of Rifkin will
trigger this requirement. We are also required by the terms of our credit
facilities to repurchase the Rifkin notes within 90 days of the Rifkin
acquisition.
The Rifkin notes are jointly and severally guaranteed on a senior
subordinated basis by specified subsidiaries of the issuers. The guarantees of
the Rifkin notes will be general unsecured obligations of the guarantors and
will be subordinated in right of to all existing and future senior debt of the
guarantors. As of March 31, 1999, $229.5 million aggregate principal amount
accrued interest remain outstanding on the Rifkin notes.
Among other restrictions, the indentures governing the Rifkin notes contain
covenants which limit the ability of the issuers and specified subsidiaries to:
- assume additional debt and issue specified additional equity interests;
- make restricted payments;
- enter into transactions with affiliates;
- incur liens;
- make specified contributions and payments to Rifkin Acquisition Partners,
L.L.L.P.;
- transfer specified assets to subsidiaries; and
- merger, consolidate, and transfer all or substantially all of the assets
of Rifkin Acquisition Partners, L.L.L.P. to another person.
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions."
The original notes were issued and the new notes will be issued under three
separate indentures, each dated as of March 17, 1999, among the issuers, Marcus
Cable Operating, LLC, Marcus Holdings, as guarantor and Harris Trust and Savings
Bank, as trustee. The terms of the notes include those stated in the indentures
and those made part of the indentures by reference to the Trust Indenture Act of
1939, as amended.
The form and terms of the new notes are the same in all material respects
to the form and terms of the original notes, except that the new notes will have
been registered under the Securities Act of 1933 and, therefore, will not bear
legends restricting the transfer thereof. The original notes have not been
registered under the Securities Act of 1933 and are subject to certain transfer
restrictions.
The original notes were sold prior to our merger with Marcus Holdings. At
the sale of the original notes, Marcus Holdings guaranteed the notes and issued
a promissory note to Charter Holdings for certain amounts loaned by Charter
Holdings to subsidiaries of Marcus Holdings. When we merged with Marcus Holdings
both the guarantee and the promissory note issued automatically became, under
the terms of the indentures, ineffective. Consequently, all references in the
indentures and the notes to the guarantor, the guarantee or the promissory note,
and all matters related thereto, including, without limitation, the pledges of
any collateral are no longer applicable.
The following description is a summary of the material provisions of the
indentures. It does not restate the indentures in their entirety. We urge you to
read the indentures because they, and not this description, define your rights
as holders of these notes. Copies of the indentures are available as set forth
under "Business -- Additional Information."
BRIEF DESCRIPTION OF THE NOTES
The notes:
- are general unsecured obligations of the issuers;
- are effectively subordinated in right of payment to all existing and
future secured Indebtedness of the issuers to the extent of the value of
the assets securing such Indebtedness and to all liabilities, including
trade payables, of Charter Holdings' Subsidiaries, other than Charter
Capital;
- are equal in right of payment to all existing and future unsubordinated,
unsecured Indebtedness of the issuers; and
- are senior in right of payment to any future subordinated Indebtedness of
the issuers.
PRINCIPAL, MATURITY AND INTEREST OF NOTES
8.250% NOTES
The 8.250% notes are limited in aggregate principal amount to $600 million,
and will be issued in denominations of $1,000 and integral multiples of $1,000.
The 8.250% notes will mature on April 1, 2007.
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Interest on the 8.250% notes will accrue at the rate of 8.250% per annum
and will be payable semi-annually in arrears on April 1 and October 1,
commencing on October 1, 1999. The issuers will make each interest payment to
the holders of record of these 8.250% notes on the immediately preceding March
15 and September 15.
Interest on the 8.250% notes will accrue from the date of original issuance
of the original notes or, if interest has already been paid, from the date it
was most recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
8.625% NOTES
The 8.625% notes are limited in aggregate principal amount to $1.5 billion,
and will be issued in denominations of $1,000 and integral multiples of $1,000.
The 8.625% notes will mature on April 1, 2009.
Interest on the 8.625% notes will accrue at the rate of 8.625% per annum
and will be payable semi-annually in arrears on April 1 and October 1,
commencing on October 1, 1999. The issuers will make each interest payment to
the holders of record of these 8.625% notes on the immediately preceding March
15 and September 15.
Interest on the 8.625% notes will accrue from the date of original issuance
of the original notes or, if interest has already been paid, from the date it
was most recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
9.920% NOTES
The 9.920% notes are limited in aggregate principal amount at maturity to
$1.475 billion and originally were issued at an issue price of $613.94 per
$1,000 principal amount at maturity, representing a yield to maturity of 9.920%,
calculated on a semi-annual bond equivalent basis, calculated from March 17,
1999. The issuers will issue 9.920% notes, in denominations of $1,000 principal
amount at maturity and integral multiples of $1,000 principal amount at
maturity. The 9.920% notes will mature on April 1, 2011.
Cash interest on the 9.920% notes will not accrue prior to April 1, 2004.
Thereafter, cash interest on the 9.920% notes will accrue at a rate of 9.920%
per annum and will be payable semi-annually in arrears on April 1 and October 1,
commencing on October 1, 2004. The issuers will make each interest payment to
the holders of record of the 9.920% notes on the immediately preceding March 15
and September 15. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The 9.920% notes will accrete at a rate of 9.920% per year to an aggregate
amount of $1.475 billion as of April 1, 2004. For United States federal income
tax purposes, holders of the 9.920% notes will be required to include amounts in
gross income in advance of the receipt of the cash payments to which the income
is attributable. See "Certain Federal Tax Considerations."
RANKING
As a holding company, Charter Holdings does not hold substantial assets
other than its direct or indirect investments in and advances to its operating
subsidiaries. Our subsidiaries conduct all of our consolidated operations and
own substantially all of our consolidated assets. As a result, our cash flow and
our ability to meet our debt service obligations on the notes will depend upon
the cash flow of our subsidiaries and the
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payment of funds by our subsidiaries to us in the form of loans, equity
distributions or otherwise. Our subsidiaries are not obligated to make funds
available to us for payment on the notes. In addition, our subsidiaries' ability
to make any such loans or distributions to us will depend on their earnings, the
terms of their indebtedness, business and tax considerations and legal
restrictions. Our credit facilities place limitations on the ability of our
subsidiaries to pay dividends and enter into certain transactions with
affiliates. Our credit facilities also contain financial covenants that could
limit the payment of dividends. However distributions generally will be
permitted by the credit facilities to pay interest on the notes except during
the existence of a default under the credit facilities.
Because of our holding company structure, the notes will be subordinate to
all liabilities of our subsidiaries. Creditors of our subsidiaries will have the
right to be paid before holders of the notes from any assets of our
subsidiaries. At March 31, 1999, on a pro forma basis giving effect to the
acquisitions and our credit facilities, all of our outstanding indebtedness,
including our credit facilities, was incurred by our subsidiaries. At that date,
our subsidiaries' liabilities totaled approximately $4.0 billion and all such
liabilities would have ranked senior to the new notes. In the event of
bankruptcy, liquidation or dissolution of a subsidiary, following payment by the
subsidiary of its liabilities, such subsidiary may not have sufficient assets
remaining to make payments to us as a shareholder or otherwise.
OPTIONAL REDEMPTION
8.250% NOTES
The 8.250% notes are not redeemable at the issuers' option prior to
maturity.
8.625% NOTES
At any time prior to April 1, 2002, the issuers may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount of the 8.625%
notes on a pro rata basis or nearly as pro rata as practicable, at a redemption
price of 108.625% of the principal amount thereof, plus accrued and unpaid
interest to the redemption date, with the net cash proceeds of one or more
Equity Offerings; provided that
(1) at least 65% of the aggregate principal amount of 8.625% notes
remains outstanding immediately after the occurrence of such redemption
excluding 8.625% notes held by Charter Holdings and its Subsidiaries; and
(2) the redemption must occur within 60 days of the date of the
closing of such Equity Offering.
Except pursuant to the preceding paragraph, the 8.625% notes will not be
redeemable at the issuers' option prior to April 1, 2004.
On or after April 1, 2004, the issuers may redeem all or a part of the
8.625% notes upon not less than 30 nor more than 60 days notice, at the
redemption prices, expressed as percentages of principal amount, set forth below
plus accrued and unpaid interest thereon,
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if any, to the applicable redemption date, if redeemed during the twelve-month
period beginning on April 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2004........................................................ 104.313%
2005........................................................ 102.875%
2006........................................................ 101.438%
2007 and thereafter......................................... 100.000%
</TABLE>
9.920% NOTES
At any time prior to April 1, 2002, the issuers may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount at maturity of the
9.920% notes on a pro rata basis or nearly as pro rata as practicable, at a
redemption price of 109.920% of the Accreted Value thereof, with the net cash
proceeds of one or more Equity Offerings; provided that
(1) at least 65% of the aggregate principal amount at maturity of
9.920% notes remains outstanding immediately after the occurrence of such
redemption, excluding 9.920% notes held by Charter Holdings and its
Subsidiaries; and
(2) the redemption must occur within 60 days of the date of the
closing of such Equity Offering.
Except pursuant to the preceding paragraph, the 9.920% notes will not be
redeemable at the issuers' option prior to April 1, 2004.
On or after April 1, 2004, the issuers may redeem all or a part of the
9.920% notes upon not less than 30 nor more than 60 days notice, at the
redemption prices, expressed as percentages of principal amount, set forth below
plus accrued and unpaid interest thereon, if any, to the applicable redemption
date, if redeemed during the twelve-month period beginning on April 1 of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2004........................................................ 104.960%
2005........................................................ 103.307%
2006........................................................ 101.653%
2007 and thereafter......................................... 100.000%
</TABLE>
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each holder of notes will have the right to
require the issuers to repurchase all or any part, equal to $1,000 or an
integral multiple thereof, of that holder's notes pursuant to a "Change of
Control offer." In the Change of Control offer, the issuers will offer a "Change
of Control payment" in cash equal to
(x) with respect to the 8.250% notes and the 8.625% notes, 101% of the
aggregate principal amount thereof repurchased plus accrued and unpaid interest
thereon, if any, to the date of purchase and
(y) with respect to the 9.920% notes, 101% of the Accreted Value plus, for
any Change of Control offer occurring after the Full Accretion Date, accrued and
unpaid
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interest, if any, on the date of purchase. Within ten days following any Change
of Control, the issuers will mail a notice to each holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase notes on a certain date, the "Change of Control payment date",
specified in such notice, pursuant to the procedures required by the indentures
and described in such notice. The issuers will comply with the requirements of
Rule 14e-1 under the Securities Exchange Act of 1934 or any successor rules, and
any other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the notes as a
result of a Change of Control.
On the Change of Control payment date, the issuers will, to the extent
lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control offer;
(2) deposit with the paying agent an amount equal to the Change of
Control payment in respect of all notes or portions thereof so tendered;
and
(3) deliver or cause to be delivered to the trustee the notes so
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions thereof being purchased by the
issuers.
The paying agent will promptly mail to each holder of notes so tendered the
Change of Control payment for such notes, and the trustee will promptly
authenticate and mail, or cause to be transferred by book entry, to each holder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each such new note will be in a principal
amount at maturity of $1,000 or an integral multiple thereof.
The provisions described above that require the issuers to make a Change of
Control offer following a Change of Control will be applicable regardless of
whether or not any other provisions of the indentures are applicable. Except as
described above with respect to a Change of Control, the indentures do not
contain provisions that permit the Holders of the notes to require that the
issuers repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
The issuers will not be required to make a Change of Control offer upon a
Change of Control if a third party makes the Change of Control offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indentures applicable to a Change of Control offer made by the issuers
and purchases all notes validly tendered and not withdrawn under such Change of
Control offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Charter Holdings and its Subsidiaries, taken as a whole.
Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of notes to require
the issuers to repurchase such notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of Charter
Holdings and its Subsidiaries, taken as a whole, another Person or group may be
uncertain.
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ASSET SALES
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) Charter Holdings or a Restricted Subsidiary of Charter Holdings
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is determined by Charter Holdings' board of
directors and evidenced by a resolution of such board of directors set
forth in an officers' certificate delivered to the trustee; and
(3) at least 75% of the consideration therefor received by Charter
Holdings or such Restricted Subsidiary is in the form of cash, Cash
Equivalents or readily marketable securities.
For purposes of this provision, each of the following shall be deemed to be
cash:
(a) any liabilities shown on Charter Holdings' or such Restricted
Subsidiary's most recent balance sheet, other than contingent liabilities
and liabilities that are by their terms subordinated to the notes, that are
assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases Charter Holdings or such Restricted
Subsidiary from further liability;
(b) any securities, notes or other obligations received by Charter
Holdings or any such Restricted Subsidiary from such transferee that are
converted by Charter Holdings or such Restricted Subsidiary into cash, Cash
Equivalents or readily marketable securities within 60 days after receipt
thereof, to the extent of the cash, Cash Equivalents or readily marketable
securities received in that conversion; and
(c) Productive Assets.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Charter Holdings or a Restricted Subsidiary of Charter Holdings may apply such
Net Proceeds at its option:
(1) to repay debt under the Credit Facilities or any other
Indebtedness of the Restricted Subsidiaries, other than Indebtedness
represented by a guarantee of a Restricted Subsidiary of Charter Holdings;
or
(2) to invest in Productive Assets; provided that any Net Proceeds
which Charter Holdings or a Restricted Subsidiary of Charter Holdings has
committed to invest in Productive Assets within 365 days of the applicable
Asset Sale may be invested in Productive Assets within two years of such
Asset Sale.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds $25.0 million, the issuers will make
an Asset Sale Offer to all holders of notes and all holders of other
Indebtedness that is pari passu with the notes containing provisions requiring
offers to purchase or redeem with the proceeds of sales of assets to purchase
the maximum principal amount of notes and such other pari passu Indebtedness
that may be purchased out of the Excess Proceeds, which amount includes the
entire amount of the Net Proceeds. The offer price in any Asset Sale Offer will
be payable in cash and equal to
(x) with respect to the 8.250% notes and the 8.625% notes, 100% of
principal amount plus accrued and unpaid interest, if any, to the date of
purchase, and
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(y) with respect to the 9.925% notes, 100% of the Accreted Value thereof
plus, after the Full Accretion Date, accrued and unpaid interest, if any, to the
date of purchase. If any Excess Proceeds remain after consummation of an Asset
Sale Offer, Charter Holdings may use such Excess Proceeds for any purpose not
otherwise prohibited by the indentures. If the aggregate principal amount of
notes and such other pari passu Indebtedness tendered into such Asset Sale Offer
exceeds the amount of Excess Proceeds, the applicable trustee shall select the
notes and such other pari passu Indebtedness to be purchased on a pro rata
basis. Upon completion of each Asset Sale Offer, the amount of Excess Proceeds
shall be reset at zero.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of
the principal national securities exchange on which the notes are listed;
or
(2) if the notes are not so listed, on a pro rata basis, by lot or by
such method as the trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the original note will be issued in the name of the holder thereof upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on, or the Accreted Value ceases to increase on, as the case may be,
notes or portions of them called for redemption.
CERTAIN COVENANTS
Set forth in this section are summaries of certain covenants contained in
the indentures. The covenants summarized are the following:
- Limitations on restricted payments by Charter Holdings and its Restricted
Subsidiaries. Restricted payments include
- dividends and other distributions on equity interests,
- purchases, redemptions on other acquisitions of equity interests, and
- purchases, redemptions, defeasance or other acquisitions of
subordinated debt;
- Limitations on restricted investments by Charter Holdings or its
Restricted Subsidiaries. Restricted investments include investments other
than
- investments in Restricted Subsidiaries, cash equivalents,
- non-cash consideration from an asset sale made in compliance with the
indenture,
- investments with the net cash proceeds of the issuance and sale of
equity interests,
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- investments in productive assets not to exceed in the $150 million,
- other investments not exceeding $50 million in any person,
- investments in customers and suppliers which either generate accounts
receivable or are accepted in settlement of bona fide disputes, and
- the investment in Marcus Cable Holdings LLC.
This covenant also limits Charter Holdings from allowing any Restricted
Subsidiary from becoming an Unrestricted Subsidiary;
- Limitations on the occurrence of Indebtedness and issuance of preferred
stock generally unless the leverage ratio is not greater than 8.75 to 1.0
on a pro forma basis. This does not prohibit the incurrence of permitted
debt which includes:
- borrowings up to $3.5 billion under the credit facilities,
- existing indebtedness,
- capital lease obligations, mortgage financings or purchase money
obligations in an aggregate amount of up to $25 million at any one
time outstanding for the purchase, construction or improvement of
productive assets,
- permitted refinancing indebtedness,
- intercompany indebtedness,
- hedging obligations,
- up to $300 million of additional indebtedness,
- additional indebtedness not exceeding 200% of the net cash proceeds
from the sale of equity interests to the extent not used to make
restricted payments or permitted investments, and
- the accretion or amortization of original issue discount and the write
up of indebtedness in accordance with purchase accounting;
- Prohibitions against the creation of liens except permitted liens;
- Prohibitions against restrictions on the ability of any Restricted
Subsidiary to pay dividends or make other distributions on its capital
stock to Charter Holdings or any Restricted Subsidiary, make loans or
advances to Charter Holdings or its Restricted Subsidiaries or transfer
properties or assets to Charter Holdings or any of its Restricted
Subsidiaries. This covenant, however, does not prohibit restrictions
under
- existing indebtedness,
- the notes and the indentures,
- applicable law,
- the terms of indebtedness or capital stock of a person acquired by
Charter Holdings or any of its Restricted Subsidiaries,
- customary non-assignment provisions in leases,
- purchase money obligations,
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- agreements for the sale or other disposition of a Restricted
Subsidiary restricting distributions pending its sale,
- permitted refinancing indebtedness,
- liens securing indebtedness permitted under the indentures,
- joint venture agreements,
- under ordinary course contracts with customers that restrict cash,
other deposits or net worth,
- indebtedness permitted under the indentures, and
- restrictions that are not materially more restrictive than customary
provisions in comparable financings which management determines will
not materially impair Charter Holdings' ability to make payments
required under the notes.
- Prohibitions against mergers, consolidations or the sale of all or
substantially all of an issuer's assets unless
- the issuer is the surviving corporation or the person formed by the
merger or consolidation or acquiring the assets is organized under the
law of the United States, any state or the District of Columbia,
- such person assumes all obligations under the notes and the
indentures,
- no default or event of default exists, and
- Charter Holdings or the person formed by the merger or consolidation
or acquiring all or substantially all the assets could incur at least
$1.00 of additional indebtedness under the leverage ratio or have a
leverage ratio after giving effect to the transaction no greater than
the leverage ratio of the issuer immediately prior to the transaction.
- Prohibitions against transactions with affiliates, unless Charter
Holdings delivers to the trustee:
- for transactions exceeding $15.0 million a resolution approved by
a majority of the board of directors certifying that the
transaction complies with the covenant; and
- for transactions exceeding $50.0 million a fairness opinion of an
accounting, appraisal or investment banking firm of national
standing.
Certain transactions are not subject to the covenant including:
- existing employment agreements and new employment agreements
entered into in the ordinary course of business and consistent
with past practice; and
- management fees under agreements existing at the issue date or
after the issue date if the percentage fees are not higher than
those under agreements existing on the issue date.
- Limitations on sale and leaseback transactions exceeding three years.
- Prohibitions against consent payments to holders of notes unless paid to
all consenting holders.
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During any period of time that
(a) either the 8.250% notes, the 8.625% notes or the 9.920% notes have
Investment Grade Ratings from both Rating Agencies, and
(b) no Default or Event of Default has occurred and is continuing under the
applicable indenture,
Charter Holdings and its Restricted Subsidiaries will not be subject to the
provisions of the indenture described under
- "-- Incurrence of Indebtedness and Issuance of preferred stock,"
- "-- Restricted Payments,"
- "-- Asset Sales,"
- "-- Sale and Leaseback Transactions,"
- "-- Dividend and Other Payment Restrictions Affecting Subsidiaries,"
- "-- Transactions with Affiliates,"
- "-- Investments" and
- clause (4) of the first paragraph of "-- Merger, Consolidation and
Sale of Assets".
If Charter Holdings and its Restricted Subsidiaries are not subject to
these covenants for any period of time and, subsequently, one or both of the
Rating Agencies withdraws its ratings or downgrades the ratings assigned to the
applicable notes below the required Investment Grade Ratings or a Default or
Event of Default occurs and is continuing, then Charter Holdings and its
Restricted Subsidiaries will be subject again to these covenants. Compliance
with the covenant with respect to Restricted Payments made after the time of
such withdrawal, downgrade, Default or Event of Default will be calculated as if
such covenant had been in effect during the entire period of time from the issue
date.
The new notes will not have Investment Grade Ratings from the Rating
Agencies upon issuance. Consequently, the covenants listed above remain
applicable to Charter Holdings and its Restricted Subsidiaries.
RESTRICTED PAYMENTS
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Charter Holdings' or any of its Restricted
Subsidiaries' Equity Interests, including, without limitation, any payment
in connection with any merger or consolidation involving Charter Holdings
or any of its Restricted Subsidiaries, or to the direct or indirect holders
of Charter Holdings' or any of its Restricted Subsidiaries' Equity
Interests in their capacity as such, other than dividends or distributions
payable in Equity Interests, other than Disqualified Stock, of Charter
Holdings or, in the case of Charter Holdings and its Restricted
Subsidiaries, to Charter Holdings or a Restricted Subsidiary of Charter
Holdings;
(2) purchase, redeem or otherwise acquire or retire for value,
including, without limitation, in connection with any merger or
consolidation involving Charter Holdings, any Equity Interests of Charter
Holdings or any direct or indirect parent of Charter
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Holdings or any Restricted Subsidiary of Charter Holdings, other than, in
the case of Charter Holdings and its Restricted Subsidiaries, any such
Equity Interests owned by Charter Holdings or any Restricted Subsidiary of
Charter Holdings; or
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the notes, other than the notes, except a payment of
interest or principal at the Stated Maturity thereof.
All such payments and other actions set forth in clauses (1) through (3)
above are collectively referred to as "Restricted Payments," unless, at the time
of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(2) Charter Holdings would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Leverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "-- Incurrence of Indebtedness and
Issuance of preferred stock"; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Charter Holdings and each of its
Restricted Subsidiaries after the date of the indentures, excluding
Restricted Payments permitted by clauses (2), (3), (4), (5), (6), (7) and
(8) of the next succeeding paragraph, shall not exceed, at the date of
determination, the sum of:
(a) an amount equal to 100% of combined Consolidated EBITDA of
Charter Holdings since the date of the indentures to the end of Charter
Holdings' most recently ended full fiscal quarter for which internal
financial statements are available, taken as a single accounting period,
less the product of 1.2 times the combined Consolidated Interest Expense
of Charter Holdings since the date of the indentures to the end of
Charter Holdings' most recently ended full fiscal quarter for which
internal financial statements are available, taken as a single
accounting period, plus
(b) an amount equal to 100% of Capital Stock Sale Proceeds less any
such Capital Stock Sale Proceeds used in connection with
(i) an Investment made pursuant to clause (6) of the
definition of "Permitted Investments" or
(ii) the incurrence of Indebtedness pursuant to clause (10) of
"Incurrence of Indebtedness and Issuance of preferred stock," plus
(c) $100.0 million.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the indentures;
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(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of Charter Holdings in
exchange for, or out of the net proceeds of, the substantially concurrent
sale, other than to a Subsidiary of Charter Holdings, of Equity Interests
of Charter Holdings, other than Disqualified Stock; provided that the
amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of Charter Holdings or any of its Restricted
Subsidiaries with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(4) regardless of whether a Default then exists, the payment of any
dividend or distribution to the extent necessary to permit direct or
indirect beneficial owners of shares of Capital Stock of Charter Holdings
to pay federal, state or local income tax liabilities that would arise
solely from income of Charter Holdings or any of its Restricted
Subsidiaries, as the case may be, for the relevant taxable period and
attributable to them solely as a result of Charter Holdings, and any
intermediate entity through which the holder owns such shares or any of
their Restricted Subsidiaries being a limited liability company,
partnership or similar entity for federal income tax purposes;
(5) regardless of whether a Default then exists, the payment of any
dividend by a Restricted Subsidiary of Charter Holdings to the holders of
its common Equity Interests on a pro rata basis;
(6) the payment of any dividend on Charter Holdings preferred stock or
the redemption, repurchase, retirement or other acquisition of Charter
Holdings preferred stock in an amount not in excess of its aggregate
liquidation value;
(7) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Charter Holdings held by any member of
Charter Holdings' management pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the
indentures; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $10 million in any fiscal year of Charter Holdings; and
(8) payment of fees in connection with any acquisition, merger or
similar transaction in an amount that does not exceed an amount equal to
1.25% of the transaction value of such acquisition, merger or similar
transaction.
The amount of all Restricted Payments, other than cash shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Charter Holdings or any of its
Restricted Subsidiaries pursuant to the Restricted Payment. The fair market
value of any assets or securities that are required to be valued by this
covenant shall be determined by the board of directors of Charter Holdings whose
resolution with respect thereto shall be delivered to the trustee. Such board of
directors' determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $100 million. Not later than the date of making any
Restricted Payment, the Charter Holdings shall deliver to the trustee an
officers' certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by this "Restricted
Payments" covenant were computed, together with a copy of any fairness opinion
or appraisal required by the indentures.
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INVESTMENTS
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) make any Restricted Investment; or
(2) allow any Restricted Subsidiary of Charter Holdings to become an
Unrestricted Subsidiary, unless, in each case:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(2) Charter Holdings would, at the time of, and after giving effect
to, such Restricted Investment or such designation of a Restricted
Subsidiary as an unrestricted Subsidiary, have been permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Leverage Ratio test
set forth in the first paragraph of the covenant described below under the
caption "-- Incurrence of Indebtedness and Issuance of preferred stock."
An Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary
if such redesignation would not cause a Default.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
(a) Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness, including Acquired
Debt, and Charter Holdings will not issue any Disqualified Stock and will not
permit any of its Restricted Subsidiaries to issue any shares of preferred stock
unless the Leverage Ratio would have been not greater than 8.75 to 1.0
determined on a pro forma basis, including a pro forma application of the net
proceeds therefrom, as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of the
most recently ended fiscal quarter.
So long as no Default shall have occurred and be continuing or would be
caused thereby, the first paragraph of this covenant will not prohibit the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(1) the incurrence by Charter Holdings and its Restricted Subsidiaries
of Indebtedness under the Credit Facilities; provided that the aggregate
principal amount of all Indebtedness of Charter Holdings and its Restricted
Subsidiaries outstanding under the Credit Facilities, after giving effect
to such incurrence, does not exceed an amount equal to $3.5 billion less
the aggregate amount of all Net Proceeds of Asset Sales applied by Charter
Holdings or any of its Subsidiaries in the case of an Asset Sale since the
date of the indentures to repay Indebtedness under the Credit Facilities,
pursuant to the covenant described above under the caption "-- Asset
Sales";
(2) the incurrence by Charter Holdings and its Restricted Subsidiaries
of Existing Indebtedness, other than the Credit Facilities;
(3) the incurrence on the issue date by Charter Holdings and its
Restricted Subsidiaries of Indebtedness represented by the notes;
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(4) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease obligations,
mortgage financings or purchase money obligations, in each case, incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement, including, without limitation, the cost of
design, development, construction, acquisition, transportation,
installation, improvement, and migration, of Productive Assets of Charter
Holdings or any of its Restricted Subsidiaries in an aggregate principal
amount not to exceed $75 million at any time outstanding;
(5) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace, in whole or
in part, Indebtedness, other than intercompany Indebtedness, that was
permitted by the indentures to be incurred under the first paragraph of
this covenant or clauses (2) or (3) of this paragraph;
(6) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries, of intercompany Indebtedness between or among Charter
Holdings and any of its Wholly Owned Restricted Subsidiaries; provided,
that this clause does not permit Indebtedness between Charter Holdings or
any of its Restricted Subsidiaries, as creditor or debtor, as the case may
be, unless otherwise permitted by the indentures; provided, further, that:
(a) if Charter Holdings is the obligor on such Indebtedness, such
Indebtedness must be expressly subordinated to the prior payment in full
in cash of all obligations with respect to the notes; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than
Charter Holdings or a Wholly Owned Restricted Subsidiary thereof, and
(ii) any sale or other transfer of any such Indebtedness to a Person
that is not either Charter Holdings or a Wholly Owned Restricted
Subsidiary thereof, shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by Charter Holdings or any of its
Restricted Subsidiaries, as the case may be, that was not permitted by
this clause (6);
(7) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the indentures to be
outstanding;
(8) the guarantee by Charter Holdings of Indebtedness of Charter
Holdings or a Restricted Subsidiary of Charter Holdings, that was permitted
to be incurred by another provision of this covenant;
(9) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries, of additional Indebtedness in an aggregate principal amount
at any time outstanding, not to exceed $300 million;
(10) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries, of additional Indebtedness in an aggregate principal amount
at any time outstanding, not to exceed 200% of the net cash proceeds
received by Charter Holdings from the sale of its Equity Interests, other
than Disqualified Stock, after the date of the indentures to the extent
such net cash proceeds have not been applied to make Restricted Payments or
to effect other transactions pursuant to the covenant described above
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under the subheading "-- Restricted Payments" or to make Permitted
Investments pursuant to clause (6) of the definition thereof;
(11) the accretion or amortization of original issue discount and the
write up of Indebtedness in accordance with purchase accounting.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness
(a) meets the criteria of more than one of the categories of Permitted
Debt described in clauses (1) through (12) above, or
(b) is entitled to be incurred pursuant to the first paragraph of this
covenant,
Charter Holdings will be permitted to classify and from time to time to
reclassify such item of Indebtedness on the date of its incurrence in any manner
that complies with this covenant. For avoidance of doubt, Indebtedness incurred
pursuant to a single agreement, instrument, program, facility or line of credit
may be classified as Indebtedness arising in part under one of the clauses
listed above, and in part under any one or more of the clauses listed above, to
the extent that such Indebtedness satisfies the criteria for such clauses.
(b) Notwithstanding the foregoing, in no event shall any Restricted
Subsidiary of Charter Holdings consummate a Subordinated Debt Financing or a
preferred stock Financing. A "Subordinated Debt Financing" or a "preferred stock
Financing", as the case may be, with respect to any Restricted Subsidiary of
Charter Holdings shall mean a public offering or private placement, whether
pursuant to Rule 144A under the Securities Act or otherwise, of Subordinated
Notes or preferred stock, whether or not such preferred stock constitutes
Disqualified Stock, as the case may be, of such Restricted Subsidiary to one or
more purchasers, other than to one or more Affiliates of Charter Holdings.
"Subordinated Notes" with respect to any Restricted Subsidiary of Charter
Holdings shall mean Indebtedness of such Restricted Subsidiary that is
contractually subordinated in right of payment to any other Indebtedness of such
Restricted Subsidiary, including, without limitation, Indebtedness under the
Credit Facilities. The foregoing limitation shall not apply to
(i) any Indebtedness or preferred stock of any Person existing at the
time such Person is merged with or into or became a Subsidiary of Charter
Holdings; provided that such Indebtedness or preferred stock was not
incurred or issued in connection with, or in contemplation of, such Person
merging with or into, or becoming a Subsidiary of, Charter Holdings, and
(ii) any Indebtedness or preferred stock of a Restricted Subsidiary
issued in connection with, and as part of the consideration for, an
acquisition, whether by stock purchase, asset sale, merger or otherwise, in
each case involving such Restricted Subsidiary, which Indebtedness or
preferred stock is issued to the seller or sellers of such stock or assets;
provided that such Restricted Subsidiary is not obligated to register such
Indebtedness or preferred stock under the Securities Act or obligated to
provide information pursuant to Rule 144A under the Securities Act.
LIENS
Charter Holdings will not, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind securing Indebtedness, Attributable Debt or
trade payables on any asset now owned or hereafter acquired, except Permitted
Liens.
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DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
Charter Holdings will not, directly or indirectly, create or permit to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary of Charter Holdings, to:
(1) pay dividends or make any other distributions on its Capital Stock
to Charter Holdings or any of its Restricted Subsidiaries, or with respect
to any other interest or participation in, or measured by, its profits, or
pay any indebtedness owed to Charter Holdings or any of its Restricted
Subsidiaries;
(2) make loans or advances to Charter Holdings or any of its
Restricted Subsidiaries or any of its Restricted Subsidiaries; or
(3) transfer any of its properties or assets to Charter Holdings or
any of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the indentures,
including, without limitation, the Credit Facilities and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof; provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive, taken as a whole,
with respect to such dividend and other payment restrictions than those
contained in such Existing Indebtedness, as in effect on the date of the
indentures;
(2) the indentures and the notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Charter Holdings or any of its Restricted Subsidiaries as in
effect at the time of such acquisition, except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition, which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired; provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
indentures to be incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so acquired of
the nature described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary of Charter Holdings that restricts distributions by such
Restricted Subsidiary pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
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(9) Liens securing Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the
caption "-- Liens" that limit the right of Charter Holdings or any of its
Restricted Subsidiaries to dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(12) restrictions contained in the terms of Indebtedness permitted to
be incurred under the covenant "-- Incurrence of Indebtedness and Issuance
of preferred stock"; provided that such restrictions are no more
restrictive than the terms contained in the Credit Facilities as in effect
on the issue date; and
(13) restrictions that are not materially more restrictive than
customary provisions in comparable financings and the management of Charter
Holdings determines that such restrictions will not materially impair
Charter Holdings' ability to make payments as required under the notes.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
Neither of the issuers may, directly or indirectly:
(1) consolidate or merge with or into another Person, whether or not
such issuer is the surviving corporation; or
(2) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of its properties or assets, in one or more related
transactions, to another Person; unless:
(1) either:
(a) such issuer, is the surviving corporation; or
(b) the Person formed by or surviving any such consolidation or
merger, if other than such issuer, or to which such sale, assignment,
transfer, conveyance or other disposition shall have been made is a
Person organized or existing under the laws of the United States, any
state thereof or the District of Columbia, provided that if the Person
formed by or surviving any such consolidation or merger with either
issuer is a limited liability company or other Person other than a
corporation, a corporate co-issuer shall also be an obligor with respect
to the notes;
(2) the Person formed by or surviving any such consolidation or
merger, if other than Charter Holdings, or the Person to which such
sale, assignment, transfer, conveyance or other disposition shall have
been made assumes all the obligations of Charter Holdings under the
notes, in the case of Charter Holdings, and the indentures pursuant to
agreements reasonably satisfactory to the trustee;
(3) immediately after such transaction no Default or Event of
Default exists; and
(4) Charter Holdings or the Person formed by or surviving any such
consolidation or merger, if other than Charter Holdings, will, on the
date of such transaction after giving pro forma effect thereto and any
related financing
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transactions as if the same had occurred at the beginning of the
applicable four-quarter period, either
(A) be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Leverage Ratio test set forth in the
first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of preferred stock" or
(B) have a Leverage Ratio immediately after giving effect to
such consolidation or merger no greater than the Leverage Ratio
immediately prior to such consolidation or merger.
In addition, Charter Holdings may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation, or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among Charter Holdings and any of its
Wholly Owned Subsidiaries.
TRANSACTIONS WITH AFFILIATES
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable
to Charter Holdings or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by Charter Holdings or
such Restricted Subsidiary with an unrelated Person; and
(2) Charter Holdings delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$15.0 million, a resolution of the board of directors of Charter
Holdings set forth in an officers' certificate certifying that such
Affiliate Transaction complies with this covenant and that such
Affiliate Transaction has been approved by a majority of the members of
the board of directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$50.0 million, an opinion as to the fairness to the holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) existing employment agreement entered into by Charter Holdings or
any of its Subsidiaries and any employment agreement entered into by
Charter Holdings or any of its Restricted Subsidiaries in the ordinary
course of business and consistent with the past practice of Charter
Holdings or such Restricted Subsidiary;
(2) transactions between or among Charter Holdings and/or its
Restricted Subsidiaries;
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(3) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of Charter Holdings, and customary indemnification and
insurance arrangements in favor of directors, regardless of affiliation
with Charter Holdings, or any of its Restricted Subsidiaries;
(4) payment of management fees pursuant to management agreements
either
(A) existing on the issue date or
(B) entered into after the issue date,
to the extent that such management agreements provide for percentage
fees no higher than the percentage fees existing under the management
agreements existing on the issue date;
(5) Restricted Payments that are permitted by the provisions of the
indentures described above under the caption "-- Restricted Payments"; and
(6) Permitted Investments.
SALE AND LEASEBACK TRANSACTIONS
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
Charter Holdings may enter into a sale and leaseback transaction if:
(1) Charter Holdings could have
(a) incurred Indebtedness in an amount equal to the Attributable
Debt relating to such sale and leaseback transaction under the Leverage
Ratio test in the first paragraph of the covenant described above under
the caption "-- Incurrence of Additional Indebtedness and Issuance of
preferred stock" and
(b) incurred a Lien to secure such Indebtedness pursuant to the
covenant described above under the caption "-- Liens"; and
(2) the transfer of assets in that sale and leaseback transaction is
permitted by, and Charter Holdings applies the proceeds of such transaction
in compliance with, the covenant described above under the caption
"-- Asset Sales."
The foregoing restrictions do not apply to a sale and leaseback transaction
if the lease is for a period, including renewal rights, of not in excess of
three years.
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
Charter Holdings will not permit any of its Restricted Subsidiaries,
directly or indirectly, to Guarantee or pledge any assets to secure the payment
of any other Indebtedness of Charter Holdings, except in respect of the Credit
Facilities (the "Guaranteed Indebtedness") unless
(1) such Restricted Subsidiary of Charter Holdings simultaneously executes
and delivers a supplemental indenture providing for the Guarantee (a "Subsidiary
Guarantee") of the payment of the notes by such Restricted Subsidiary, and
(2) until one year after all the notes have been paid in full in cash, such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against Charter Holdings or any other Restricted
Subsidiary of Charter Holdings as a
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result of any payment by such Restricted Subsidiary under its Subsidiary
Guarantee; provided that this paragraph shall not be applicable to any Guarantee
or any Restricted Subsidiary that existed at the time such Person became a
Restricted Subsidiary and was not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary. If the
Guaranteed Indebtedness is subordinated to the notes, then the Guarantee of such
Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at
least to the extent that the Guaranteed Indebtedness is subordinated to the
notes.
PAYMENTS FOR CONSENT
Charter Holdings will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any holder of notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indentures or the notes
unless such consideration is offered to be paid and is paid to all holders of
the notes that consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
REPORTS
Whether or not required by the Securities and Exchange Commission, so long
as any notes are outstanding, Charter Holdings will furnish to the holders of
notes, within the time periods specified in the Securities and Exchange
Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Securities and Exchange
Commission on Forms 10-Q and 10-K if Charter Holdings were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section and, with respect to the
annual information only, a report on the annual financial statements by
Charter Holdings' independent public accountants; and
(2) all current reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if Charter Holdings were
required to file such reports.
If Charter Holdings has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of Charter
Holdings and its Restricted Subsidiaries separate from the financial condition
and results of operations of the Unrestricted Subsidiaries of Charter Holdings.
In addition, whether or not required by the Securities and Exchange
Commission, Charter Holdings will file a copy of all of the information and
reports referred to in clauses (1) and (2) above with the Securities and
Exchange Commission for public availability within the time periods specified in
the Securities and Exchange Commission's rules and regulations, unless the
Securities and Exchange Commission will not accept such a filing, and make such
information available to securities analysts and prospective investors upon
request.
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EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the
notes;
(2) default in payment when due of the principal of or premium, if
any, on the notes;
(3) failure by Charter Holdings or any of its Restricted Subsidiaries,
to comply with the provisions described under the captions "-- Change of
Control" or "-- Merger, Consolidation, or Sale of Assets";
(4) failure by Charter Holdings or any of its Restricted Subsidiaries,
for 30 days after written notice thereof has been given to Charter Holdings
by the trustee or to Charter Holdings and the trustee by holders of at
least 25% of the aggregate principal amount of the notes outstanding to
comply with any of their other covenants or agreements in the indentures;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Charter Holdings or any of its
Restricted Subsidiaries, or the payment of which is guaranteed by Charter
Holdings or any of its Restricted Subsidiaries, whether such Indebtedness
or guarantee now exists, or is created after the date of the indentures, if
that default:
(a) is caused by a failure to pay at final stated maturity the
principal amount on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity, and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $100.0 million or
more;
(6) failure by Charter Holdings or any of its Restricted Subsidiaries
to pay final judgments which are non-appealable aggregating in excess of
$100.0 million, net of applicable insurance which has not been denied in
writing by the insurer, which judgments are not paid, discharged or stayed
for a period of 60 days; and
(7) Charter Holdings or any of its Significant Subsidiaries pursuant
to or within the meaning of bankruptcy law:
(a) commences a voluntary case,
(b) consents to the entry of an order for relief against it in an
involuntary case,
(c) consents to the appointment of a custodian of it or for all or
substantially all of its property, or
(d) makes a general assignment for the benefit of its creditors; or
(8) a court of competent jurisdiction enters an order or decree under
any bankruptcy law that:
(a) is for relief against Charter Holdings or any of its
Significant Subsidiaries in an involuntary case;
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(b) appoints a custodian of Charter Holdings or any of its
Significant Subsidiaries or for all or substantially all of the property
of Charter Holdings or any of its Significant Subsidiaries; or
(c) orders the liquidation of Charter Holdings or any of its
Significant Subsidiaries;
and the order or decree remains unstayed and in effect for 60 consecutive
days.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Charter Holdings, all outstanding
notes will become due and payable immediately without further action or notice.
If any other Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding notes of
each series may declare their respective notes to be due and payable
immediately.
Holders of the notes may not enforce the indentures or the notes except as
provided in the indentures. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding notes of each series may
direct the trustee in its exercise of any trust or power with respect to that
series. The trustee may withhold from holders of the notes notice of any
continuing Default or Event of Default, except a Default or Event of Default
relating to the payment of principal or interest, if it determines that
withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding of each series by notice to the trustee may on behalf of the holders
of all of the notes of such series waive any existing Default or Event of
Default and its consequences under the indentures except a continuing Default or
Event of Default in the payment of interest on, or the principal of, the notes.
Charter Holdings will be required to deliver to the trustee annually a
statement regarding compliance with the indentures. Upon becoming aware of any
Default or Event of Default, Charter Holdings will be required to deliver to the
trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, MEMBERS AND
STOCKHOLDERS
No director, officer, employee, incorporator, member or stockholder of
Charter Holdings, as such, shall have any liability for any obligations of
Charter Holdings under the notes, the indentures, or for any claim based on, in
respect of, or by reason of, such obligations or their creation. Each holder of
notes by accepting a note waives and releases all such liability. The waiver and
release will be part of the consideration for issuance of the notes. The waiver
may not be effective to waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Charter Holdings may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding notes ("Legal
Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the Accreted Value or principal of, premium, if any, and
interest on such notes when such payments are due from the trust referred
to below;
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(2) Charter Holdings' obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and Charter Holdings' obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indentures.
In addition, Charter Holdings may, at its option and at any time, elect to
have the obligations of Charter Holdings released with respect to certain
covenants that are described in the indentures ("Covenant Defeasance") and
thereafter any omission to comply with those covenants shall not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events, not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events, described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Charter Holdings must irrevocably deposit with the trustee, in
trust, for the benefit of the holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest on the outstanding notes on the stated maturity or on
the applicable redemption date, as the case may be, and Charter Holdings
must specify whether the notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, Charter Holdings shall have
delivered to the trustee an Opinion of Counsel reasonably acceptable to the
trustee confirming that
(a) Charter Holdings has received from, or there has been published
by, the Internal Revenue Service a ruling or
(b) since the date of the indentures, there has been a change in
the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that, the
holders of the outstanding notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Charter Holdings shall have
delivered to the trustee an opinion of counsel reasonably acceptable to the
trustee confirming that the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing either:
(a) on the date of such deposit, other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit; or
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(b) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument, other than the indentures, to which Charter
Holdings or any of its Restricted Subsidiaries is a party or by which
Charter Holdings or any of its Restricted Subsidiaries is bound;
(6) Charter Holdings must have delivered to the trustee an opinion of
counsel to the effect that after the 91st day assuming no intervening
bankruptcy, that no holder is an insider of Charter Holdings following the
deposit and that such deposit would not be deemed by a court of competent
jurisdiction a transfer for the benefit of either issuer in its capacity as
such, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally;
(7) Charter Holdings must deliver to the trustee an officers'
certificate stating that the deposit was not made by Charter Holdings with
the intent of preferring the holders of notes over the other creditors of
Charter Holdings with the intent of defeating, hindering, delaying or
defrauding creditors of Charter Holdings or others; and
(8) Charter Holdings must deliver to the trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent relating to the Legal Defeasance or the Covenant Defeasance have
been complied with.
Notwithstanding the foregoing, the opinion of counsel required by clause
(2) above with respect to a Legal Defeasance need not be delivered if all notes
not theretofore delivered to the trustee for cancellation
(a) have become due and payable or
(b) will become due and payable on the maturity date within one year under
arrangements satisfactory to the trustee for the giving of notice of redemption
by the trustee in the name, and at the expense, of the issuers.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided below, the indentures or the notes may be amended or
supplemented with the consent of the holders of at least a majority in principal
amount of the then outstanding notes of each series. This includes consents
obtained in connection with a purchase of notes, a tender offer for notes, or an
exchange offer for notes. Any existing Default or compliance with any provision
of the indentures or the notes may be waived with the consent of the holders of
a majority in principal amount of the then outstanding notes of each series.
This includes consents obtained in connection with a purchase of notes, a tender
offer for notes, or an exchange offer for notes. Without the consent of each
holder affected, an amendment or waiver may not, with respect to any notes held
by a non-consenting holder:
(1) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the payment provisions with respect to the redemption of the
notes, other than provisions
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relating to the covenants described above under the caption "-- Repurchase
at the Option of holders";
(3) reduce the rate of or extend the time for payment of interest on
any note;
(4) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the notes, except a rescission of
acceleration of the notes by the holders of at least a majority in
aggregate principal amount of the notes and a waiver of the payment default
that resulted from such acceleration;
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the indentures relating to
waivers of past Defaults or the rights of holders of notes to receive
payments of Accreted Value or principal of, or premium, if any, or interest
on the notes;
(7) waive a redemption payment with respect to any note, other than a
payment required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders";
(8) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any holder of notes,
Charter Holdings and the trustee may amend or supplement the indentures or the
notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Charter Holdings' obligations to
holders of notes in the case of a merger or consolidation or sale of all or
substantially all of Charter Holdings' assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of notes or that does not adversely affect the
legal rights under the indentures of any such holder; or
(5) to comply with requirements of the Securities and Exchange
Commission in order to effect or maintain the qualification of the
indentures under the Trust Indenture Act or otherwise as necessary to
comply with applicable law.
GOVERNING LAW
The indentures and the notes will be governed by the laws of the State of
New York.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of Charter Holdings, the indentures limit
its right to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate such conflict within 90
days, apply to the Securities and Exchange Commission for permission to continue
or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indentures provide
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that in case an Event of Default shall occur and be continuing, the trustee will
be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
trustee will be under no obligation to exercise any of its rights or powers
under the indentures at the request of any holder of notes, unless such holder
shall have offered to the trustee security and indemnity satisfactory to it
against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indentures
without charge by writing to Charter Investment, Inc., 12444 Powerscourt Drive,
Suite 100, St. Louis, Missouri 63131, Attention: Corporate Secretary.
BOOK-ENTRY, DELIVERY AND FORM
The notes will initially be issued in the form of global securities held in
book-entry form. The notes will be deposited with the trustee as custodian for
the Depository Trust Company, and the Depository Trust Company or its nominee
will initially be the sole registered holder of the notes for all purposes under
the indentures. Unless it is exchanged in whole or in part for debt securities
in definitive form as described below, a global security may not be transferred.
However, transfers of the whole security between the Depository Trust Company
and its nominee or their respective successors are permitted.
Upon the issuance of a global security, the Depository Trust Company or its
nominee will credit on its internal system the principal amount at maturity of
the individual beneficial interest represented by the global security acquired
by the persons in this offering. Ownership of beneficial interests in a global
security will be limited to persons that have accounts with the Depository Trust
Company or persons that hold interests through participants. Ownership of
beneficial interests will be shown on, and the transfer of that the Depository
Trust Company or its nominee relating to interests of participants and the
records of participants relating to interests of persons other than
participants. The laws of some jurisdictions require that some purchasers of
securities take physical delivery of the securities in definitive form. These
limits and laws may impair the ability to transfer beneficial interests in a
global security.
Principal and interest payments on global securities registered in the name
of the Depository Trust Company's nominee will be made in immediate available
funds to the Depository Trust Company's nominee as the registered owner of the
global securities. The issuers and the trustee will treat the Depository Trust
Company's nominee as the owner of the global securities for all other purposes
as well. Accordingly, the issuers, the trustee, any paying agent and the initial
purchasers will have no direct responsibility or liability for any aspect of the
records relating to payments made on account of beneficial interests in the
global securities or for maintaining, supervising or reviewing any records
relating to these beneficial interests. It is the Depository Trust Company's
current practice, upon receipt of any payment of principal or interest, to
credit direct participants' accounts on the payment date according to their
respective holdings of beneficial interests in the global securities. These
payments will be the responsibility of the direct and indirect participants and
not of the Depository Trust Company, the issuers, the trustee or the initial
purchasers.
So long as the Depository Trust Company or its nominee is the registered
owner or holder of the global security, the Depository Trust Company or its
nominee, as the case
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may be, will be considered the sole owner or holder of the notes represented by
the global security for the purposes of:
(1) receiving payment on the notes;
(2) receiving notices; and
(3) for all other purposes under the indentures and the notes.
Beneficial interests in the notes will be evidenced only by, and transfers of
the notes will be effected only through, records maintained by the Depository
Trust Company and its participants.
Except as described above, owners of beneficial interests in a global
security will not be entitled to receive physical delivery of certificated notes
in definitive form and will not be considered the holders of the global security
for any purposes under the indentures. Accordingly, each person owning a
beneficial interest in a global security must rely on the procedures of the
Depository Trust Company. And, if that person is not a participant, the person
must rely on the procedures of the participant through which that person owns
its interest, to exercise any rights of a holder under the indentures. Under
existing industry practices, if the issuers request any action of holders or an
owner of a beneficial interest in a global security desires to take any action
under the indentures, the Depository Trust Company would authorize the
participants holding the relevant beneficial interest to take that action. The
participants then would authorize beneficial owners owning through the
participants to take the action or would otherwise act upon the instructions of
beneficial owners owning through them.
The Depository Trust Company has advised the issuers that it will take any
action permitted to be taken by a holder of notes only at the direction of one
or more participants to whose account with the Depository Trust Company
interests in the global security are credited. Further, the Depository Trust
Company will take action only as to the portion of the aggregate principal
amount at maturity of the notes as to which the participant or participants has
or have given the direction.
Although the Depository Trust Company has agreed to the procedures
described above in order to facilitate transfers of interests in global
securities among participants of the Depository Trust Company, it is under no
obligation to perform these procedures, and the procedures may be discontinued
at any time. None of the issuers, the trustee, any agent of the issuers or the
initial purchasers will have any responsibility for the performance by the
Depository Trust Company or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
The Depository Trust Company has provided the following information to us.
The Depository Trust Company is a:
(1) limited-purpose trust company organized under the New York Banking Law;
(2) a banking organization within the meaning of the New York Banking Law;
(3) a member of the United States Federal Reserve System;
(4) a clearing corporation within the meaning of the New York Uniform
Commercial Code; and
(5) a clearing agency registered under the provisions of Section 17A of the
Securities Exchange Act.
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CERTIFICATED NOTES
Notes represented by a global security are exchangeable for certificated
notes only if:
(1) the Depository Trust Company notifies the issuers that it is unwilling
or unable to continue as depository or if the Depository Trust Company
ceases to be a registered clearing agency, and a successor depository
is not appointed by the issuers within 90 days;
(2) the issuers determine not to require all of the notes to be represented
by a global security and notifies the trustee of its decision; or
(3) an Event of Default or an event which, with the giving of notice or
lapse of time, or both, would constitute an Event of Default relating
to the notes represented by the global security has occurred and is
continuing.
Any global security that is exchangeable for certificated notes in
accordance with the preceding sentence will be transferred to, and registered
and exchanged for, certificated notes in authorized denominations and registered
in the names as the Depository Trust Company or its nominee may direct. However,
a global security is only exchangeable for a global security of like
denomination to be registered in the name of the Depository Trust Company or its
nominee. If a global security becomes exchangeable for certificated notes:
(1) certificated notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples of $1,000;
(2) payment of principal, premium, if any, and interest on the certificated
notes will be payable, and the transfer of the certificated notes will
be registrable, at the office or agency of the issuers maintained for
these purposes; and
(3) no service charge will be made for any issuance of the certificated
notes, although the issuers may require payment of a sum sufficient to
cover any tax or governmental charge imposed in connection with the
issuance.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the indentures. Reference
is made to the indentures for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
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"ACCRETED VALUE" is defined to mean, for any Specific Date, the amount
calculated pursuant to (1), (2), (3) or (4) for each $1,000 of principal amount
at maturity of the 9.920% notes:
(1) if the Specified Date occurs on one or more of the following
dates, each a "Semi-Annual Accrual Date", the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL
ACCRUAL DATE ACCRETED VALUE
- ------------ --------------
<S> <C>
Issue Date....................................... $ 613.94
October 1, 1999.................................. 646.88
April 1, 2000.................................... 678.96
October 1, 2000.................................. 712.64
April 1, 2001.................................... 747.99
October 1, 2001.................................. 785.09
April 1, 2002.................................... 824.03
October 1, 2002.................................. 864.90
April 1, 2003.................................... 907.80
October 1, 2003.................................. 952.82
April 1, 2004.................................... $1,000.00
</TABLE>
(2) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of
(a) $613.94 and
(b) an amount equal to the product of
(x) the Accreted Value for the first Semi-Annual Accrual Date
less $613.94 multiplied by
(y) a fraction, the numerator of which is the number of days
from the issue date of the notes to the Specified Date, using a
360-day year of twelve 30-day months, and the denominator of which
is the number of days elapsed from the issue date of the notes to
the first Semi-Annual Accrual Date, using a 360-day year of twelve
30-day months;
(3) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of
(a) the Accreted Value for the Semi-Annual Accrual Date immediately
preceding such Specified Date and
(b) an amount equal to the product of
(1) the Accreted Value for the immediately following
Semi-Annual Accrual Date less the Accreted Value for the
immediately preceding Semi-Annual Accrual Date multiplied by
(2) a fraction, the numerator of which is the number of days
from the immediately preceding Semi-Annual Accrual Date to the
Specified Date, using a 360-day year of twelve 30-day months, and
the denominator of which is 180; or
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(4) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"ACQUIRED DEBT" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"AFFILIATE TRANSACTION" is set forth above under the caption "-- Certain
Covenants -- Transaction with Affiliates."
"ASSET ACQUISITION" means
(a) an Investment by Charter Holdings or any of its Restricted
Subsidiaries, in any other Person pursuant to which such Person shall become a
Restricted Subsidiary of Charter Holdings or any of its Restricted Subsidiaries,
or shall be merged with or into Charter Holdings or any of its Restricted
Subsidiaries, or
(b) the acquisition by Charter Holdings or any of its Restricted
Subsidiaries, of the assets of any Person which constitute all or substantially
all of the assets of such Person, any division or line of business of such
Person or any other properties or assets of such Person other than in the
ordinary course of business.
"ASSET SALE" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of business
consistent with past practices; provided that the sale, conveyance or other
disposition of all or substantially all of the assets of Charter Holdings
and its Restricted Subsidiaries, taken as a whole, will be governed by the
provisions of the indentures described above under the caption "-- Change
of Control" and/or the provisions described above under the caption
"-- Merger, Consolidation or Sale of Assets" and not by the provisions of
the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of Charter Holdings'
Restricted Subsidiaries or the sale of Equity Interests in any of Charter
Holdings' Restricted Subsidiaries.
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Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that:
(a) involves assets having a fair market value of less than $100
million; or
(b) results in net proceeds to Charter Holdings and its Restricted
Subsidiaries of less than $100 million;
(2) a transfer of assets between or among Charter Holdings and its
Restricted Subsidiaries;
(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary of Charter Holdings to Charter Holdings or to another Wholly
Owned Restricted Subsidiary of Charter Holdings;
(4) a Restricted Payment that is permitted by the covenant described
above under the caption "-- Restricted Payments" and a Restricted
Investment that is permitted by the covenant described above under the
caption "-- Investments"; and
(5) the incurrence of Permitted Liens and the disposition of assets
related to such Permitted Liens by the secured party pursuant to a
foreclosure.
"ASSET SALE OFFER" means a situation in which the issuers commence an offer
to all holders to purchase notes pursuant to Section 4.11 of the indentures.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessee, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"BENEFICIAL OWNER" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person," as such term is used in Section 13(d)(3)
of the Exchange Act, such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire, whether such
right is currently exercisable or is exercisable only upon the occurrence of a
subsequent condition.
"CABLE RELATED BUSINESS" means the business of owning cable television
systems and businesses ancillary, complementary and related thereto.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents, however
designated, of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests, whether general or limited; and
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(4) any other interest, other than any debt obligation, or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"CAPITAL STOCK SALE PROCEEDS" means the aggregate net cash proceeds,
including the fair market value of the non-cash proceeds, as determined by an
independent appraisal firm, received by Charter Holdings since the date of the
indentures
(x) as a contribution to the common equity capital or from the issue
or sale of Equity Interests of Charter Holdings, other than Disqualified
Stock, or
(y) from the issue or sale of convertible or exchangeable Disqualified
Stock or convertible or exchangeable debt securities of Charter Holdings
that have been converted into or exchanged for such Equity Interests, other
than Equity Interests or Disqualified Stock or debt securities sold to a
Subsidiary of Charter Holdings.
"CASH EQUIVALENTS" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof,
provided that the full faith and credit of the United States is pledged in
support thereof, having maturities of not more than twelve months from the
date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of twelve months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any domestic commercial bank having combined
capital and surplus in excess of $500 million and a Thompson Bank Watch
Rating at the time of acquisition of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having a rating of at least "P-1" from Moody's or
at least "A-1" from S&P and in each case maturing within twelve months
after the date of acquisition;
(6) corporate debt obligations maturing within twelve months after the
date of acquisition thereof, rated at the time of acquisition at least
"Aaa" or "P-1" by Moody's or "AAA" or "A-1" by S&P;
(7) auction-rate preferred stocks of any corporation maturing not
later than 45 days after the date of acquisition thereof, rated at the time
of acquisition at least "Aaa" by Moody's or "AAA" by S&P;
(8) securities issued by any state, commonwealth or territory of the
United States, or by any political subdivision or taxing authority thereof,
maturing not later than six months after the date of acquisition thereof,
rated at the time of acquisition at least "A" by Moody's or S&P; and
(9) money market or mutual funds at least 90% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (1) through
(8) of this definition.
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"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) the sale, transfer, conveyance or other disposition, other than by
way of merger or consolidation, in one or a series of related transactions,
of all or substantially all of the assets of Charter Holdings and its
Subsidiaries, taken as a whole, to any "person," as such term is used in
Section 13(d)(3) of the Exchange Act, other than Paul G. Allen or a Related
Party of Mr. Allen;
(2) the adoption of a plan relating to the liquidation or dissolution
of Charter Holdings;
(3) the consummation of any transaction, including, without
limitation, any merger or consolidation, the result of which is that any
"person," as defined above, other than the principal and Related Parties
and any entity formed for the purpose of owning Capital Stock of Charter
Holdings, becomes the Beneficial Owner, directly or indirectly, of more
than 35% of the Voting Stock of Charter Holdings, measured by voting power
rather than number of shares, unless the principal or a Related Party
Beneficially Owns, directly or indirectly a greater percentage of Voting
Stock of Charter Holdings, measured by voting power rather than the number
of shares, than such person;
(4) after Charter Holdings' initial public offering, the first day on
which a majority of the members of the board of directors of Charter
Holdings are not Continuing Directors; or
(5) Charter Holdings consolidates with, or merges with or into, any
Person, or any Person consolidates with, or merges with or into, Charter
Holdings, in any such event pursuant to a transaction in which any of the
outstanding Voting Stock of Charter Holdings is converted into or exchanged
for cash, securities or other property, other than any such transaction
where the Voting Stock of Charter Holdings outstanding immediately prior to
such transaction is converted into or exchanged for Voting Stock, other
than Disqualified Stock, of the surviving or transferee Person constituting
a majority of the outstanding shares of such Voting Stock of such surviving
or transferee Person immediately after giving effect to such issuance.
"COMPANY PREFERRED STOCK" means the 10% cumulative convertible redeemable
preferred equity of Charter Holdings with an aggregate liquidation value of $25
million.
"CONSOLIDATED EBITDA" means with respect to any Person, for any period, the
net income of such Person and its Restricted Subsidiaries for such period plus,
to the extent such amount was deducted in calculating such net income:
(1) Consolidated Interest Expense;
(2) income taxes;
(3) depreciation expense;
(4) amortization expense;
(5) all other non-cash items, extraordinary items, nonrecurring and
unusual items and the cumulative effects of changes in accounting
principles reducing such net income, less all non-cash items, extraordinary
items, nonrecurring and unusual items and cumulative effects of changes in
accounting principles increasing such net income, all as determined on a
consolidated basis for Charter Holdings and its Restricted Subsidiaries in
conformity with GAAP;
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(6) amounts actually paid during such period pursuant to a deferred
compensation plan; and
(7) for purposes of the covenant "-- Incurrence of Indebtedness and
Issuance of preferred stock" only, Management Fees;
provided that Consolidated EBITDA shall not include:
(x) the net income, or net loss, of any Person that is not a
Restricted Subsidiary ("Other Person"), except
(I) with respect to net income, to the extent of the amount of
dividends or other distributions actually paid to such Person or
any of its Restricted Subsidiaries by such Other Person during such
period and
(II) with respect to net losses, to the extent of the amount
of investments made by such Person or any Restricted Subsidiary of
such Person in such Other Person during such period;
(y) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (3) of the covenant
described under the subheading "Certain Covenants -- Restricted
Payments," and in such case, except to the extent includable pursuant to
clause (x) above, the net income or net loss, of any Other Person
accrued prior to the date it becomes a Restricted Subsidiary or is
merged into or consolidated with such Person or any Restricted
Subsidiaries or all or substantially all of the property and assets of
such Other Person are acquired by such Person or any of its Restricted
Subsidiaries; and
(z) the net income of any Restricted Subsidiary to the extent that
the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary, other than any agreement or
instrument evidencing Indebtedness or preferred stock outstanding on the
date of the indenture or incurred or issued thereafter in compliance
with the covenant described under the caption "Certain Covenants --
Incurrence of Indebtedness and Issuance of preferred stock;" provided
that
(a) the terms of any such agreement restricting the
declaration and payment of dividends or similar distributions apply
only in the event of a default with respect to a financial covenant
or a covenant relating to payment, beyond any applicable period of
grace, contained in such agreement or instrument, and
(b) such terms are determined by such Person to be customary
in comparable financings and such restrictions are determined by
the issuers not to materially affect the issuers' ability to make
principal or interest payments on the notes when due.
"CONSOLIDATED INDEBTEDNESS" means, with respect to any Person as of any
date of determination, the sum, without duplication, of:
(1) the total amount of outstanding Indebtedness of such Person and
its Restricted Subsidiaries, plus
(2) the total amount of Indebtedness of any other Person, that has
been Guaranteed by the referent Person or one or more of its Restricted
Subsidiaries, plus
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(3) the aggregate liquidation value of all Disqualified Stock of such
Person and all preferred stock of Restricted Subsidiaries of such Person,
in each case, determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, without duplication, the sum of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization or original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net payments, if any, pursuant to Hedging Obligations; and
(2) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, and
(3) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon;
excluding, however, any amount of such interest of any Restricted Subsidiary if
the net income of such Restricted Subsidiary is excluded in the calculation of
Consolidated EBITDA pursuant to clause (z) of the definition thereof, but only
in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Consolidated EBITDA pursuant to clause (z) of
the definition thereof, in each case, on a consolidated basis and in accordance
with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member
of the board of directors of Charter Holdings who:
(1) was a member of such board of directors on the date of the
indentures; or
(2) was nominated for election or elected to such board of directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election or whose
election or appointment was previously so approved.
"COVENANT DEFEASANCE" is set forth above under the caption "-- Legal
Defeasance and Covenant Defeasance."
"CREDIT FACILITIES" means, with respect to Charter Holdings, and/or its
Restricted Subsidiaries, one or more debt facilities or commercial paper
facilities, in each case with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing, including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables, or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DISPOSITION" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person, whether or not such Person
is the Surviving
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Person, or the sale, assignment, or transfer, lease conveyance or other
disposition of all or substantially all of such Person's assets or Capital
Stock.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms, or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof, or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require Charter Holdings to repurchase such
Capital Stock upon the occurrence of a change of control or an asset sale shall
not constitute Disqualified Stock if the terms of such Capital Stock provide
that Charter Holdings may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies with
the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments."
"EVENTS OF DEFAULT" are set forth above under the caption "-- Events of
Default and Remedies."
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"EQUITY OFFERING" means any private or underwritten public offering of
Qualified Capital Stock of Charter Holdings which the gross proceeds to Charter
Holdings are at least $25 million.
"EXCESS PROCEEDS" means any Net Proceeds from Asset Sales that are not
applied to repay debt under the Credit Facilities or other Indebtedness or
invested in Productive Assets, in accordance with the indenture.
"EXISTING INDEBTEDNESS" means Indebtedness of Charter Holdings and its
Restricted Subsidiaries in existence on the date of the indentures, until such
amounts are repaid.
"FULL ACCRETION DATE" means April 1, 2004, the first date on which the
Accreted Value of the 9.920% notes has accreted to an amount equal to the
principal amount at maturity of the 9.920% notes.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the issue date.
"GUARANTEE" or "GUARANTEE" means a guarantee other than by endorsement of
negotiable instruments for collection in the ordinary course of business, direct
or indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness, measured as the lesser of the
aggregate outstanding amount of the Indebtedness so guaranteed and the face
amount of the guarantee.
"GUARANTEED INDEBTEDNESS" is set forth above under the caption "-- Certain
Covenants -- Limitations on Issuances of Guarantees of Indebtedness."
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"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements;
(2) interest rate option agreements, foreign currency exchange
agreements, foreign currency swap agreements; and
(3) other agreements or arrangements designed to protect such Person
against fluctuations in interest and currency exchange rates.
"INDEBTEDNESS" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit, or reimbursement agreements in respect thereof;
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) in respect of the balance deferred and unpaid of the purchase
price of any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing the notional amount of any Hedging Obligations,
if and to the extent any of the preceding items, other than letters of credit
and Hedging Obligations, would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person, whether or not such Indebtedness is assumed by
the specified Person, and, to the extent not otherwise included, the guarantee
by such Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount; and
(2) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons, including Affiliates, in the forms of direct or
indirect loans, including guarantees of Indebtedness or other obligations,
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business,
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
"INVESTMENT GRADE RATING" means a rating equal to or higher than Baa3, or
the equivalent, by Moody's and BBB-, or the equivalent, by S&P.
"LEGAL DEFEASANCE" is set forth above under the caption "-- Legal
Defeasance and Covenant Defeasance."
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"LEVERAGE RATIO" means, as of any date, the ratio of:
(1) the Consolidated Indebtedness of Charter Holdings on such date to
(2) the aggregate amount of combined Consolidated EBITDA for Charter
Holdings for the most recently ended fiscal quarter for which internal
financial statements are available multiplied by four (the "Reference
Period").
In addition to the foregoing, for purposes of this definition,
"Consolidated EBITDA" shall be calculated on a pro forma basis after giving
effect to
(1) the issuance of the notes;
(2) the incurrence of the Indebtedness or the issuance of the
Disqualified Stock or other preferred stock of a Restricted Subsidiary, and
the application of the proceeds therefrom, giving rise to the need to make
such calculation and any incurrence or issuance, and the application of the
proceeds therefrom, or repayment of other Indebtedness or Disqualified
Stock or other preferred stock or a Restricted Subsidiary, other than the
incurrence or repayment of Indebtedness for ordinary working capital
purposes, at any time subsequent to the beginning of the Reference Period
and on or prior to the date of determination, as if such incurrence, and
the application of the proceeds thereof, or the repayment, as the case may
be, occurred on the first day of the Reference Period;
(3) any Dispositions or Asset Acquisitions, including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted
Subsidiaries, including any person that becomes a Restricted Subsidiary as
a result of such Asset Acquisition, incurring, assuming or otherwise
becoming liable for or issuing Indebtedness, Disqualified Stock or
Preferred Stock, made on or subsequent to the first day of the Reference
Period and on or prior to the date of determination, as if such
Disposition, Asset Acquisition, including the incurrence, assumption or
liability for any such Indebtedness Disqualified Stock or preferred stock
and also including any Consolidated EBITDA associated with such Asset
Acquisition, including any cost savings adjustments in compliance with
Regulation S-X promulgated by the Securities and Exchange Commission, had
occurred on the first day of the Reference Period.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code, or equivalent statutes, of any jurisdiction.
"MANAGEMENT FEES" means the fee payable to Charter Investment pursuant to
the management agreement between Charter Investment and Charter Operating, as
such agreement exists on the issue date, including any amendment or replacement
thereof, provided that any such amendment or replacement is not more
disadvantageous to the holders of the notes in any material respect from such
management agreement existing on the issue date.
"MARCUS COMBINATION" means the consolidation or merger of the Guarantor
with and into Charter Holdings or any of its Restricted Subsidiaries.
"MOODY'S" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
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"NET PROCEEDS" means the aggregate cash proceeds received by Charter
Holdings or any of its Restricted Subsidiaries in respect of any Asset Sale,
including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale, net of the
direct costs relating to such Asset Sale, including, without limitation, legal,
accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result thereof or taxes paid or payable as a
result thereof, including amounts distributable in respect of owners', partners'
or members' tax liabilities resulting from such sale, in each case after taking
into account any available tax credits or deductions and any tax sharing
arrangements and amounts required to be applied to the repayment of
Indebtedness.
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither Charter Holdings nor any of its Restricted
Subsidiaries
(a) provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute Indebtedness,
(b) is directly or indirectly liable as a guarantor or otherwise,
or
(c) constitutes the lender;
(2) no default with respect to which, including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary, would permit upon notice, lapse of time or both any holder of
any other Indebtedness, other than the notes, of Charter Holdings or any of
its Restricted Subsidiaries to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its
stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of Charter Holdings or
any of its Restricted Subsidiaries.
"PAYMENT DEFAULT" is set forth above under the caption "-- Events of
Default and Remedies."
"PERMITTED DEBT" is set forth above under the caption "-- Certain
Covenants -- Incurrence of indebtedness and Issuance of preferred stock."
"PERMITTED INVESTMENTS" means:
(1) any Investment by Charter Holdings in a Restricted Subsidiary of
Charter Holdings, or any Investment by a Restricted Subsidiary of Charter
Holdings in Charter Holdings;
(2) any Investment in Cash Equivalents;
(3) any Investment by Charter Holdings or any Restricted Subsidiary of
Charter Holdings in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of Charter
Holdings; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, Charter Holdings or a Restricted Subsidiary of Charter
Holdings;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant
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described above under the caption "-- Repurchase at the Option of
Holders -- Asset Sales";
(5) Investment made out of the net cash proceeds of the issue and
sale, other than to a Subsidiary of Charter Holdings, of Equity Interests,
other than Disqualified Stock, of Charter Holdings to the extent that
(a) such net cash proceeds have not been applied to make a
Restricted Payment or to effect other transactions pursuant to the
covenant described above under the subheading "-- Restricted Payments,"
or
(b) such net cash proceeds have not been used to incur Indebtedness
pursuant to clause (10) of the covenant described above under the
subheading "-- Incurrence of Indebtedness and Issuance of preferred
stock";
(6) Investments in Productive Assets having an aggregate fair market
value, measured on the date each such Investment was made and without
giving effect to subsequent changes is value, when taken together with all
other Investments made pursuant to this clause (6) since the issue date,
not to exceed $150 million; provided that either Charter Holdings or any of
its Restricted Subsidiaries, after giving effect to such Investments, will
own at least 20% of the Voting Stock of such Person;
(7) other Investments in any Person having an aggregate fair market
value, measured on the date each such Investment was made and without
giving effect to subsequent changes in value, when taken together with all
other Investments made pursuant to this clause (7) since the date of the
indentures, not to exceed $50 million;
(8) Investments in customers and suppliers in the ordinary course of
business which either
(A) generate accounts receivable, or
(B) are accepted in settlement of bona fide disputes; and
(9) Charter Holdings' investment in Marcus Cable Holdings, LLC, as
outstanding on the Issue Date.
"PERMITTED LIENS" means:
(1) Liens on the assets of Charter Holdings securing Indebtedness and
other Obligations under clause (1) of the covenant "-- Incurrence of
Indebtedness and Issuance of preferred stock";
(2) Liens in favor of Charter Holdings and Liens on the assets of any
Restricted Subsidiary of Charter Holdings in favor of any other Restricted
Subsidiary of Charter Holdings;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Charter Holdings; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with Charter Holdings;
(4) Liens on property existing at the time of acquisition thereof by
Charter Holdings; provided that such Liens were in existence prior to the
contemplation of such acquisition;
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(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) purchase money mortgages or other purchase money liens, including
without limitation any Capitalized Lease Obligations, incurred by Charter
Holdings upon any fixed or capital assets acquired after the Issue Date or
purchase money mortgages, including without limitation Capitalized Lease
Obligations, on any such assets, whether or not assumed, existing at the
time of acquisition of such assets, whether or not assumed, so long as
(a) such mortgage or lien does not extend to or cover any of the
assets of Charter Holdings, except the asset so developed, constructed,
or acquired, and directly related assets such as enhancements and
modifications thereto, substitutions, replacements, proceeds, including
insurance proceeds, products, rents and profits thereof, and
(b) such mortgage or lien secures the obligation to pay the
purchase price of such asset, interest thereon and other charges, costs
and expenses, including, without limitation, the cost of design,
development, construction, acquisition, transportation, installation,
improvement, and migration, and incurred in connection therewith, or the
obligation under such Capitalized Lease Obligation, only;
(7) Liens existing on the date of the indentures, other than in
connection with the Credit Facilities;
(8) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(9) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(10) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(11) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligation, bankers'
acceptance, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business, exclusive of obligations for the payment
of borrowed money;
(12) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of Charter
Holdings or any of its Restricted Subsidiaries or the Guarantor or any of
its Restricted Subsidiaries;
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(13) Liens of franchisors or other regulatory bodies arising in the
ordinary course of business;
(14) Liens arising from filing Uniform Commercial Code financing
statements regarding leases or other Uniform Commercial Code financing
statements for precautionary purposes relating to arrangements not
constituting Indebtedness;
(15) Liens arising from the rendering of a final judgment or order
against Charter Holdings or any of its Restricted Subsidiaries that does
not give rise to an Event of Default;
(16) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(17) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case,
securing Indebtedness under Hedging Obligations and forward contracts,
options, future contracts, future options or similar agreements or
arrangements designed solely to protect Charter Holdings or any of its
Restricted Subsidiaries from fluctuations in interest rates, currencies or
the price of commodities;
(18) Liens consisting of any interest or title of licensor in the
property subject to a license;
(19) Liens on the Capital Stock of Unrestricted Subsidiaries;
(20) Liens arising from sales or other transfers of accounts
receivable which are past due or otherwise doubtful of collection in the
ordinary course of business;
(21) Liens incurred in the ordinary course of business of Charter
Holdings, with respect to obligations which in the aggregate do not exceed
$50 million at any one time outstanding;
(22) Liens in favor of the trustee arising under the provisions in the
indentures under the subheading "-- Compensation and Indemnity"; and
(23) Liens in favor of the trustee for its benefit and the benefit of
holders of the notes, as their respective interests appear.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of Charter
Holdings or any of its Restricted Subsidiaries, issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Charter Holdings or any of its Restricted
Subsidiaries, other than intercompany Indebtedness, provided that unless
permitted otherwise by the Indentures, no Indebtedness of Charter Holdings or
any of its Restricted Subsidiaries may be issued in exchange for, or the net
proceeds of are used to extend, refinance, renew, replace, defease or refund
Indebtedness of Charter Holdings or any of its Restricted Subsidiaries;
provided, further, that:
(1) the principal amount, or accreted value, if applicable, of such
Permitted Refinancing Indebtedness does not exceed the principal amount of,
or accreted value, if applicable, plus accrued interest and premium, if
any, on, the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded, plus the amount of reasonable expenses incurred in
connection therewith;
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(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
notes on terms at least as favorable to the holders of notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by Charter Holdings or by any
of its Restricted Subsidiaries who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof or any other entity.
"PRODUCTIVE ASSETS" means assets, including assets of a referent Person
owned directly or indirectly through ownership of Capital Stock, of a kind used
or useful in the Cable Related Business.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Stock.
"RATING AGENCIES" means Moody's and S&P.
"RELATED PARTY" means:
(1) the spouse or an immediate family member, estate or heir of Mr.
Allen; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of Mr. Allen
and/or such other Persons referred to in the immediately preceding clause
(1).
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED PAYMENTS" are set forth above under the caption "-- Certain
Covenants -- Restricted Payments."
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Service, a division of the
McGraw-Hill Companies, Inc. or any successor to the rating agency business
thereof.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of Charter
Holdings which is a "Significant Subsidiary" as defined in Rule 1-02(w) of
Regulation S-X under the Securities Act.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the documentation governing
such Indebtedness on the Issue Date, or, if none, the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
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"SUBORDINATED DEBT FINANCING" means, with respect to any restricted
subsidiary of Charter Holdings or the guarantor, a public offering or private
placement, whether pursuant to Rule 144A under the Securities Act or otherwise,
of subordinated notes or preferred stock, whether or not such preferred stock
constitutes disqualified stock, as the case may be, of such restricted
subsidiary to one or more purchasers, other than to one or more affiliates of
Charter Holdings or the guarantor.
"SUBORDINATED NOTES" are set forth above under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of preferred stock."
"SUBSIDIARY" means, with respect to any Person:
(1) any corporation, association or other business entity of which at
least 50% of the total voting power of shares of Capital Stock entitled,
without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person, or a combination thereof, and, in the
case of any such entity of which 50% of the total voting power of shares of
Capital Stock is so owned or controlled by such Person or one or more of
the other Subsidiaries of such Person, such Person and its Subsidiaries
also has the right to control the management of such entity pursuant to
contract or otherwise; and
(2) any partnership
(a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person, or
(b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person, or any combination thereof.
"SUBSIDIARY GUARANTEE" is set forth above under the caption "-- Certain
Covenants -- Limitations on Issuances of Guarantees of Indebtedness."
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of Charter Holdings that is
designated by the board of directors as an Unrestricted Subsidiary pursuant to a
board resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with Charter Holdings or any Restricted Subsidiary of Charter
Holdings unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to Charter Holdings or any Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of Charter Holdings unless such terms constitute
Investments permitted by the covenant described above under the heading
"-- Investments";
(3) is a Person with respect to which neither Charter Holdings nor any
of its Restricted Subsidiaries has any direct or indirect obligation
(a) to subscribe for additional Equity Interests or
(b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Charter Holdings or any of its
Restricted Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of Charter Holdings or any of its Restricted
Subsidiaries or has at
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least one executive officer that is not a director or executive officer of
Charter Holdings or any of its Restricted Subsidiaries.
Any designation of a Subsidiary of Charter Holdings as an Unrestricted
Subsidiary shall be evidenced to the trustee by filing with the trustee a
certified copy of the board resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "Certain Covenants -- Investments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the indentures and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of Charter Holdings as of such
date and, if such Indebtedness is not permitted to be incurred as of such date
under the covenant described under the caption "Incurrence of Indebtedness and
Issuance of preferred stock," Charter Holdings shall be in default of such
covenant. The board of directors of Charter Holdings may at any time designate
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of Charter Holdings of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if
(1) such Indebtedness is permitted under the covenant described under the
caption "Certain Covenants -- Incurrence of Indebtedness and Issuance of
preferred stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the four-quarter reference period; and
(2) no Default or Event of Default would be in existence following such
designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the board of
directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by
(b) the number of years, calculated to the nearest one-twelfth,
that will elapse between such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which, other than directors' qualifying shares, shall at
the time be owned by such Person and/or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following sets forth the opinion of Paul, Hastings, Janofsky & Walker
LLP, our legal counsel, as to the material United States federal income tax
consequences of
(1) the exchange offer relevant to U.S. holders and
(2) the ownership and disposition of the new notes relevant to U.S. holders
and, in certain circumstances, non-U.S. holders.
The following deals only with notes held as capital assets within the
meaning of section 1221 of the Internal Revenue Code of 1986, as amended. The
following does not address special situations, such as those of broker-dealers,
tax-exempt organizations, individual retirement accounts and other tax deferred
accounts, financial institutions, insurance companies, or persons holding notes
as part of a hedging or conversion transaction, a straddle or a constructive
sale. Furthermore, the following is based upon the provisions of the Internal
Revenue Code and regulations, rulings and judicial decisions promulgated under
the Internal Revenue Code and judicial decisions as of the date hereof. Such
authorities may be repealed, revoked, or modified, possibly with retroactive
effect, so as to result in United States federal income tax consequences
different from those discussed below. In addition, except as otherwise
indicated, the following does not consider the effect of any applicable foreign,
state, local or other tax laws or estate or gift tax considerations.
We have not sought, and will not seek, any rulings from the IRS with
respect to the positions discussed below. There can be no assurance that the IRS
will not take a different position concerning the tax consequences of the
exchange offer and ownership or disposition of the original notes or new notes,
or that any such position would not be sustained.
As used herein, a "United States person" is
(1) a citizen or resident of the U.S.,
(2) a corporation, partnership or other entity created or organized in or
under the laws of the U.S. or any political subdivision thereof,
(3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source,
(4) a trust if
(A) a United States court is able to exercise primary supervision over
the administration of the trust and
(B) one or more United States persons have the authority to control
all substantial decisions of the trust,
(5) a certain type of trust in existence on August 20, 1996, which was
treated as a United States person under the Internal Revenue Code in effect
immediately prior to such date and which has made a valid election to be treated
as a United States person under the Internal Revenue Code and
(6) any person otherwise subject to U.S. federal income tax on a net income
basis in respect of its worldwide taxable income.
A U.S. holder is a beneficial owner of a note who is a United States
person. A non-U.S. holder is a beneficial owner of a note that is not a U.S.
holder.
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THE EXCHANGE OFFER
Pursuant to the exchange offer, holders are entitled to exchange the
original notes for new notes that will be substantially identical in all
material respects to the original notes, except that the new notes will be
registered with the Securities and Exchange Commission and therefore will not be
subject to transfer restrictions. The exchange pursuant to the exchange offer as
described above will not result in a taxable event. Accordingly,
(1) no gain or loss will be realized by a U.S. holder upon receipt of a new
note,
(2) the holding period of the new note will include the holding period of
the original note exchanged therefor and
(3) the adjusted tax basis of the new notes will be the same as the
adjusted tax basis of the original notes exchanged at the time of such exchange.
UNITED STATES FEDERAL INCOME TAXATION OF U.S. HOLDERS
PAYMENTS OF INTEREST ON THE 8.250% NOTES AND THE 8.625% NOTES.
Interest on the 8.250% notes and the 8.625% notes, as the case may be, will
be taxable to a U.S. holder as ordinary income from domestic sources at the time
it is paid or accrued in accordance with the U.S. holder's regular method of
accounting for tax purposes.
ORIGINAL ISSUE DISCOUNT ON THE 9.920% NOTES
The 9.920% notes will be issued with original issue discount. Such notes
will be issued with original issue discount because they will be issued at an
issue price which is substantially less than their stated principal amount at
maturity, and because interest on such notes will not be payable until October
1, 2004. Each U.S. holder will be required to include in income in each year, in
advance of receipt of cash payments on such notes to which such income is
attributable, original issue discount income as described below.
The amount of original issue discount with respect to the 9.920% notes will
be equal to the excess of
(1) the note's "stated redemption price at maturity" over
(2) its "issue price."
The issue price of the 9.920% notes will be equal to the price to the
public at which a substantial amount of such notes is initially sold for money,
excluding any sales to a bond house, broker or similar person or organization
acting in the capacity of an underwriter, placement agent or wholesaler. The
stated redemption price at maturity of such a note is the total of all payments
provided by the 9.920% notes, including stated interest payments.
A U.S. holder of such a note is required to include in gross income for
U.S. federal income tax purposes an amount equal to the sum of the "daily
portions" of such original issue discount for all days during the taxable year
on which the holder holds such note. The daily portions of original issue
discount required to be included in such holder's gross income in a taxable year
will be determined on a constant yield basis. A pro rata portion of the original
issue discount on such note which is attributable to the "accrual period" in
which such day is included will be allocated to each day during the taxable year
in which
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the holder holds the 9.920% notes. Accrual periods with respect to such a note
may be of any length and may vary in length over the term of the 9.920% notes as
long as
(1) no accrual period is longer than one year and
(2) each scheduled payment of interest or principal on such note occurs on
either the first or final day of an accrual period.
The amount of original issue discount attributable to each accrual period
will be equal to the product of
(1) the "adjusted issue price" at the beginning of such accrual period and
(2) the "yield to maturity" of the instrument, stated in a manner
appropriately taking into account the length of the accrual period.
The yield to maturity is the discount rate that, when used in computing the
present value of all payments to be made under the 9.920% notes, produces an
amount equal to the issue price of such notes. The adjusted issue price of such
a note at the beginning of an accrual period is generally defined as the issue
price of such note plus the aggregate amount of original issue discount that
accrued in all prior accrual periods, less any cash payments made on the 9.920%
notes. Accordingly, a U.S. holder of such a note will be required to include
original issue discount in gross income for United States federal income tax
purposes in advance of the receipt of cash attributable to such income. The
amount of original issue discount allocable to an initial short accrual period
may be computed using any reasonable method if all other accrual periods, other
than a final short accrual period, are of equal length. The amount of original
issue discount allocable to the final accrual period at maturity of a 9.920%
note is the difference between
(A) the amount payable at the maturity of such note and
(B) such note's adjusted issue price as of the beginning of the final
accrual period.
Payments on the 9.920% notes, including principal and stated interest
payments, are not separately included in a U.S. holder's income. Such payments
are treated first as payments of accrued original issue discount to the extent
of such accrued original issue discount and the excess as payments of principal,
which reduce the U.S. holder's adjusted tax basis in such notes.
EFFECT OF MANDATORY AND OPTIONAL REDEMPTION ON ORIGINAL ISSUE DISCOUNT
In the event of a change of control, we will be required to offer to redeem
all of the notes, at redemption prices specified elsewhere in this prospectus.
If we receive net proceeds from one or more equity offerings, we may, at our
option, use all or a portion of such net proceeds to redeem in the aggregate up
to 35% of the aggregate principal amount at maturity of the 8.625% notes and up
to 35% of the aggregate principal amount at maturity of the 9.920% notes,
provided that at least 65% of the aggregate principal amount of the 8.625% notes
and of the aggregate principal amount at maturity of the 9.920% notes remain
outstanding after each such redemption. Computation of the yield and maturity of
the notes is not affected by such redemption rights and obligations if, based on
all the facts and circumstances as of the issue date, the stated payment
schedule of the notes, that does not reflect the change of control event or
equity offering event, is significantly more likely than not to occur. We have
determined that, based on all of the facts and circumstances as of the issue
date, it is significantly more likely than not that the notes will be paid
according to their stated schedule.
We may redeem the 8.625% notes and the 9.920% notes, in whole or in part,
at any time on or after April 1, 2004, at redemption prices specified plus
accrued and unpaid
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stated interest, if any, on the notes so redeemed but excluding the date of
redemption. The United States Treasury Regulations contain rules for determining
the "maturity date" and the stated redemption price at maturity of an instrument
that may be redeemed prior to its stated maturity date at the option of the
issuer. Under United States Treasury Regulations, solely for the purposes of the
accrual of original issue discount, it is assumed that an issuer will exercise
any option to redeem a debt instrument if such exercise would lower the yield to
maturity of the debt instrument. We will not be presumed to redeem the notes
prior to their stated maturity under these rules because the exercise of such
options would not lower the yield to maturity of the notes.
U.S. holders may wish to consult their own tax advisors regarding the
treatment of such contingencies.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Upon the sale, exchange, retirement or other taxable disposition of a note,
a U.S. holder will recognize gain or loss in an amount equal to the difference
between
(1) the amount of cash and the fair market value of other property received
in the exchange, and
(2) the holder's adjusted tax basis in such note.
Amounts attributable to accrued but unpaid interest on the 8.250% notes and
the 8.625% notes will be treated as ordinary interest income. A holder's
adjusted tax basis in a note will equal the purchase price paid by such holder
for the note increased by the amount of any market discount, and in the case of
a 9.920% note by any original issue discount previously included in income by
such holder with respect to such note, and decreased by the amount of any
amortized bond premium applied to reduce interest on the notes, and in the case
of a 9.920% note by any payments received on such note.
Gain or loss realized on the sale, exchange, retirement or other taxable
disposition of a note will be capital gain or loss and will be long-term capital
gain or loss if at the time of sale, exchange, retirement, or other taxable
disposition, the note has been held for more than 12 months. The maximum rate of
tax on long-term capital gains with respect to notes held by an individual
currently is 20%. The deductibility of capital losses is subject to certain
limitations.
MARKET DISCOUNT
A holder receives a "market discount" when it
(1) purchases an 8.250% note or an 8.625% note for an amount below the
issue price, or
(2) purchases a 9.920% note for an amount below the adjusted issue price on
the date of purchase, as determined in accordance with the original issue
discount rules above.
Under the market discount rules, a U.S. holder will be required to treat
any partial principal payment on, or any gain on the sale, exchange, retirement
or other disposition of, a note as ordinary income to the extent of the market
discount which has not previously been included in income and is treated as
having accrued on such note at the time of such payment or disposition. In
addition, the U.S. holder may be required to defer, until the maturity of the
note or its earlier disposition in a taxable transaction, the deduction of a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such notes.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the note, unless the U.S.
holder elects to accrue
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such discount on a constant interest rate method. A U.S. holder may elect to
include market discount in income currently as it accrues, on either a ratable
or constant interest rate method. If this election is made, the holder's basis
in the note will be increased to reflect the amount of income recognized and the
rules described above regarding deferral of interest deductions will not apply.
This election to include market discount in income currently, once made, applies
to all market discount obligations acquired on or after the first taxable year
to which the election applies and may not be revoked without the consent of the
Internal Revenue Service.
AMORTIZABLE BOND PREMIUM; ACQUISITION PREMIUM
A U.S. holder that:
(1) purchases an 8.250% note or an 8.625% note for an amount in excess of
the principal amount, or
(2) purchases a 9.920% note for an amount in excess of the stated
redemption price
will be considered to have purchased such note with "amortizable bond premium."
A U.S. holder generally may elect to amortize the premium over the remaining
term of the note on a constant yield method as applied with respect to each
accrual period of the note, and allocated ratably to each day within an accrual
period in a manner substantially similar to the method of calculating daily
portions of original issue discount, as described above. However, because the
notes may be optionally redeemed for an amount that is in excess of their
principal amount, special rules apply that could result in a deferral of the
amortization of bond premium until later in the term of the note. The amount
amortized in any year will be treated as a reduction of the U.S. holder's
interest income, including original issue discount income, from the note. Bond
premium on a note held by a U.S. holder that does not make such an election will
decrease the gain or increase the loss otherwise recognized upon disposition of
the note. The election to amortize premium on a constant yield method, once
made, applies to all debt obligations held or subsequently acquired by the
electing U.S. holder on or after the first day of the first taxable year to
which the election applies and may not be revoked without the consent of the
Internal Revenue Service.
A U.S. holder that purchases a 9.920% note for an amount that is greater
than the adjusted issue price of such note on the date of purchase, as
determined in accordance with the original issue discount rules, above, will be
considered to have purchased such note at an "acquisition premium." A holder of
a 9.920% note that is purchased at an acquisition premium may reduce the amount
of the original issue discount otherwise includible in income with respect to
such note by the "acquisition premium fraction." The acquisition premium
fraction is that fraction the numerator of which is the excess of the holder's
adjusted tax basis in such note immediately after its acquisition over the
adjusted issue price of such note, and the denominator of which is the excess of
the sum of all amounts payable on such note after the purchase date over the
adjusted issue price of such note. Alternatively, a holder of a 9.920% note that
is purchased at an acquisition premium may elect to compute the original issue
discount accrual on such note by treating the purchase as a purchase of such
note at original issuance, treating the purchase price as the issue price, and
applying the original issue discount rules thereto using a constant yield
method.
UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
The payment to a non-U.S. holder of interest on a note will not be subject
to United States federal withholding tax pursuant to the "portfolio interest
exception," provided that
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(1) the non-U.S. holder does not actually or constructively own 10% or more
of the capital or profits interest in us and is not a "controlled foreign
corporation" that is related to us within the meaning of the Internal Revenue
Code and
(2) either
(A) the beneficial owner of the notes certifies to us or our agent,
under penalties of perjury, that it is not a U.S. holder and provides its
name and address on United States Treasury Form W-8, or a suitable
substitute form, or
(B) a securities clearing organization, bank or other financial
institution that holds the notes on behalf of such non-U.S. holder in the
ordinary course of its trade or business certifies under penalties of
perjury that such Form W-8, or suitable substitute form, has been received
from the beneficial owner by it or by a financial institution between it
and the beneficial owner and furnishes the payor with a copy thereof.
Recently adopted Treasury Regulations that will be effective January 1,
2001 provide alternative methods for satisfying the certification requirement
described in (2) above. These regulations will generally require, in the case of
notes held by a foreign partnership, that the certificate described in (2) above
be provided by the partners rather than by the foreign partnership, and that the
partnership provide certain information including a United States tax
identification number. For purposes of the United States federal withholding
tax, payment of interest includes the amount of any payment that is attributable
to original issue discount that accrued while such non-U.S. holder held the
note.
If a non-U.S. holder cannot satisfy the requirements of the portfolio
interest exception described above, payments of interest, including original
issue discount, made to such non-U.S. holder will be subject to a 30%
withholding tax, unless the beneficial owner of the note provides us or our
paying agent, as the case may be, with a properly executed
(1) Internal Revenue Service Form 1001, or successor form, claiming an
exemption from or reduction in the rate of withholding under the benefit of a
tax treaty or
(2) Internal Revenue Service Form 4224, or successor form, stating that
interest paid on the note is not subject to withholding tax because it is
effectively connected with the beneficial owner's conduct of a trade or business
in the United States.
If a non-U.S. holder of a note is engaged in a trade or business in the
United States and interest on the note is effectively connected with the conduct
of such trade or business, such non-U.S. holder will be subject to United States
federal income tax on such interest including original issue discount in the
same manner as if it were a U.S. holder. In addition, if such non-U.S. holder is
a foreign corporation, it may be subject to a branch profits tax equal to 30% of
its effectively connected earnings and profits, subject to adjustment, for that
taxable year unless it qualifies for a lower rate under an applicable income tax
treaty.
Any capital gain realized on the sale, exchange, redemption, retirement or
other taxable disposition of a note by a non-U.S. holder generally will not be
subject to United States federal income tax provided
(1) such gain is not effectively connected with the conduct by such holder
of a trade or business in the United States,
(2) in the case of gains derived by an individual, such individual is not
present in the United States for 183 days or more in the taxable year of the
disposition and certain other conditions are met and
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(3) the non-U.S. holder is not subject to tax pursuant to the provisions of
United States federal income tax law applicable to certain expatriates.
FEDERAL ESTATE TAX
Subject to applicable estate tax treaty provisions, notes held by an
individual who is not a citizen or resident of the United States for federal
estate tax purposes at the time of his or her death will not be subject to
United States federal estate tax if the interest on the notes qualifies for the
portfolio interest exemption from United States federal withholding tax under
the rules described above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding and information reporting requirements may apply to
certain payments of principal, premium, if any, and interest, including accruals
of original issue discount, on a note, and to the proceeds of the sale or
redemption of a note before maturity. We, our agent, a broker, the trustee or
the paying agent under the indentures governing the notes, as the case may be,
will be required to withhold from any payment that is subject to backup
withholding a tax equal to 31% of such payment if a U.S. holder fails to furnish
his taxpayer identification number, certify that such number is correct, certify
that such holder is not subject to backup withholding or otherwise comply with
the applicable backup withholding rules. Certain U.S. holders, including all
corporations, are not subject to backup withholding and information reporting
requirements.
Non-U.S. holders other than corporations may be subject to backup
withholding and information reporting requirements. However, backup withholding
and information reporting requirements do not apply to payments of portfolio
interest, including original issue discount, made by us or a paying agent to
non-U.S. holders if the appropriate certification is received, provided that the
payor does not have actual knowledge that the holder is a U.S. holder. If any
payments of principal and interest are made to the beneficial owner of a note by
or through the foreign office of a foreign custodian, foreign nominee or other
foreign agent of such beneficial owner, or if the foreign office of a foreign
"broker," as defined in the applicable Treasury Regulations, pays the proceeds
of the sale, redemption or other disposition of note or a coupon to the seller
of such note or coupon, backup withholding and information reporting
requirements will not apply. Information reporting requirements, but not backup
withholding, will apply, however, to a payment by a foreign office of a broker
that is a United States person or is a foreign person that derives 50% of more
of its gross income for certain periods from the conduct of a trade or business
in the United States, or that is a "controlled foreign corporation," that is, a
foreign corporation controlled by certain United States shareholders, with
respect to the United States unless the broker has documentary evidence in its
records that the holder is a non-U.S. holder and certain other conditions are
met or the holder otherwise establishes an exemption. Payment by a United States
office of a broker is subject to both backup withholding at a rate of 31% and
information reporting unless the holder certifies under penalties of perjury
that it is a non-U.S. holder or otherwise establishes an exemption.
In October 1997, Treasury regulations were issued which alter the foregoing
rules in certain respects and which generally will apply to any payments in
respect of a note or proceeds from the sale of a note that are made after
December 31, 2000. Among other things, such regulations expand the number of
foreign intermediaries that are potentially subject to information reporting and
address certain documentary evidence requirements relating to exemption from the
backup withholding requirements. Holders of the notes should consult their tax
advisers concerning the possible application of such regulations to any payments
made on or with respect to the notes.
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Any amounts withheld under the backup withholding rules from a payment to a
holder of the notes will be allowed as a refund or a credit against such
holder's United States federal income tax liability, provided that the required
information is furnished to the IRS.
We must report annually to the IRS and to each non-U.S. holder any interest
that is subject to withholding, or that is exempt from United States federal
withholding tax pursuant to a tax treaty, or interest that is exempt from United
States federal withholding tax under the portfolio interest exception. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which the
non-U.S. holder resides.
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PLAN OF DISTRIBUTION
A broker-dealer that is the holder of original notes that were acquired for
the account of such broker-dealer as a result of market-making or other trading
activities, other than original notes acquired directly from us or any of our
affiliates may exchange such original notes for new notes pursuant to the
exchange offer. This is true so long as each broker-dealer that receives new
notes for its own account in exchange for original notes, where such original
notes were acquired by such broker-dealer as a result of market-making or other
trading activities acknowledges that it will deliver a prospectus in connection
with any resale of such new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for original notes where such
original notes were acquired as a result of market-making activities or other
trading activities. We have agreed that for a period of 180 days after
consummation of the exchange offer or such time as any broker-dealer no longer
owns any registrable securities, we will make this prospectus, as it may be
amended or supplemented from time to time, available to any broker-dealer for
use in connection with any such resale. All dealers effecting transactions in
the new notes will be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers or any other holder of new notes. New notes received by
broker-dealers for their own account in the exchange offer may be sold from time
to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the new notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such new
notes. Any broker-dealer that resells new notes that were received by it for its
own account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of new notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after consummation of the exchange offer or such
time as any broker-dealer no longer owns any registrable securities, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer and to our performance of, or compliance with, the registration
rights agreements (other than commissions or concessions of any brokers or
dealers) and will indemnify the holders of the notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
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EXPERTS
The consolidated financial statements of Charter Holdings, LLC and
subsidiaries, the combined financial statements of CCA Group, the consolidated
financial statements of CharterComm Holdings, L.P. and subsidiaries, the
combined financial statements of Greater Media Cablevision Systems, the
financial statements of Sonic Communications Cable Television Systems and the
financial statements of Long Beach Acquisition Corp., included in this
prospectus, to the extent and for the periods indicated in their reports, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included in this
prospectus in reliance upon the authority of said firm as experts in giving said
report.
The consolidated financial statements of Marcus Cable Company, L.L.C. as of
December 31, 1997, and for the periods from April 23, 1998 to December 23, 1998
and from January 1, 1998 to April 22, 1998 and for each of the years in the
two-year period ended December 31, 1997, and the combined financial statements
of Helicon Partners I, L.P. and affiliates as of December 31, 1997 and 1998 and
for each of the years in the three-year period ended December 31, 1998, have
been included herein in reliance upon the reports of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The consolidated financial statements of Renaissance Media Group LLC, the
combined financial statements of the Picayune MS, LaFourche LA, St. Tammany LA,
St. Landry LA, Pointe Coupee LA, and Jackson TN cable television systems, the
financial statements of Indiana Cable Associates, Ltd. and the consolidated
financial statements of R/N South Florida Cable Management Limited Partnership,
included in this prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere in this
prospectus, and are included herein in reliance upon such reports given on the
authority of such firm as experts in accounting and auditing.
The combined financial statements of InterMedia Cable Systems (comprised of
components of InterMedia Partners and InterMedia Capital Partners IV, L.P.), the
financial statements of Rifkin Cable Income Partners L.P., and the consolidated
financial statements of Rifkin Acquisition Partners, L.L.L.P., included in this
prospectus have been audited by PricewaterhouseCoopers LLP, independent
accountants. The entities and periods covered by these audits are indicated in
their reports. Such financial statements have been so included in reliance on
the reports of PricewaterhouseCoopers LLP given on the authority of said firm as
experts in auditing and accounting.
LEGAL MATTERS
The legality of the notes offered hereby and certain other matters will be
passed upon for us by Paul, Hastings, Janofsky & Walker LLP, New York, New York.
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CHARTER COMMUNICATIONS HOLDINGS, LLC
INDEX TO FINANCIAL STATEMENTS
<TABLE>
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES:
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.
Report of Independent Public Accountants.................. F-6
Consolidated Balance Sheet as of December 31, 1998........ F-7
Consolidated Statement of Operations for the Period from
December 24, 1998, Through December 31, 1998........... F-8
Consolidated Statement of Cash Flows for the Period from
December 24, 1998, Through December 31, 1998........... F-9
Notes to Consolidated Financial Statements................ F-10
Report of Independent Public Accountants.................. F-27
Consolidated Balance Sheet as of December 31, 1997........ F-28
Consolidated Statements of Operations for the Period From
January 1, 1998, Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-29
Consolidated Statements of Shareholder's Investment for
the Period From January 1, 1998 Through December 23,
1998 and for the Years Ended December 31, 1997 and
1996................................................... F-30
Consolidated Statements of Cash Flows for the Period From
January 1, 1998, Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-31
Notes to Consolidated Financial Statements................ F-32
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES:
Independent Auditors' Report.............................. F-43
Consolidated Balance Sheet as of December 31, 1997........ F-44
Consolidated Statements of Operations for the Periods From
April 23 to December 23, 1998 and January 1 to April
22, 1998 and for the Years in the Two-Year Period Ended
December 31, 1997...................................... F-45
Consolidated Statements of Partners' Capital (Deficit) for
the Period From January 1, 1998 to April 22, 1998 and
for Each of the Years in the Two-Year Period Ended
December 31, 1997...................................... F-46
Consolidated Statement of Members' Equity from April 23,
1998 to December 23, 1998.............................. F-47
Consolidated Statements of Cash Flows for the Period from
April 23, 1998 to December 23, 1998, From January 1,
1998 to April 22, 1998 and for the Years Ended December
31, 1997 and 1996...................................... F-48
Notes to Consolidated Financial Statements................ F-49
CCA GROUP:
Report of Independent Public Accountants.................. F-61
Combined Balance Sheet as of December 31, 1997............ F-62
Combined Statements of Operations for the Period From
January 1, 1998, Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-63
Combined Statements of Shareholders' Deficit for the
Period From January 1, 1998, Through December 23, 1998
and for the Years Ended December 31, 1997 and 1996..... F-64
Combined Statements of Cash Flows for the Period From
January 1, 1998, Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-65
Notes to Combined Financial Statements.................... F-66
</TABLE>
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CHARTERCOMM HOLDINGS, L.P.:
Report of Independent Public Accountants.................. F-81
Consolidated Balance Sheet as of December 31, 1997........ F-82
Consolidated Statements of Operations for the Period From
January 1, 1998 Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-83
Consolidated Statements of Partner's Capital for the
Period From January 1, 1998 Through December 23, 1998
and for the Years Ended December 31, 1997 and 1996..... F-84
Consolidated Statements of Cash Flows for the Period From
January 1, 1998 Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-85
Notes to Consolidated Financial Statements................ F-86
GREATER MEDIA CABLEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-100
Combined Balance Sheets as of March 31, 1999 (unaudited),
September 30, 1998 and 1997............................ F-101
Combined Statements of Income for the Six Months Ended
March 31, 1999 and 1998 (unaudited) and for the Years
Ended September 30, 1998, 1997 and 1996................ F-102
Combined Statements of Changes in Net Assets for the Six
Months Ended March 31, 1999 (unaudited) and for the
Years Ended September 30, 1996, 1997 and 1998.......... F-103
Combined Statements of Cash Flows for the Six Months Ended
March 31, 1999 and 1998 (unaudited) and for the Years
Ended September 30, 1998, 1997 and 1996................ F-104
Notes to Combined Financial Statements.................... F-105
RENAISSANCE MEDIA GROUP LLC:
Report of Independent Auditors............................ F-111
Consolidated Balance Sheet as of December 31, 1998........ F-112
Consolidated Statement of Operations for the Year Ended
December 31, 1998...................................... F-113
Consolidated Statement of Changes in Members' Equity for
the Year Ended December 31, 1998....................... F-114
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1998...................................... F-115
Notes to Consolidated Financial Statements for the Year
Ended December 31, 1998................................ F-116
PICAYUNE MS, LAFOURCHE, LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA AND JACKSON TN CABLE TELEVISION SYSTEMS:
Report of Independent Auditors............................ F-126
Combined Balance Sheet as of April 8, 1998................ F-127
Combined Statement of Operations for the Period from
January 1, 1998 through April 8, 1998.................. F-128
Combined Statement of Changes in Net Assets for the Period
from January 1, 1998 through April 8, 1998............. F-129
Combined Statement of Cash Flows for the Period from
January 1, 1998 through April 8, 1998.................. F-130
Notes to Combined Financial Statements.................... F-131
Report of Independent Auditors............................ F-138
Combined Balance Sheets as of December 31, 1996 and
1997................................................... F-139
Combined Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997....................... F-140
Combined Statements of Changes in Net Assets for the Years
Ended December 31, 1996 and 1997....................... F-141
Combined Statements of Cash Flows for the Years Ended
1995, 1996 and 1997.................................... F-142
Notes to Combined Financial Statements.................... F-143
</TABLE>
F-2
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HELICON PARTNERS I, L.P. AND AFFILIATES:
Independent Auditors' Report.............................. F-151
Combined Balance Sheets as of December 31, 1997 and
1998................................................... F-152
Combined Statements of Operations for Each of the Years in
the Three-Year Period Ended December 31, 1998.......... F-153
Combined Statements of Changes in Partners' Deficit for
Each of the Years in the Three-Year Period Ended
December 31, 1998...................................... F-154
Combined Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1998.......... F-155
Notes to Combined Financial Statements.................... F-156
INTERMEDIA CABLE SYSTEMS (comprised of components of
InterMedia Partners and InterMedia Capital Partners IV,
L.P.):
Report of Independent Accountants......................... F-169
Combined Balance Sheets at December 31, 1998 and 1997..... F-170
Combined Statements of Operations for the Years Ended
December 31, 1998 and 1997............................. F-171
Combined Statement of Changes in Equity for the Years
Ended December 31, 1998 and 1997....................... F-172
Combined Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997............................. F-173
Notes to Combined Financial Statements.................... F-174
RIFKIN CABLE INCOME PARTNERS L.P.:
Report of Independent Accountants......................... F-187
Balance Sheet at December 31, 1997 and 1998............... F-188
Statement of Operations for Each of the Three Years in the
Period Ended December 31, 1998......................... F-189
Statement of Partners' Equity (Deficit) for Each of the
Three Years in the Period Ended December 31, 1998...... F-190
Statement of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998......................... F-191
Notes to Financial Statements............................. F-192
RIFKIN ACQUISITION PARTNERS, L.L.L.P.:
Report of Independent Accountants......................... F-196
Consolidated Balance Sheet at December 31, 1998 and
1997................................................... F-197
Consolidated Statement of Operations for Each of the Three
Years in the Period Ended December 31, 1998............ F-198
Consolidated Statement of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998............ F-199
Consolidated Statement of Partners' Capital (Deficit) for
Each of the Three Years in the Period Ended December
31, 1998............................................... F-200
Notes to Consolidated Financial Statements................ F-201
INDIANA CABLE ASSOCIATES, LTD.:
Report of Independent Auditors............................ F-215
Balance Sheet as December 31, 1997 and 1998............... F-216
Statement of Operations for the Years Ended December 31,
1996, 1997 and 1998.................................... F-217
Statement of Partners' Deficit for the Years Ended
December 31, 1996, 1997 and 1998....................... F-218
Statement of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998.................................... F-219
Notes to Financial Statements............................. F-220
</TABLE>
F-3
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R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP:
Report of Independent Auditors............................ F-225
Consolidated Balance Sheet as of December 31, 1997 and
1998................................................... F-226
Consolidated Statement of Operations for the Years Ended
December 31, 1996, 1997 and 1998....................... F-227
Consolidated Statement of Partners' Equity (Deficit) for
the Years Ended December 31, 1996, 1997 and 1998....... F-228
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998....................... F-229
Notes to Consolidated Financial Statements................ F-230
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-234
Statement of Operations and Changes in Net Assets for the
Period from April 1, 1998, through May 20, 1998........ F-235
Statement of Cash Flows for the Period from April 1, 1998,
through May 20, 1998................................... F-236
Notes to Financial Statements............................. F-237
LONG BEACH ACQUISITION CORP.:
Report of Independent Public Accountants.................. F-240
Statement of Operations for the Period from April 1, 1997,
through May 23, 1997................................... F-241
Statement of Stockholder's Equity for the Period from
April 1, 1997, through May 23, 1997.................... F-242
Statement of Cash Flows for the Period from April 1, 1997,
through May 23, 1997................................... F-243
Notes to Financial Statements............................. F-244
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998...................... F-249
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1999 and 1998
(unaudited)............................................ F-250
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998
(unaudited)............................................ F-251
Notes to Condensed Consolidated Financial Statements...... F-252
RENAISSANCE MEDIA GROUP LLC:
Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998...................... F-258
Consolidated Statement of Operations for the Three Months
Ended March 31, 1999 (unaudited)....................... F-259
Consolidated Statement of Changes in Members' Equity for
the Three Months Ended March 31, 1999 (unaudited)...... F-260
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1999 (unaudited)....................... F-261
Notes to Consolidated Financial Statements................ F-262
HELICON PARTNERS I, L.P. AND AFFILIATES:
Unaudited Condensed Combined Balance Sheet as of March 31,
1999................................................... F-265
Unaudited Condensed Combined Statements of Operations for
the Three-Month Periods Ended March 31, 1998 and
1999................................................... F-266
Unaudited Condensed Combined Statements of Changes in
Partners' Deficit for the Three-Month Period Ended
March 31, 1999......................................... F-267
Unaudited Condensed Combined Statements of Cash Flows for
the Three-Month Periods Ended March 31, 1998 and
1999................................................... F-268
Notes to Unaudited Condensed Combined Financial
Statements............................................. F-269
</TABLE>
F-4
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INTERMEDIA CABLE SYSTEMS (comprised of components of
InterMedia Partners and InterMedia Capital Partners IV,
L.P.):
Combined Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998.................................. F-271
Combined Statements of Operations for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-272
Combined Statement of Changes in Equity for the Three
Months Ended March 31, 1999 (unaudited) and for the
Year Ended December 31, 1998........................... F-273
Combined Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-274
Notes to Condensed Combined Financial Statements
(unaudited)............................................ F-275
RIFKIN CABLE INCOME PARTNERS L.P.:
Balance Sheet at December 31, 1998 and March 31, 1999
(unaudited)............................................ F-282
Statement of Operations for the Quarters Ended March 31,
1998 and 1999 (unaudited).............................. F-283
Statement of Partners' Equity for the Quarters Ended March
31, 1998 and 1999 (unaudited).......................... F-284
Statement of Cash Flows for the Quarters Ended March 31,
1998 and 1999 (unaudited).............................. F-285
Notes to Financial Statements............................. F-286
RIFKIN ACQUISITION PARTNERS, L.L.L.P.:
Consolidated Balance Sheet at March 31, 1999 (unaudited)
and December 31, 1998.................................. F-288
Consolidated Statement Of Operations for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-289
Consolidated Statement of Cash Flow for the Three Months
Ended March 31, 1999 and 1998 (unaudited).............. F-290
Consolidated Statements of Partners' Capital (Deficit) for
the Three Months Ended March 31, 1999 and 1998
(unaudited)............................................ F-291
Notes to Consolidated Financial Statements................ F-292
INDIANA CABLE ASSOCIATES, LTD.:
Balance Sheet as of March 31, 1999 (unaudited)............ F-294
Statement of Operations for the Three Months Ended March
31, 1998 and 1999 (unaudited).......................... F-295
Statement of Cash Flows for the Three Months Ended March
31, 1998 and 1999 (unaudited).......................... F-296
Notes to Financial Statement (unaudited).................. F-297
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
Consolidated Balance Sheet as of March 31, 1999
(unaudited)............................................ F-298
Consolidated Statement of Operations for the Three Months
Ended March 31, 1998 and 1999 (unaudited).............. F-299
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1998 and 1999 (unaudited).............. F-300
Notes to Consolidated Financial Statement (unaudited)..... F-301
</TABLE>
F-5
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying consolidated balance sheet of Charter
Communications Holdings, LLC and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations and cash flows for the period from
December 24, 1998, through December 31, 1998. We did not audit the balance sheet
of Marcus Cable Company, L.L.C. and subsidiaries as of December 31, 1998, that
is included in the consolidated balance sheet of Charter Communications
Holdings, LLC and subsidiaries and reflects total assets of 40% of the
consolidated totals. This balance sheet was audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Marcus Cable Company, L.L.C. and subsidiaries, is based
solely on the report of the other auditors. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Charter Communications Holdings, LLC and subsidiaries
as of December 31, 1998, and the results of their operations and their cash
flows for the period from December 24, 1998, through December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999 (except with respect to the
matters discussed in Notes 1 and 12,
as to which the date is April 19, 1999)
F-6
<PAGE> 218
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,386
Accounts receivable, net of allowance for doubtful
accounts of $3,528..................................... 31,163
Prepaid expenses and other................................ 8,613
----------
Total current assets................................... 50,162
----------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 1,473,727
Franchises, net of accumulated amortization of $112,122... 5,705,420
----------
7,179,147
----------
OTHER ASSETS................................................ 6,347
----------
$7,235,656
==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 87,950
Accounts payable and accrued expenses..................... 199,831
Payable to related party.................................. 20,000
Payables to manager of cable television systems -- related
party.................................................. 7,675
----------
Total current liabilities.............................. 315,456
----------
LONG-TERM DEBT.............................................. 3,435,251
----------
DEFERRED MANAGEMENT FEES -- RELATED PARTY................... 15,561
----------
OTHER LONG-TERM LIABILITIES................................. 40,097
----------
MEMBERS' EQUITY -- 100 UNITS ISSUED AND OUTSTANDING......... 3,429,291
----------
$7,235,656
==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-7
<PAGE> 219
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
1998, THROUGH
DECEMBER 31,
1998
-------------
<S> <C>
REVENUES.................................................... $23,450
-------
OPERATING EXPENSES:
Operating costs........................................... 9,957
General and administrative................................ 2,722
Depreciation and amortization............................. 13,811
Corporate expense charges -- related party................ 766
-------
27,256
-------
Loss from operations................................... (3,806)
-------
OTHER INCOME (EXPENSE):
Interest income........................................... 133
Interest expense.......................................... (5,051)
-------
(4,918)
-------
Net loss............................................... $(8,724)
=======
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-8
<PAGE> 220
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
1998, THROUGH
DECEMBER 31,
1998
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (8,724)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 13,811
Changes in assets and liabilities --
Receivables, net..................................... (8,753)
Prepaid expenses and other........................... (587)
Accounts payable and accrued expenses................ 4,961
Payables to manager of cable television systems...... 473
Other operating activities........................... 2,021
----------
Net cash provided by operating activities......... 3,202
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (13,672)
----------
Net cash used in investing activities............. (13,672)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 15,620
----------
Net cash provided by financing activities......... 15,620
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 5,150
CASH AND CASH EQUIVALENTS, beginning of period.............. 5,236
----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 10,386
==========
CASH PAID FOR INTEREST...................................... $ 6,155
==========
NONCASH TRANSACTION -- Transfer of cable television
operating subsidiaries from the parent company (see Note
1)........................................................ $3,438,015
==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-9
<PAGE> 221
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited
liability company, was formed in February 1999 as a wholly owned subsidiary of
Charter Investment, Inc. (Charter), formerly Charter Communications, Inc.
Charter, through its wholly owned cable television operating subsidiary, Charter
Communications Properties, LLC (CCP), 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 for an aggregate purchase price of
$211 million, excluding $214 million in debt assumed (the "Paul Allen
Transaction"). In conjunction with the Paul Allen Transaction, Charter acquired
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
from unrelated third parties for fair value. Charter 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 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 CCP, CharterComm Holdings and CCA
Group, Charter Holdings has applied push-down accounting in the preparation of
the consolidated financial statements. Accordingly, Charter Holdings increased
its members' equity by $2.2 billion to reflect the amounts paid by Paul G. Allen
and Charter. 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 valuation information of intangible assets. The valuation information
is expected to be finalized in the third 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 7, 1999, the cable television operating subsidiaries of Marcus
Cable Company, L.L.C. (Marcus) were transferred to Charter Operating. The
transfer was accounted for as a reorganization of entities under common control
similar to a pooling of interests since Paul G. Allen and a company controlled
by Paul G. Allen purchased substantially all of the outstanding partnership
interests in Marcus in April 1998, and purchased the remaining interest in
Marcus in March 1999.
F-10
<PAGE> 222
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated financial statements of Charter Holdings include the
accounts of Charter Operating and CCP and the accounts of CharterComm Holdings
and CCA Group and their subsidiaries since December 23, 1998 (date acquired by
Charter), and the accounts of Marcus since December 23, 1998 (date Paul G. Allen
controlled both Charter and Marcus), and are collectively referred to as the
"Company" herein. All subsidiaries are wholly owned. All material intercompany
transactions and balances have been eliminated. The Company derives its primary
source of revenues by providing various levels of cable television programming
and services to residential and business customers. As of December 31, 1998, the
Company provided cable television services to customers in 22 states in the U.S.
The consolidated financial statements of Charter Holdings for periods prior
to December 24, 1998, are not presented herein since, as a result of the Paul
Allen Transaction and the application of push down accounting, the financial
information as of December 31, 1998, and for the period from December 24, 1998,
through December 31, 1998, is presented on a different cost basis than the
financial information as of December 31, 1997, and for the periods prior to
December 24, 1998. Such information is not comparable.
The accompanying financial statements have been retroactively restated to
include the accounts of Marcus beginning December 24, 1998, using historical
carrying amounts. Previously reported revenues and net loss of the Company,
excluding Marcus, was $13,713 and $4,432, respectively, for the period from
December 24, 1998, through December 31, 1998. Revenues and net loss of Marcus
for the period from December 24, 1998 through December 31, 1998, included in the
accompanying financial statements, was $9,737 and $4,292, respectively.
Previously reported members' equity of the Company, excluding Marcus, was $2.1
billion as of December 31, 1998.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1998,
cash equivalents consist primarily of repurchase agreements. These investments
are carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installations. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, and equipment replacement and betterments are capitalized.
F-11
<PAGE> 223
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems................................ 3-15 years
Buildings and leasehold improvements...................... 5-15 years
Vehicles and equipment.................................... 3-5 years
</TABLE>
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable television systems represent management's
estimate of fair value and are generally amortized using the straight-line
method over a period of 15 years. The period of 15 years is management's best
estimate of the useful lives of the franchises and assumes substantially all of
those franchises that expire during the period will be renewed by the Company.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of December 31, 1998, no installation revenue has
been deferred, as direct selling costs have exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Company ranging up to a federally
mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are
collected from the Company's customers and are periodically remitted to local
franchises. Franchise fees collected and paid are reported as revenues.
INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums
F-12
<PAGE> 224
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
paid for interest rate caps are deferred, included in other assets, and are
amortized over the original term of the interest rate agreement as an adjustment
to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
INCOME TAXES
Income taxes are the responsibility of the individual members or partners
and are not provided for in the accompanying consolidated financial statements.
In addition, certain subsidiaries are corporations subject to income taxes but
have no operations and, therefore, no material income tax liabilities or assets.
SEGMENTS
In 1998, Charter Holdings adopted SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." Segments have been identified based
upon management responsibility. Charter Holdings operates in one segment, cable
services.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
In addition to the acquisitions by Charter of CharterComm Holdings and CCA
Group, the Company acquired cable television systems for an aggregate purchase
price, net of cash acquired, of $291,800 and $342,100 in 1998 and 1997,
respectively, and completed the sale of certain former Marcus cable television
systems for an aggregate sales price of $405,000 in 1998, all prior to December
24, 1998. The Company also refinanced substantially all of its long-term debt in
March 1999 (see Note 12).
F-13
<PAGE> 225
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma operating results as though the acquisitions and
refinancing discussed above, including the Paul Allen Transaction and the
combination with Marcus, had occurred on January 1, 1997, with adjustments to
give effect to amortization of franchises, interest expense and certain other
adjustments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
-----------------------
1998 1997
---------- ---------
<S> <C> <C>
Revenues....................................... $1,059,882 $ 971,924
Loss from operations........................... (143,557) (185,051)
Net loss....................................... (599,953) (631,592)
</TABLE>
The unaudited pro forma financial information has been presented for
comparative purposes and does not purport to be indicative of the results of
operations or financial position of the Company had these transactions been
completed as of the assumed date or which may be obtained in the future.
3. MEMBERS' EQUITY:
For the period from December 24, 1998, through December 31, 1998, members'
equity consisted of the following:
<TABLE>
<S> <C>
Balance, December 24, 1998................................. $3,438,015
Net loss................................................... (8,724)
----------
Balance, December 31, 1998................................. $3,429,291
==========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1998:
<TABLE>
<S> <C>
Cable distribution systems................................. $1,439,182
Land, buildings and leasehold improvements................. 41,321
Vehicles and equipment..................................... 61,237
----------
1,541,740
Less -- Accumulated depreciation........................... (68,013)
----------
$1,473,727
==========
</TABLE>
For the period from December 24, 1998, through December 31, 1998,
depreciation expense was $5,029.
F-14
<PAGE> 226
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1998:
<TABLE>
<S> <C>
Accrued interest............................................ $ 34,561
Franchise fees.............................................. 21,441
Programming costs........................................... 21,395
Capital expenditures........................................ 17,343
Accrued income taxes........................................ 15,205
Accounts payable............................................ 7,439
Other accrued liabilities................................... 82,447
--------
$199,831
========
</TABLE>
6. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Charter:
Credit Agreements (including CCP, CCA Group and
CharterComm Holdings)................................. $1,726,500
Senior Secured Discount Debentures....................... 109,152
11 1/4% Senior Notes..................................... 125,000
Marcus:
Senior Credit Facility................................... 808,000
13 1/2% Senior Subordinated Discount Notes............... 383,236
14 1/4% Senior Discount Notes............................ 241,183
----------
3,393,071
Current maturities....................................... (87,950)
Unamortized net premium.................................. 130,130
----------
$3,435,251
==========
</TABLE>
CCP CREDIT AGREEMENT
CCP maintains a credit agreement (the "CCP Credit Agreement"), which
provides for two term loan facilities, one with the principal amount of $60,000
that matures on June 30, 2006, and the other with the principal amount of
$80,000 that matures on June 30, 2007. The CCP Credit Agreement also provides
for a $90,000 revolving credit facility with a maturity date of June 30, 2006.
Amounts under the CCP Credit Agreement bear interest at the LIBOR Rate or Base
Rate, as defined, plus a margin up to 2.88%. The variable interest rates ranged
from 7.44% to 8.19% at December 31, 1998.
F-15
<PAGE> 227
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CC-I, CC-II COMBINED CREDIT AGREEMENT
Charter Communications, LLC and Charter Communications II, LLC,
subsidiaries of CharterComm Holdings, maintains a combined credit agreement (the
"Combined Credit Agreement"), which provides for two term loan facilities, one
with the principal amount of $200,000 that matures on June 30, 2007, and the
other with the principal amount of $150,000 that matures on December 31, 2007.
The Combined Credit Agreement also provides for a $290,000 revolving credit
facility, with a maturity date of June 30, 2007. Amounts under the Combined
Credit Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus
a margin up to 2.0%. The variable interest rates ranged from 6.69% to 7.31% at
December 31, 1998. A quarterly commitment fee of between 0.25% and 0.375% per
annum is payable on the unborrowed balance of the revolving credit facility.
CHARTERCOMM HOLDINGS -- SENIOR SECURED DISCOUNT DEBENTURES
CharterComm Holdings issued $146,820 of Senior Secured Discount Debentures
(the "Debentures") for proceeds of $75,000. The Debentures are effectively
subordinated to the claims and creditors of CharterComm Holdings' subsidiaries,
including the lenders under the Combined Credit Agreement. The Debentures are
redeemable at the Company's option at amounts decreasing from 107% to 100% of
principal, plus accrued and unpaid interest to the redemption date, beginning on
March 15, 2001. The issuer is required to make an offer to purchase all of the
Debentures, at a purchase price equal to 101% of the principal amount, together
with accrued and unpaid interest, upon a Change in Control, as defined in the
Debentures Indenture. No interest is payable on the Debentures prior to March
15, 2001. Thereafter, interest on the Debentures is payable semiannually in
arrears beginning September 15, 2001, until maturity on March 15, 2007.
CHARTERCOMM HOLDINGS -- 11 1/4% SENIOR NOTES
CharterComm Holdings issued $125,000 aggregate principal amount of 11 1/4%
Senior Notes (the "11 1/4% Notes"). The Notes are effectively subordinated to
the claims of creditors of CharterComm Holdings' subsidiaries, including the
lenders under the Combined Credit Agreements. The 11 1/4% Notes are redeemable
at the Company's option at amounts decreasing from 106% to 100% of principal,
plus accrued and unpaid interest to the date of redemption, beginning on March
15, 2001. The issuer is required to make an offer to purchase all of the 11 1/4%
Notes, at a purchase price equal to 101% of the principal amount, together with
accrued and unpaid interest, upon a Change in Control, as defined in the 11 1/4%
Notes indenture. Interest is payable semiannually on March 15 and September 15
until maturity on March 15, 2006.
As of December 24, 1998, the Debentures and 11 1/4% Notes were recorded at
their estimated fair values resulting in an increase in the carrying values of
the debt and an unamortized net premium as of December 31, 1998. The premium
will be amortized to interest expense over the estimated remaining lives of the
debt using the interest method. As of December 31, 1998, the effective interest
rates on the Debentures and 11 1/4% Notes were 10.7% and 9.6%, respectively.
F-16
<PAGE> 228
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CCE-I CREDIT AGREEMENT
Charter Communications Entertainment I LLC, a subsidiary of CCA Group,
maintains a credit agreement (the "CCE-I Credit Agreement"), which provides for
a $280,000 term loan that matures on September 30, 2006, and $85,000 fund loan
that matures on March 31, 2007, and a $175,000 revolving credit facility with a
maturity date of September 30, 2006. Amounts under the CCE-I Credit Agreement
bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin
up to 2.75%. The variable interest rates ranged from 6.88% to 8.06% at December
31, 1998. A quarterly commitment fee of between 0.375% and 0.5% per annum is
payable on the unborrowed balance of the revolving credit facility.
CCE-II COMBINED CREDIT AGREEMENT
Charter Communications Entertainment II, LLC and Long Beach LLC,
subsidiaries of CCA Group, maintain a credit agreement (the "CCE-II Combined
Credit Agreement"), which provides for two term loan facilities, one with the
principal amount of $100,000 that matures on March 31, 2005, and the other with
the principal amount of $90,000 that matures on March 31, 2006. The CCE-II
Combined Credit Agreement also provides for a $185,000 revolving credit
facility, with a maturity date of March 31, 2005. Amounts under the CCE-II
Combined Credit Agreement bear interest at either the LIBOR Rate or Base Rate,
as defined, plus a margin up to 2.5%. The variable rates ranged from 6.56% to
7.59% at December 31, 1998. A quarterly commitment fee of between 0.25% and
0.375% per annum is payable on the unborrowed balance of the revolving credit
facility.
CCE CREDIT AGREEMENT
Charter Communications Entertainment, LLC, a subsidiary of CCA Group,
maintains a credit agreement (the "CCE Credit Agreement") which provides for a
term loan facility with the principal amount of $130,000 that matures on
September 30, 2007. Amounts under the CCE Credit Agreement bear interest at the
LIBOR Rate or Base Rate, as defined, plus a margin up to 3.25%. The variable
interest rate at December 31, 1998, was 8.62%.
CCE-II HOLDINGS CREDIT AGREEMENT
CCE-II Holdings, LLC, a subsidiary of CCA Group, entered into a credit
agreement (the "CCE-II Holdings Credit Agreement"), which provides for a term
loan facility with the principal amount of $95,000 that matures on September 30,
2006. Amounts under the CCE-II Holdings Credit Agreement bear interest at either
the LIBOR Rate or Base Rate, as defined, plus a margin up to 3.25%. The variable
rate at December 31, 1998, was 8.56%.
MARCUS -- SENIOR CREDIT FACILITY
Marcus maintains a senior credit facility (the "Senior Credit Facility"),
which provides for two term loan facilities, one with a principal amount of
$490,000 that matures on December 31, 2002 (Tranche A) and the other with a
principal amount of $300,000 that matures on April 30, 2004 (Tranche B). The
Senior Credit Facility provides for
F-17
<PAGE> 229
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
scheduled amortization of the two term loan facilities which began in September
1997. The Senior Credit Facility also provides for a $360,000 revolving credit
facility ("Revolving Credit Facility"), with a maturity date of December 31,
2002. Amounts outstanding under the Senior Credit Facility bear interest at
either the (i) Eurodollar rate, (ii) prime rate or (iii) CD base rate or Federal
Funds rate, plus a margin up to 2.25%, which is subject to certain quarterly
adjustments based on the ratio of the issuer's total debt to annualized
operating cash flow, as defined. The variable interest rates ranged from 6.23%
to 7.75% at December 31, 1998. A quarterly commitment fee ranging from 0.250% to
0.375% per annum is payable on the unused commitment under the Senior Credit
Facility.
MARCUS -- 13 1/2% SENIOR SUBORDINATED DISCOUNT NOTES
Marcus issued $413,461 face amount of 13 1/2% Senior Subordinated Discount
Notes due August 1, 2004 (the "13 1/2% Notes") for net proceeds of $215,000. The
13 1/2% Notes are unsecured, are guaranteed by Marcus and are redeemable, at the
option of Marcus, at amounts decreasing from 105% to 100% of par beginning on
August 1, 1999. No interest is payable on the 13 1/2% Notes until February 1,
2000. Thereafter, interest is payable semiannually until maturity. The discount
on the 13 1/2% Notes is being accreted using the effective interest method and
the effective interest rate as of December 31, 1998 was 10.0%. The unamortized
discount was $30,225 at December 31, 1998.
MARCUS -- 14 1/4% SENIOR DISCOUNT NOTES
Marcus issued $299,228 of 14 1/4% Senior Discount Notes due December 15,
2005 (the "14 1/4% Notes") for net proceeds of $150,003. The 14 1/4% Notes are
unsecured and are redeemable at the option of Marcus at amounts decreasing from
107% to 100% of par beginning on June 15, 2000. No interest is payable until
December 15, 2000. Thereafter, interest is payable semiannually until maturity.
The discount on the 14 1/4% Notes is being accreted using the effective interest
method and the effective interest rate as of December 31, 1998 was 14.1%. The
unamortized discount was $53,545 at December 31, 1998.
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.
F-18
<PAGE> 230
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based upon outstanding indebtedness at December 31, 1998, and the
amortization of term and fund loans, and scheduled reductions in available
borrowings of the revolving credit facilities, aggregate future principal
payments on the total borrowings under all debt agreements at December 31, 1998,
are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ----------
<S> <C>
1999....................................................... $ 87,950
2000....................................................... 110,245
2001....................................................... 148,950
2002....................................................... 393,838
2003....................................................... 295,833
Thereafter................................................. 2,482,193
----------
$3,519,009
==========
</TABLE>
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1998, is as follows:
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
DEBT VALUE AMOUNT VALUE
- ---- ---------- ---------- ----------
<S> <C> <C> <C>
Charter:
Charter Credit Agreements (including
CCP, CCA Group and CharterComm
Holdings)........................... $1,726,500 $ -- $1,726,500
Senior Secured Discount Debentures..... 138,102 -- 138,102
11 1/4% Senior Notes................... 137,604 -- 137,604
Marcus:
Senior Credit Facility................. 808,000 -- 808,000
13 1/2% Senior Subordinated Discount
Notes............................... 425,812 -- 418,629
14 1/4% Senior Discount Notes.......... 287,183 -- 279,992
INTEREST RATE HEDGE AGREEMENTS
Swaps.................................... (22,092) 1,505,000 (28,977)
Caps..................................... -- 15,000 --
Collars.................................. (4,174) 310,000 (4,174)
</TABLE>
As the long-term debt under the credit agreements bears interest at current
market rates, their carrying amount approximates market value at December 31,
1998. The fair values of the 11 1/4% Notes, the Debentures, the 13 1/2% Notes
and the 14 1/2% Notes are based on quoted market prices.
The weighted average interest pay rate for the Company's interest rate swap
agreements was 7.1% at December 31, 1998. The weighted average interest rate for
the Company's interest rate cap agreements was 8.45% at December 31, 1998. The
weighted
F-19
<PAGE> 231
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
average interest rates for the Company's interest rate collar agreements were
8.63% and 7.31% for the cap and floor components, respectively, at December 31,
1998.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would receive or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's credit facilities, thereby reducing the exposure to
credit loss. The Company has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the Company's
consolidated financial position or results of operations.
8. RELATED-PARTY TRANSACTIONS:
Charter provides management services to the Company including centralized
customer billing services, data processing and related support, benefits
administration and coordination of insurance coverage and self-insurance
programs for medical, dental and workers' compensation claims. Certain costs for
services are billed and charged directly to the Company's operating subsidiaries
and are included in operating costs. These billings are determined based on the
number of basic customers. Such costs totaled $128 for the period from December
24, 1998, through December 31, 1998. All other costs incurred by Charter on
behalf of the Company are recorded as expenses in the accompanying consolidated
financial statements and are included in corporate expense charges -- related
party. Management believes that costs incurred by Charter on Charter Holdings
behalf and included in the accompanying financial statements are not materially
different than costs Charter Holdings would have incurred as a stand alone
entity.
Charter utilizes a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to Charter Holdings as determined by independent
actuaries at the present value of the actuarially computed present and future
liabilities for such benefits. Medical coverage provides for $2,435 aggregate
stop loss protection and a loss limitation of $100 per person per year. Workers'
compensation coverage provides for $800 aggregate stop loss protection and a
loss limitation of $150 per person per year.
The Company is charged a management fee based on percentages of revenues or
a flat fee plus additional fees based on percentages of operating cash flows, as
stipulated in the management agreements between Charter and the operating
subsidiaries. To the extent management fees charged to the Company are greater
(less) than the corporate expenses incurred by Charter, the Company will record
distributions to (capital contributions from)
F-20
<PAGE> 232
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Charter. For the period from December 24, 1998, through December 31, 1998, the
management fee charged to the Company approximated the corporate expenses
incurred by Charter on behalf of the Company. As of December 31, 1998,
management fees currently payable of $7,675 are included in payables to manager
of cable television systems-related party. Beginning in 1999, the management fee
will be based on 3.5% of revenues as permitted by the new debt agreements of the
Company (see Note 12).
The payable to related party represents the reimbursement of costs incurred
by Paul G. Allen in connection with the acquisition of Marcus by Paul G. Allen.
Charter, Paul G. Allen and certain affiliates of Mr. Allen own equity
interests or warrants to purchase equity interests in various entities which
provide services or programming to the Company, including High Speed Access
Corp. (High Speed Access), WorldGate Communications, Inc. (WorldGate), Wink
Communications, Inc. (Wink), ZDTV, USA Networks, Inc. (USA Networks) and Oxygen
Media Inc. (Oxygen Media). In addition, certain officers or directors of the
Company also serve as directors of High Speed Access and USA Networks. The
Company and its affiliates do not hold controlling interests in any of these
companies.
Certain of the Company's cable television subscribers receive cable
modem-based internet access through High Speed Access and TV-based internet
access through WorldGate. For the period from December 24, 1998, through
December 31, 1998, revenues attributable to these services were less than 1% of
total revenues.
The Company receives or will receive programming and certain interactive
features embedded into the programming for broadcast via its cable television
systems from Wink, ZDTV, USA Networks and Oxygen Media. The Company pays a fee
for the programming service generally based on the number of subscribers
receiving the service. Such fees for the period from December 24, 1998, through
December 31, 1998, were less than 1% of total operating costs. In addition, the
Company receives commissions from USA Networks for home shopping sales generated
by its customers. Such revenues for the period from December 24, 1998, through
December 31, 1998, were less than 1% of total revenues.
9. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense for the period from
December 24, 1998, through December 31, 1998, were $144. Future minimum lease
payments are as follows:
<TABLE>
<S> <C>
1999........................................................ $5,898
2000........................................................ 4,070
2001........................................................ 3,298
2002........................................................ 1,305
2003........................................................ 705
Thereafter.................................................. 3,395
</TABLE>
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent
F-21
<PAGE> 233
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expense incurred for pole rental attachments for the period from December 24,
1998, through December 31, 1998, was $226.
LITIGATION
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier
F-22
<PAGE> 234
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(CPST). The FCC is currently developing permanent regulations to implement the
rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict
the ultimate effect of the 1996 Telecom Act on the Company's consolidated
financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation. The Company is subject to state regulation in
Connecticut.
10. EMPLOYEE BENEFIT PLANS:
The Company's employees may participate in 401(k) plans (the "401(k)
Plans"). Employees that qualify for participation can contribute up to 15% of
their salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company made contributions to
the 401(k) Plans totaling $30 for the period from December 24, 1998, through
December 31, 1998.
11. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings
(loss).
F-23
<PAGE> 235
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. PARENT COMPANY ONLY FINANCIAL STATEMENTS
As a result of the limitations on and prohibitions of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, the parent company. Charter
Holdings (parent company only) financial statements are presented below.
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
ASSETS
INVESTMENT IN CHARTER OPERATING............................ $3,429,291
==========
MEMBER'S EQUITY
MEMBERS' EQUITY............................................ $3,429,291
==========
</TABLE>
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24, 1998,
THROUGH
DECEMBER 31, 1998
------------------
<S> <C>
EQUITY IN LOSS OF CHARTER OPERATING....................... $ (8,724)
==========
Net loss................................................ $ (8,724)
==========
</TABLE>
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
STATEMENT OF MEMBERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance, December 24, 1998................................. $3,438,015
Net loss................................................... (8,724)
----------
Balance, December 31, 1998................................. $3,429,291
==========
</TABLE>
The investment in Charter Operating is accounted for on the equity method.
No statement of cash flows has been presented as Charter Holdings (parent
company only) had no cash flow activity.
13. SUBSEQUENT EVENTS:
Through April 19, 1999, the Company has entered into definitive agreements
to purchase eight cable television companies, including a swap of cable
television systems, for approximately $4.6 billion. The swap of cable television
systems will be recorded at the fair
F-24
<PAGE> 236
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the systems exchanged. The acquisitions are expected to close no later
than March 31, 2000. The acquisitions will be accounted for using the purchase
method of accounting, and accordingly, results of operations of the acquired
businesses will be included in the financial statements from the dates of
acquisitions.
In March 1999, concurrent with the issuance of $600.0 million 8.250% Senior
Notes due 2007, $1.5 billion 8.625% Senior Notes due 2009 and $1.475 billion
9.920% Senior Discount Notes due 2011 (collectively, the "CCH Notes"), the
Company extinguished substantially all 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
(the "CCO Credit Agreement") entered into by Charter Operating. Charter Holdings
expects to record an extraordinary loss of approximately $4 million in
conjunction with the extinguishment of substantially all long-term debt and the
refinancing of its credit agreements.
The CCO Credit Agreement 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 on March 2009
(Term B). The CCO Credit Agreement also provides for a $1.25 billion revolving
credit facility with a maturity date of September 2008. Amounts under the CCO
Credit Agreement bear interest at the Base Rate or the Eurodollar rate, as
defined, 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. On March 17, 1999, the Company borrowed $1.75 billion
under Term B and invested the excess cash of $1.0 billion in short-term
investments.
Charter Communications Holdings Capital Corporation is a co-issuer of the
CCH Notes and is a wholly owned finance subsidiary of Charter Holdings with no
independent assets or operations.
In accordance with an employment agreement between Charter and the
President and Chief Executive Officer of Charter options to purchase 3% of the
net equity value of Charter Communications Holdings Company, LLC (CCHC), parent
of Charter Holdings, were issued to the President and Chief Executive Officer of
Charter. The option exercise price is equal to the fair market value at the date
of grant. The options vest over a four year period and expire 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
CCHC. The option plan provides for grants of options to employees, officers and
directors of CCHC and its affiliates and consultants who provide services to
CCHC. The option exercise price is equal to the fair market value at the date of
grant. Options granted vest over five years. However, if there has not been a
public offering of the equity interests of CCHC or an affiliate, vesting will
occur only upon termination of employment for any reason, other than for cause
or disability. 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.
F-25
<PAGE> 237
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options outstanding as of March 31, 1999, are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------
EXERCISE NUMBER OF REMAINING CONTRACT NUMBER OF
PRICE OPTIONS LIFE (IN YEARS) OPTIONS
- --------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
$20.00 16,095,008 9.8 1,761,032
</TABLE>
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" to account for the option plans. No compensation
expense is recognized because the option exercise price is equal to the fair
value of the underlying membership interests on the date of grant. Had
compensation expense for the option plans been determined based on the fair
value at the grant dates under the provisions of SFAS No. 123, the Company's net
loss would have been $10.8 million for the period from December 24, 1998,
through December 31, 1998. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: no dividend yield, expected volatility of 44.00%, risk
free rate of 5.00%, and expected option lives of 10 years.
F-26
<PAGE> 238
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying consolidated balance sheet of Charter
Communications Holdings, LLC and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, shareholder's investment and cash
flows for the period from January 1, 1998, through December 23, 1998, and for
the years ended December 31, 1997 and 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Charter Communications
Holdings, LLC and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the period from January 1, 1998, through
December 23, 1998, and for the years ended December 31, 1997 and 1996, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999 (except with respect to
the matters discussed in Note 1, as to
which the date is April 7, 1999)
F-27
<PAGE> 239
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 626
Accounts receivable, net of allowance for doubtful
accounts of $52........................................ 579
Prepaid expenses and other................................ 32
-------
Total current assets................................... 1,237
-------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 25,530
Franchises, net of accumulated amortization of $3,829..... 28,195
-------
53,725
-------
OTHER ASSETS................................................ 849
-------
$55,811
=======
LIABILITIES AND SHAREHOLDER'S INVESTMENT
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 3,082
Payables to manager of cable television systems -- related
party.................................................. 114
-------
Total current liabilities.............................. 3,196
-------
LONG-TERM DEBT.............................................. 41,500
-------
NOTE PAYABLE TO RELATED PARTY, including accrued interest... 13,090
-------
SHAREHOLDER'S INVESTMENT:
Common stock, $.01 par value, 100 shares authorized, one
issued and outstanding................................. --
Paid-in capital........................................... 5,900
Accumulated deficit....................................... (7,875)
-------
Total shareholder's investment......................... (1,975)
-------
$55,811
=======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-28
<PAGE> 240
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, YEAR ENDED
1998, THROUGH DECEMBER 31
DECEMBER 23, ------------------
1998 1997 1996
------------- ------- -------
<S> <C> <C> <C>
REVENUES....................................... $ 49,731 $18,867 $14,881
-------- ------- -------
OPERATING EXPENSES:
Operating costs.............................. 18,751 9,157 5,888
General and administrative................... 7,201 2,610 2,235
Depreciation and amortization................ 16,864 6,103 4,593
Corporate expense allocation -- related
party..................................... 6,176 566 446
-------- ------- -------
48,992 18,436 13,162
-------- ------- -------
Income from operations.................... 739 431 1,719
-------- ------- -------
OTHER INCOME (EXPENSE):
Interest income.............................. 44 41 20
Interest expense............................. (17,277) (5,120) (4,415)
Other, net................................... (728) 25 (47)
-------- ------- -------
(17,961) (5,054) (4,442)
-------- ------- -------
Net loss.................................. $(17,222) $(4,623) $(2,723)
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-29
<PAGE> 241
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S INVESTMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995........ $-- $ 1,500 $ (529) $ 971
Capital contributions........... -- 4,400 -- 4,400
Net loss........................ -- -- (2,723) (2,723)
-- ------- -------- --------
BALANCE, December 31, 1996........ -- 5,900 (3,252) 2,648
Net loss........................ -- -- (4,623) (4,623)
-- ------- -------- --------
BALANCE, December 31, 1997........ -- 5,900 (7,875) (1,975)
Capital contributions........... -- 10,800 -- 10,800
Net loss........................ -- -- (17,222) (17,222)
-- ------- -------- --------
BALANCE, December 23, 1998........ $-- $16,700 $(25,097) $ (8,397)
== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-30
<PAGE> 242
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, YEAR ENDED
1998, THROUGH DECEMBER 31
DECEMBER 23, -------------------
1998 1997 1996
------------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $ (17,222) $(4,623) $ (2,723)
Adjustments to reconcile net loss to net cash
provided by operating activities --
Depreciation and amortization...................... 16,864 6,103 4,593
Loss on sale of cable television system............ -- 1,363 --
Amortization of debt issuance costs, debt discount
and interest rate cap agreements................. 267 123 --
(Gain) loss on disposal of property, plant and
equipment........................................ (14) 130 --
Changes in assets and liabilities, net of effects
from acquisitions --
Receivables, net................................. 10 (227) 6
Prepaid expenses and other....................... (125) 18 312
Accounts payable and accrued expenses............ 16,927 894 3,615
Payables to manager of cable television
systems....................................... 5,288 (153) 160
Other operating activities....................... 569 -- --
--------- ------- --------
Net cash provided by operating activities........ 22,564 3,628 5,963
--------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........... (15,364) (7,880) (5,894)
Payments for acquisitions, net of cash acquired...... (167,484) -- (34,069)
Proceeds from sale of cable television system........ -- 12,528 --
Other investing activities........................... (486) -- 64
--------- ------- --------
Net cash provided by (used in) investing
activities.................................... (183,334) 4,648 (39,899)
--------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt......................... 217,500 5,100 31,375
Repayments of long-term debt......................... (60,200) (13,375) (1,000)
Capital contributions................................ 7,000 -- 4,400
Payment of debt issuance costs....................... (3,487) (12) (638)
--------- ------- --------
Net cash provided by (used in) financing
activities.................................... 160,813 (8,287) 34,137
--------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 43 (11) 201
CASH AND CASH EQUIVALENTS, beginning of period......... 626 637 436
--------- ------- --------
CASH AND CASH EQUIVALENTS, end of period............... $ 669 $ 626 $ 637
========= ======= ========
CASH PAID FOR INTEREST................................. $ 7,679 $ 3,303 $ 2,798
========= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-31
<PAGE> 243
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited
liability company, was formed in February 1999 as a wholly owned subsidiary of
Charter Investment, Inc. (Charter), formerly Charter Communications, Inc.
Charter, through its wholly owned cable television operating subsidiary, Charter
Communications Properties, LLC (CCP), 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 for an aggregate purchase price of
$211 million, excluding $214 million in debt assumed (the "Paul Allen
Transaction"). In conjunction with the Paul Allen Transaction, Charter acquired
100% of the interest 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
from unrelated third parties for fair value. Charter 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 CarterComm Holdings and CCA Group are included in the financial
statements of Charter Holdings from the date of acquisition. In February 1999,
Charter transferred all of its cable television operating subsidiaries to a
wholly owned subsidiary of Charter Holdings, Charter Communications Operating,
LLC (Charter Operating). The transfer was accounted for as a reorganization of
entities under common control similar to a pooling of interests.
On April 7, 1999, the cable television operating subsidiaries of Marcus
Cable Company, L.L.C. (Marcus) were transferred to Charter Operating. The
transfer was accounted for as a reorganization of entities under common control
similar to a pooling of interests, since Paul G. Allen and a company controlled
by Paul G. Allen purchased substantially all of the outstanding partnership
interests in Marcus in April 1998, and purchased the remaining interests in
Marcus on April 7, 1999.
The accompanying financial statements include the accounts of CCP,
Charter's wholly owned cable operating subsidiary, representing the financial
statements of Charter Holdings and subsidiaries (the Company) for all periods
presented. The accounts of CharterComm Holdings and CCA Group are not included
since these companies were not owned and controlled by Charter prior to December
23, 1998. The accounts of Marcus are not included since both Charter and Marcus
were not owned and controlled by the same party prior to December 23, 1998.
As a result of the change in ownership of CCP, CharterComm Holdings and CCA
Group, Charter Holdings has applied push-down accounting in the preparation of
the consolidated financial statements effective December 23, 1998. Accordingly,
the financial statements of Charter Holdings for periods ended on or before
December 23, 1998, are presented on a different cost basis than the financial
statements for the periods after December 23, 1998 (not presented herein), and
are not comparable.
F-32
<PAGE> 244
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997,
cash equivalents consist primarily of repurchase agreements. These investments
are carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installations. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, and equipment replacement and betterments are capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems................................ 3-15 years
Buildings and leasehold improvements...................... 5-15 years
Vehicles and equipment.................................... 3-5 years
</TABLE>
In 1997, the Company shortened the useful lives from 10 years to 5 years of
certain plant and equipment included in cable distribution systems associated
with costs of new customer installations. As a result, additional depreciation
of $550 was recorded during 1997. The estimated useful lives were shortened to
be more reflective of average customer lives.
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable television systems represent management's
estimate of fair value and are generally amortized using the straight-line
method over a period of 15 years. The period of 15 years is management's best
estimate of the useful lives of the franchises and assumes substantially all of
those franchises that expire during the period will be renewed by the Company.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
F-33
<PAGE> 245
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of December 31, 1997, no installation revenue has
been deferred, as direct selling costs have exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Company ranging up to a federally
mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are
collected from the Company's customers and are periodically remitted to local
franchises. Franchise fees collected and paid are reported as revenues.
INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
INCOME TAXES
The Company files a consolidated income tax return with Charter. Income
taxes are allocated to the Company in accordance with the tax-sharing agreement
between the Company and Charter.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-34
<PAGE> 246
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS:
In 1998, the Company acquired cable television systems for an aggregate
purchase price, net of cash acquired, of $228,400, comprising $167,500 in cash
and $60,900 in a note payable to Seller. The excess of cost of properties
acquired over the amounts assigned to net tangible assets at the date of
acquisition was $207,600 and is included in franchises.
In 1996, the Company acquired cable television systems for an aggregate
purchase price, net of cash acquired, of $34,100. The excess of the cost of
properties acquired over the amounts assigned to net tangible assets at the date
of acquisition was $24,300 and is included in franchises.
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.
Unaudited pro forma operating results as though the acquisition discussed
above, excluding the Paul Allen Transaction, had occurred on January 1, 1997,
with adjustments to give effect to amortization of franchises, interest expense
and certain other adjustments are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1998,
THROUGH YEAR ENDED
DECEMBER 23, 1998 1997
----------------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues.......................................... $ 67,007 $ 63,909
Loss from operations.............................. (7,097) (7,382)
Net loss.......................................... (24,058) (26,099)
</TABLE>
The unaudited 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.
3. SALE OF FT. HOOD SYSTEM:
In February 1997, the Company sold the net assets of the Ft. Hood system,
which served customers in Texas, for an aggregate sales price of approximately
$12,500. The sale of the Ft. Hood system resulted in a loss of $1,363, which is
included in operating costs in the accompanying statement of operations for the
year ended December 31, 1997.
F-35
<PAGE> 247
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1997:
<TABLE>
<S> <C>
Cable distribution systems.................................. $29,061
Land, buildings and leasehold improvements.................. 447
Vehicles and equipment...................................... 1,744
-------
31,252
Less- Accumulated depreciation.............................. (5,722)
-------
$25,530
=======
</TABLE>
For the period from January 1, 1998, through December 23, 1998, and for the
years ended December 31, 1997 and 1996, depreciation expense was $6,249, $3,898
and $2,371, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1997:
<TABLE>
<S> <C>
Accrued interest............................................ $ 292
Capital expenditures........................................ 562
Franchise fees.............................................. 426
Programming costs........................................... 398
Accounts payable............................................ 298
Other....................................................... 1,012
------
$2,988
======
</TABLE>
6. LONG-TERM DEBT:
The Company maintained a revolving credit agreement (the "Old Credit
Agreement") with a consortium of banks for borrowings up to $47,500, of which
$41,500 was outstanding at December 31, 1997. In 1997, the Credit Agreement was
amended to reflect the impact of the sale of a cable television system. The debt
bears interest, at the Company's option, at rates based on the prime rate of the
Bank of Montreal (the agent bank), or LIBOR, plus the applicable margin based
upon the Company's leverage ratio at the time of the borrowings. The variable
interest rates ranged from 7.44% to 7.63% at December 31, 1997.
In May 1998, the Company entered into a credit agreement (the "CCP Credit
Agreement"), which provides for two term loan facilities, one with the principal
amount of $60,000 that matures on June 30, 2006, and the other with the
principal amount of $80,000 that matures on June 30, 2007. The CCP Credit
Agreement also provides for a $90,000 revolving credit facility with a maturity
date of June 30, 2006. Amounts under the CCP Credit Agreement bear interest at
the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.88%.
F-36
<PAGE> 248
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commencing March 31, 1999, and at the end of each quarter thereafter,
available borrowings under the revolving credit facility shall be reduced on an
annual basis by 3.5% in 1999, 7.0% in 2000, 9.0% in 2001, 10.5% in 2002 and
16.5% in 2003. Commencing March 31, 2000, and at the end of each quarter
thereafter, available borrowings under the term loan shall be reduced on an
annual basis by 6.0% in 2000, 8.0% in 2001, 11.0% in 2002 and 16.5% in 2003.
Commencing March 31, 2000, and at the end of each quarter thereafter, available
borrowings under the other term loan shall be reduced on an annual basis by 1.0%
in 2000, 1.0% in 2001, 1.0% in 2002 and 1.0% in 2003.
The credit agreement requires the Company and/or its subsidiaries to comply
with various financial and other covenants, including the maintenance of certain
operating and financial ratios. This agreement also contains substantial
limitations on, or prohibitions of, distributions, additional indebtedness,
liens, asset sales and certain other items.
7. NOTE PAYABLE TO RELATED PARTY:
As of December 31, 1997, the Company holds a promissory note payable to CCT
Holdings Corp., a company managed by Charter and acquired by Charter effective
December 23, 1998. The promissory note bears interest at the rates paid by CCT
Holdings Corp. on a note payable to a third party. Principal and interest are
due on September 29, 2005.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1997, is as follows:
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
-------- -------- -------
<S> <C> <C> <C>
Debt
CCP Credit Agreement............................. $41,500 $ -- $41,500
Interest Rate Hedge Agreements
Caps............................................. -- 15,000 --
Collars.......................................... -- 20,000 (74)
</TABLE>
As the long-term debt under the credit agreements bears interest at current
market rates, its carrying amount approximates market value at December 31,
1997.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would receive or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
F-37
<PAGE> 249
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. The Company has
policies regarding the financial stability and credit standing of major
counterparties. Nonperformance by the counterparties is not anticipated nor
would it have a material adverse effect on the Company's financial position or
results of operations.
9. INCOME TAXES:
At December 31, 1997, the Company had net operating loss carryforwards of
$9,594, which if not used to reduce taxable income in future periods, expire in
the years 2010 through 2012. As of December 31, 1997, the Company's deferred
income tax assets were offset by valuation allowances and deferred income tax
liabilities resulting primarily from differences in accounting for depreciation
and amortization.
10. RELATED-PARTY TRANSACTIONS:
Charter provides management services to the Company including centralized
customer billing services, data processing and related support, benefits
administration and coordination of insurance coverage and self-insurance
programs for medical, dental and workers' compensation claims. Certain costs for
services are billed and charged directly to the Company's operating subsidiaries
and are included in operating costs. These billings are determined based on the
number of basic customers. Such costs totaled $437, $220 and $131, respectively
for the period from January 1, 1998, through December 23, 1998, and the years
ended December 31, 1997 and 1996. All other costs incurred by Charter on behalf
of the Company are expensed in the accompanying financial statements and are
included in corporate expense allocations -- related party. The cost of these
services is allocated based on the number of basic customers. Management
considers these allocations to be reasonable for the operations of the Company.
Charter utilizes a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to Charter Holdings as determined by independent
actuaries, at the present value of the actuarially computed present and future
liabilities for such benefits. Medical coverage provides for $2,435 aggregate
stop loss protection and a loss limitation of $100 per person per year. Workers'
compensation coverage provides for $800 aggregate stop loss protection and a
loss limitation of $150 per person per year.
The Company is charged a management fee based on percentages of revenues as
stipulated in the management agreement between Charter and the Company. For the
period from January 1, 1998, through December 23, 1998, and the years ended
December 31, 1997 and 1996, the management fee charged to the Company
approximated the corporate expenses incurred by Charter on behalf of the
Company. Management fees currently payable of $114 are included in payables to
manager of cable television systems -- related party as of December 31, 1997.
F-38
<PAGE> 250
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense for the period from
January 1, 1998, through December 23, 1998, and for the years ended December 31,
1997 and 1996, were $278, $130 and $91, respectively.
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
period from January 1, 1998, through December 23, 1998, and for the years ended
December 31, 1997 and 1996, was $421, $271 and $174, respectively.
LITIGATION
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's financial position or results of operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous
F-39
<PAGE> 251
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
twelve-month period may be ordered upon certification if the Company is unable
to justify its basic rates. The Company is unable to estimate at this time the
amount of refunds, if any, that may be payable by the Company in the event
certain of its rates are successfully challenged by franchising authorities or
found to be unreasonable by the FCC. The Company does not believe that the
amount of any such refunds would have a material adverse effect on the financial
position or results of operations of the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation. The Company is subject to state regulation in
Connecticut.
12. EMPLOYEE BENEFIT PLAN:
401(k) PLAN
The Company's employees may participate in the Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 15% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Company contributes an amount equal to 50% of the first 5% of contributions by
each employee. The Company contributed $74, $29 and $22 for the period from
January 1, 1998, through December 23, 1998, and for the years ended December 31,
1997 and 1996, respectively.
APPRECIATION RIGHTS PLAN
Certain employees of Charter participate in the 1995 Charter
Communications, Inc. Appreciation Rights Plan (the "Plan"). The Plan permits
Charter to grant 1,500,000 units to certain key employees, of which 1,251,500
were outstanding at December 31, 1997. Units received by an employee vest at a
rate of 20% per year, unless otherwise provided in the participant's
Appreciation Rights Unit Agreement. The appreciation rights entitle the
participants to receive payment, upon termination or change in control of
Charter, of the excess of the unit value over the base value (defined as the
appreciation value) for each vested unit. The unit value is based on Charter's
adjusted equity, as defined in the Plan.
F-40
<PAGE> 252
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred compensation expense recorded by Charter is based on the appreciation
value since the grant date and is being amortized over the vesting period.
As a result of the acquisition of Charter by Paul G. Allen, the Plan was
terminated, all outstanding units became 100% vested and all amounts were paid
by Charter in 1999. The cost of this plan was allocated to the Company based on
the number of basic customers. Management considers this allocation to be
reasonable for the operations of the Company. For the period January 1, 1998,
through December 23, 1998, the Company expensed $3,800, included in corporate
expense allocation, for the cost of this plan.
13. PARENT COMPANY ONLY FINANCIAL STATEMENTS
As a result of the limitations on and prohibitions of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, the parent company. Charter
Holdings (parent company only) financial statements are presented below.
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
LIABILITIES
INVESTMENT IN CHARTER OPERATING............................. $(1,975)
=======
SHAREHOLDER'S INVESTMENT
Common Stock................................................ $ --
Paid-in-capital............................................. 5,900
Accumulated deficit......................................... (7,875)
-------
$(1,975)
=======
</TABLE>
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
JANUARY 1, 1998 DECEMBER 31
THROUGH ------------------
DECEMBER 23, 1998 1997 1996
----------------- ------- -------
<S> <C> <C> <C>
EQUITY IN LOSS OF CHARTER OPERATING........... $(17,222) $(4,623) $(2,723)
-------- ------- -------
Net loss.................................... $(17,222) $(4,623) $(2,723)
======== ======= =======
</TABLE>
F-41
<PAGE> 253
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
STATEMENT OF SHAREHOLDER'S INVESTMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995............. $-- $ 1,500 $ (529) $ 971
Capital Contribution................. -- 4,400 -- 4,400
Net loss -- -- (2,723) (2,723)
-- ------- -------- --------
BALANCE, December 31, 1996............. -- 5,900 (3,252) 2,648
Net loss............................. -- -- (4,623) (4,623)
-- ------- -------- --------
BALANCE, December 31, 1997............. -- 5,900 (7,875) (1,975)
Capital Contribution................. -- 10,800 -- 10,800
Net loss............................. -- -- (17,222) (17,222)
-- ------- -------- --------
BALANCE, December 23, 1998............. $-- $16,700 $(25,097) $ (8,397)
== ======= ======== ========
</TABLE>
The investment in Charter Operating is accounted for on the equity method.
No statement of cash flows has been presented as Charter Holdings (parent
company only) had no cash flow activity.
14. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings
(loss).
F-42
<PAGE> 254
INDEPENDENT AUDITORS' REPORT
The Members
Marcus Cable Company, L.L.C.:
We have audited the accompanying consolidated balance sheets of Marcus
Cable Company, L.L.C. and subsidiaries as of December 31, 1998 and 1997 (which
December 31, 1998 balance sheet is not presented separately herein) and the
related consolidated statements of operations, members' equity and cash flows
for the period from April 23, 1998 to December 23, 1998 and the consolidated
statements of operations, partners' capital (deficit), and cash flows for the
period from January 1, 1998 to April 22, 1998 and for each of the years in the
two-year period ended December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Marcus Cable
Company, L.L.C. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the periods from April 23,
1998 to December 23, 1998 and from January 1, 1998 to April 22, 1998 and for
each of the years in the two-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements,
substantially all of Marcus Cable Company, L.L.C. was acquired by Vulcan Cable,
Inc. and Paul G. Allen as of April 22, 1998 in a business combination accounted
for as a purchase. As a result of the application of purchase accounting, the
consolidated financial statements of Marcus Cable Company, L.L.C. and
subsidiaries for the period from April 23, 1998 to December 23, 1998 are
presented on a different cost basis than those for periods prior to April 23,
1998, and accordingly, are not directly comparable.
/s/ KPMG LLP
Dallas, Texas
February 19, 1999
(except for the tenth paragraph of Note 1
which is as of April 7, 1999)
F-43
<PAGE> 255
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR (NOTE 1)
--------------------
1997
----
<S> <C>
ASSETS
- ----------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents................................. $ 1,607
Accounts receivable, net of allowance of $1,800 in 1998
and $1,904 in 1997..................................... 23,935
Prepaid expenses and other................................ 2,105
----------
Total current assets.............................. 27,647
Investment in cable television systems:
Property, plant and equipment............................. 706,626
Franchises................................................ 972,440
Noncompetition agreements................................. 6,770
Other assets................................................ 36,985
----------
$1,750,468
==========
LIABILITIES AND PARTNERS' CAPITAL
- ----------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt...................... $ 67,499
Accrued liabilities....................................... 68,754
----------
Total current liabilities......................... 136,253
Long-term debt.............................................. 1,531,927
Other long-term liabilities................................. 2,261
Partners' capital........................................... 80,027
----------
$1,750,468
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE> 256
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR (NOTE 1)
SUCCESSOR (NOTE 1) -----------------------------------------------
-------------------- YEAR ENDED DECEMBER 31
PERIOD FROM APRIL 23 PERIOD FROM JANUARY 1 -----------------------
TO DECEMBER 23, 1998 TO APRIL 22, 1998 1997 1996
-------------------- --------------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Cable services.......... $ 332,139 $ 157,389 $ 473,701 $ 432,172
Management fees --
related party........ 181 374 5,614 2,335
--------- --------- --------- ---------
Total
revenues...... 332,320 157,763 479,315 434,507
--------- --------- --------- ---------
Operating expenses:
Selling, service and
system management.... 129,435 60,501 176,515 157,197
General and
administrative....... 51,912 24,245 72,351 73,017
Transaction and
severance costs...... 16,034 114,167 -- --
Management fees --
related party........ 3,048 -- -- --
Depreciation and
amortization......... 174,968 64,669 188,471 166,429
--------- --------- --------- ---------
Total operating
expenses...... 375,397 263,582 437,337 396,643
--------- --------- --------- ---------
Operating income
(loss)........ (43,077) (105,819) 41,978 37,864
--------- --------- --------- ---------
Other (income) expense:
Interest expense........ 93,103 49,905 151,207 144,376
Gain on sale of
assets............... -- (43,662) -- (6,442)
--------- --------- --------- ---------
Total other
expense....... 93,103 6,243 151,207 137,934
--------- --------- --------- ---------
Loss before
extraordinary
item.......... (136,180) (112,062) (109,229) (100,070)
Extraordinary item -- gain
on early retirement of
debt.................... (2,384) -- -- --
--------- --------- --------- ---------
Net loss........ $(133,796) $(112,062) $(109,229) $(100,070)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE> 257
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR (NOTE 1)
----------------------------------
CLASS B
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
-------- -------- -----
<S> <C> <C> <C>
Balance at December 31, 1995.................... $(21,396) $ 310,722 $ 289,326
Net loss...................................... (200) (99,870) (100,070)
-------- --------- ---------
Balance at December 31, 1996.................... (21,596) 210,852 189,256
Net loss...................................... (218) (109,011) (109,229)
-------- --------- ---------
Balance at December 31, 1997.................... (21,814) 101,841 80,027
Net loss -- January 1, 1998 to April 22,
1998....................................... (224) (111,838) (112,062)
-------- --------- ---------
Balance at April 22, 1998....................... $(22,038) $ (9,997) $ (32,035)
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-46
<PAGE> 258
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 1)
----------------------------------------
MARCUS
CABLE
PROPERTIES, VULCAN
L.L.C. CABLE, INC. TOTAL
----------- ----------- ----------
<S> <C> <C> <C>
Initial capitalization (note 3)................ $53,200 $1,346,800 $1,400,000
Capital contribution (note 3).................. -- 20,000 20,000
Net loss -- April 23, 1998 to December 23,
1998......................................... (5,084) (128,712) (133,796)
------- ---------- ----------
Balance at December 23, 1998................... $48,116 $1,238,088 $1,286,204
======= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE> 259
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR (NOTE 1) PREDECESSOR (NOTE 1)
-------------------- ---------------------------------------------------
YEAR ENDED DECEMBER 31,
PERIOD FROM APRIL 23 PERIOD FROM JANUARY 1 --------------------------
TO DECEMBER 23, 1998 TO APRIL 22, 1998 1997 1996
-------------------- --------------------- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $(133,796) $(112,062) $(109,229) $(100,070)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Extraordinary item -- gain on early
retirement of debt.................... (2,384) -- -- --
Gain on sale of assets.................. -- (43,662) -- (6,442)
Depreciation and amortization........... 174,969 64,669 188,471 166,429
Non cash interest expense............... 52,942 24,819 72,657 63,278
Amortization of carrying value
premium............................... (11,043) -- -- --
Changes in assets and liabilities, net
of working capital adjustments for
acquisitions:
Accounts receivable, net.............. 6,550 1,330 (6,439) (70)
Prepaid expenses and other............ (1,356) (1,855) 95 (574)
Other assets.......................... -- (16) (385) (502)
Payables to related party............. 3,048 -- -- --
Accrued liabilities................... (1,504) 90,804 9,132 (3,063)
--------- --------- --------- ---------
Net cash provided by operating
activities:...................... 87,426 24,027 154,302 118,986
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of cable systems.............. -- (57,500) (53,812) (10,272)
Proceeds from sale of assets, net of cash
acquired and selling costs.............. 340,568 64,564 -- 20,638
Additions to property, plant and
equipment............................... (158,388) (65,715) (197,275) (110,639)
Other..................................... (648) (42) -- --
--------- --------- --------- ---------
Net cash provided by (used in)
investing activities:............ 181,532 (58,693) (251,087) (100,273)
--------- --------- --------- ---------
Cash flows from financing activities:
Borrowings under Senior Credit Facility... 158,750 59,000 226,000 65,000
Repayments under Senior Credit Facility... (343,250) (16,250) (131,250) (95,000)
Repayments of notes and debentures........ (109,344) -- -- --
Payment of debt issuance costs............ -- (99) (1,725) --
Cash contributed by member................ 20,000 -- -- --
Payments on other long-term liabilities... (550) (321) (667) (88)
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities............. (274,394) 42,330 92,358 (30,088)
--------- --------- --------- ---------
Net decrease in cash and cash equivalents... (5,436) 7,664 (4,427) (11,375)
Cash and cash equivalents at the beginning
of the period............................. 9,271 1,607 6,034 17,409
--------- --------- --------- ---------
Cash and cash equivalents at the end of the
period.................................... $ 3,835 $ 9,271 $ 1,607 $ 6,034
========= ========= ========= =========
Supplemental disclosure of cash flow
information:
Interest paid............................. $ 52,631 $ 28,517 $ 81,155 $ 83,473
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE> 260
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Marcus Cable Company, L.L.C. ("MCCLLC") and subsidiaries (collectively, the
"Company") is a Delaware limited liability company, formerly Marcus Cable
Company, L.P. ("MCCLP"). MCCLP was formed as a Delaware limited partnership and
was converted to a Delaware limited liability company on June 9, 1998 (note 3).
The Company derives its primary source of revenues by providing various levels
of cable television programming and services to residential and business
customers. The Company's operations are conducted through Marcus Cable Operating
Company, L.L.C. ("MCOC"), a wholly-owned subsidiary of the Company. The Company
has operated its cable television systems primarily in Texas, Wisconsin,
Indiana, California and Alabama.
The accompanying consolidated financial statements include the accounts of
MCCLLC and its subsidiary limited liability companies and corporations. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
On April 23, 1998, Vulcan Cable, Inc. and Paul G. Allen (collectively
referred to as "Vulcan") acquired all of the outstanding limited partnership
interests and substantially all of the general partner interest in MCCLP. Under
the terms of the purchase agreement, the owner of the remaining 0.6% general
partner interest (the "Minority Interest") in the Company can cause Vulcan to
purchase the 0.6% general partner interest under certain conditions, or Vulcan
can cause the Minority Interest to sell its interest to Vulcan under certain
conditions, at a fair value of not less than $8,000.
As a result of this acquisition (the "Vulcan Acquisition"), the Company has
applied purchase accounting in the preparation of the accompanying consolidated
financial statements. Accordingly, MCCLP adjusted its equity as of April 23,
1998 to reflect the amount paid in the Vulcan Acquisition and has allocated that
amount to assets acquired and liabilities assumed based on their relative fair
values. The excess of the purchase price over the fair value of MCCLP's tangible
and separately identifiable intangible assets less liabilities was allocated as
franchises. The allocation of the purchase price is based, in part, on
preliminary information which is subject to adjustment upon completion of
certain appraisal and valuation information.
The total transaction was valued at $3,243,475 and was allocated as
follows:
<TABLE>
<S> <C>
Franchises............................. $2,492,375
Property, plant and equipment.......... 735,832
Noncompetition agreements.............. 6,343
Other assets........................... 8,925
----------
$3,243,475
==========
</TABLE>
The transaction was initially funded through cash payments of $1,392,000
from Vulcan and the assumption of $1,809,621 in net liabilities. In addition,
Vulcan incurred direct costs of the acquisition (principally financial advisory,
legal and accounting fees) of $20,000, which will be reimbursed by the Company.
In addition, the Company recorded the fair value of the Minority Interest of
$8,000 in equity and $13,854 in direct transaction costs.
In connection with the Vulcan Acquisition, the Company incurred transaction
costs of approximately $114,167, comprised of $90,167 paid to employees of the
Company in
F-49
<PAGE> 261
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
settlement of specially designated Class B units in MCCLP ("EUnit") granted in
past periods by the general partner of MCCLP, and $24,000 of transaction fees
paid to certain equity partners for investment banking services. These
transaction costs have been included in the accompanying consolidated statement
of operations for the period from January 1, 1998 to April 22, 1998.
As a result of the Vulcan Acquisition and the application of purchase
accounting, financial information in the accompanying consolidated financial
statements and notes thereto for the period from April 23, 1998 to December 23,
1998 (the "Successor Period") are presented on a different cost basis than the
financial information as of December 31, 1997 and for the period from January 1,
1998 to April 22, 1998 and for the years ended December 31, 1997 and 1996 (the
"Predecessor Period"), and therefore, such information is not comparable.
Effective December 23, 1998, through a series of transactions, Paul G.
Allen acquired approximately 94% of Charter Communications, Inc. ("Charter").
In March 1999, Charter transferred all of its cable television operating
subsidiaries to a subsidiary, Charter Communications Holdings, LLC (Charter
Holdings) in connection with the issuance of Senior Notes and Senior Discount
Notes totaling $3.6 billion. These operating subsidiaries were then transferred
to Charter Communications Operating, LLC ("Charter Operating"). On April 7,
1999, the cable operations of the Company were transferred to Charter Operating
subsequent to the purchase by Paul G. Allen of the Minority Interest. The
transfer was accounted for as a reorganization of entities under common control
similar to a pooling of interests. For periods subsequent to December 23, 1998
(the date Paul G. Allen controlled both Charter and the Company), the accounts
of the Company will be included in the consolidated financial statements of
Charter Holdings at historical carrying amounts.
As a result of the combination of the Company and Charter, the Company
recognized severance and stay-on bonus compensation of $16,034, which is
included in Transaction and Severance Costs in the accompanying statement of
operations for the period from April 22, 1998 to December 23, 1998. As of
December 23, 1998, 35 employees and officers of the Company had been terminated
and $13,634 had been paid under severance and bonus arrangements. By March 31,
1999, an additional 50 employees will be terminated. The remaining balance of
$2,400 is to be paid by April 30, 1999 and an additional $400 in stay-on bonuses
will be recorded as compensation in 1999 as the related services are provided.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997,
cash equivalents consist of certificates of deposit and money market funds.
These investments are carried at cost which approximates market value.
(b) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installation. The costs of disconnecting
F-50
<PAGE> 262
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a customer are charged to expense in the period incurred. Expenditures for
maintenance and repairs are charged to expense as incurred and equipment
replacements and betterments are capitalized.
Depreciation is provided by the straight-line method over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems............. 3-10 years
Buildings and leasehold improvements... 5-15 years
Vehicles and equipment................. 3-5 years
</TABLE>
(c) FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the estimated lives of the franchises. Costs relating to
unsuccessful franchise applications are charged to expense when it is determined
that the efforts to obtain the franchise will not be successful. Franchise
rights acquired through the purchase of cable television systems, including the
Vulcan Acquisition, represent the excess of the cost of properties acquired over
the amounts assigned to net tangible and identifiable intangible assets at date
of acquisition and are amortized using the straight-line method over a period of
15 years. Accumulated amortization was $264,600 at December 31, 1997.
The historical cost of $37,274 and the related accumulated amortization of
$9,959 for the going concern value of acquired cable television systems as of
December 31, 1997 has been reflected in the caption "Franchises" in the
accompanying consolidated balance sheet. This asset was amortized in the
Predecessor Period using the straight-line method over a period of up to 15
years.
(d) NONCOMPETITION AGREEMENTS
Noncompetition agreements are amortized using the straight-line method over
the term of the respective agreements. Accumulated amortization was $19,144 at
December 31, 1997.
(e) OTHER ASSETS
Debt issuance costs were amortized to interest expense over the term of the
related debt. Debt issuance costs associated with debt outstanding at the Vulcan
Acquisition date were eliminated in connection with pushdown accounting.
(f) IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
(g) REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of
F-51
<PAGE> 263
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997, no installation revenue has been deferred, as direct selling
costs exceeded installation revenue.
Management fee revenues are recognized concurrently with the recognition of
revenues by the managed cable television system, or as a specified monthly
amount as stipulated in the management agreement. Incentive management fee
revenue is recognized upon performance of specified actions as stipulated in the
management agreement.
(h) INCOME TAXES
Income taxes are the responsibility of the individual members and are not
provided for in the accompanying financial statements. The Company's subsidiary
corporations are subject to federal income tax but have had no operations and
therefore, no taxable income since inception.
(i) INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain of its debt agreements. Interest rate
swaps and caps are accounted for as hedges of debt obligations, and accordingly,
the net settlement amounts are recorded as adjustments to interest expense in
the period incurred.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating thereby creating fixed
rate debt. Interest rate caps are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(k) ACCOUNTING STANDARD NOT IMPLEMENTED
In June 1998, the Financial Accounting Standards Boards adopted Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Financial Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999.
F-52
<PAGE> 264
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has not yet quantified the impacts of adopting SFAS No. 133 on its
consolidated financial statements nor has it determined the timing or method of
its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility of
earnings (loss).
(3) CAPITAL STRUCTURE
PARTNERS' CAPITAL
(a) CLASSES OF PARTNERSHIP INTERESTS
The MCCLP partnership agreement (the "Partnership Agreement") provided for
Class B Units and Convertible Preference Units. Class B Units consisted of
General Partner Units ("GP Units") and Limited Partner Units ("LP Units"). To
the extent that GP Units had the right to vote, GP Units voted as Class B Units
together with Class B LP Units. Voting rights of Class B LP Units were limited
to items specified under the Partnership Agreement. Prior to the dissolution of
the Partnership on June 9, 1998, there were 18,848.19 GP Units and 294,937.67
Class B LP Units outstanding.
The Partnership Agreement also provided for the issuance of a class of
Convertible Preference Units. These units were entitled to a general
distribution preference over the Class B LP Units and were convertible into
Class B LP Units. The Convertible Preference Units could vote together with
Class B Units as a single class, and the voting percentage of each Convertible
Preference Unit, at a given time, was based on the number of Class B LP Units
into which such Convertible Preference Unit is then convertible. MCCLP had
issued 7,500 Convertible Preference Units with a distribution preference and
conversion price of two thousand dollars per unit.
The Partnership Agreement permitted the General Partner, at its sole
discretion, to issue up to 31,517 Employee Units (classified as Class B Units)
to key individuals providing services to the Company. Employee Units were not
entitled to distributions until such time as all units have received certain
distributions as calculated under provisions of the Partnership Agreement
("subordinated thresholds"). At December 31, 1997 28,033.20 Employee Units were
outstanding with a subordinated threshold ranging from $1,600 to $1,750 per unit
(per unit amounts in whole numbers). In connection with the Vulcan Acquisition,
the amount paid to EUnit holders of $90,167 was recognized as Transaction and
Severance Costs in the period from January 1, 1998 to April 22, 1998.
(b) ALLOCATION OF INCOME AND LOSS TO PARTNERS
MCCLP incurred losses from inception. Losses were allocated as follows:
(1) First, among the partners whose capital accounts exceed their
unreturned capital contributions in proportion to such excesses until each such
partner's capital account equals its unreturned capital contribution; and
(2) Next, to the holders of Class B Units in accordance with their
unreturned capital contribution percentages.
The General Partner was allocated a minimum of 0.2% to 1% of income or loss
at all times, depending on the level of capital contributions made by the
partners.
F-53
<PAGE> 265
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MEMBERS' EQUITY
Upon completion of the Vulcan Acquisition, Vulcan collectively owned 99.4%
of MCCLP through direct ownership of all LP Units and through 80% ownership of
Marcus Cable Properties, Inc. ("MCPI"), the general partner of Marcus Cable
Properties, L.P. ("MCPLP"), the general partner of MCCLP. The Minority Interest
owned the voting common stock, or the remaining 20% of MCPI. In connection with
the Vulcan Acquisition, historical partners' capital at April 22, 1998 was
eliminated and the Successor entity was initially recapitalized at $1,400,000
(see note 1). In July 1998, Vulcan contributed $20,000 in cash to the Company
relating to certain employee severance arrangements.
On June 9, 1998, MCCLP was converted into a Delaware limited liability
company with two members: Vulcan Cable, Inc., with 96.2% ownership, and Marcus
Cable Properties, L.L.C. ("MCPLLC") (formerly MCPLP), with 3.8% ownership.
Vulcan Cable, Inc. owns approximately 25.6% and MCPI owns approximately 74.4% of
MCPLLC, with Vulcan's interest in MCPI unchanged. As there was no change in
ownership interests, the historical partners' capital balances at June 9, 1998
were transferred to and became the initial equity of MCCLLC, and thus the
accompanying statement of members' equity from April 22, 1998 to December 23,
1998 has been presented as if the conversion of MCCLP into MCCLLC occurred on
April 23, 1998.
As of December 23, 1998, MCCLLC has 100 issued and outstanding membership
units. Income and losses of MCCLLC are allocated to the members in accordance
with their ownership interests. Members are not personally liable for
obligations of MCCLLC.
(4) ACQUISITIONS AND DISPOSITIONS
In 1998, the Company acquired cable television systems in the Birmingham,
Alabama area for a purchase price of $57,500. The excess of the cost of
properties acquired over the amounts assigned to net tangible assets and
noncompetition agreements as of the date of acquisition was approximately
$44,603 and is included in franchises.
Additionally, in 1998, the Company completed the sale of certain cable
television systems for an aggregate sales price of $405,132, resulting in a gain
of $43,662. No gains or losses were recognized on the sale of the cable
television systems divested after the Vulcan Acquisition as such amounts are
considered to be an adjustment of the purchase price allocation as these systems
were designated as assets to be sold at the date of the Vulcan Acquisition.
In 1997, the Company acquired cable television systems in the Dallas-Ft.
Worth, Texas area for a purchase price of $35,263. The excess of the cost of
properties acquired over the amounts assigned to net tangible assets as of the
date of acquisition was $15,098 and is included in franchises.
Additionally, in July 1997, the Company completed an exchange of cable
television systems in Indiana and Wisconsin. According to the terms of the trade
agreement, in addition to the contribution of its systems, the Company paid
$18,549.
In 1996, the Company acquired cable television systems in three separate
transactions for an aggregate purchase price of $10,272. The excess of the cost
of properties acquired over the amounts assigned to net tangible assets as of
the date of acquisition was $4,861 and is included in franchises.
F-54
<PAGE> 266
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, in 1996, the Company completed the sale of cable television
systems in Washington, D.C. for a sale price of $20,638. The sale resulted in a
gain of $6,442.
The above acquisitions, which were completed during the Predecessor Period,
were accounted for using the purchase method of accounting and, accordingly,
results of operations of the acquired assets have been included in the
accompanying consolidated financial statements from the dates of acquisition.
The purchase prices were allocated to tangible and intangible assets based on
estimated fair market values at the dates of acquisition. The cable system trade
discussed above was accounted for as a nonmonetary exchange and, accordingly,
the additional cash contribution was allocated to tangible and intangible assets
based on recorded amounts of the nonmonetary assets relinquished.
Unaudited pro forma operating results as though 1998 and 1997 acquisitions
and divestitures discussed above, including the Vulcan Acquisition, had occurred
on January 1, 1997, with adjustments to give effect to amortization of
franchises, interest expense and certain other adjustments is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED
DECEMBER 23, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues................................. $444,738 $ 421,665
Operating loss........................... (51,303) (56,042)
Net loss................................. (187,342) (190,776)
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1997:
<TABLE>
<CAPTION>
(PREDECESSOR)
-------------
<S> <C>
Cable distribution systems............................ $878,721
Vehicles and other.................................... 37,943
Land and buildings.................................... 17,271
--------
933,935
Accumulated depreciation.............................. (227,309)
--------
$706,626
========
</TABLE>
Depreciation expense for the periods from January 1, 1998 to April 22, 1998
and from April 23, 1998 to December 23, 1998 and for the years ended December
31, 1997 and 1996 was $35,929, $70,538, $96,220, and $72,281, respectively.
(6) OTHER ASSETS
Other assets consist of the following at December 31, 1997:
<TABLE>
<CAPTION>
(PREDECESSOR)
-------------
<S> <C>
Debt issuance costs................................... $45,225
Other................................................. 1,090
-------
46,315
Accumulated amortization.............................. (9,330)
-------
$36,985
=======
</TABLE>
F-55
<PAGE> 267
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31, 1997:
<TABLE>
<CAPTION>
(PREDECESSOR)
-------------
<S> <C>
Accrued operating liabilities......................... $27,923
Accrued programming costs............................. 9,704
Accrued franchise fees................................ 10,131
Accrued property taxes................................ 5,125
Accrued interest...................................... 7,949
Other accrued liabilities............................. 7,922
-------
$68,754
=======
</TABLE>
(8) LONG-TERM DEBT
The Company has outstanding the following borrowings on long-term debt
arrangements at December 31, 1997:
<TABLE>
<CAPTION>
(PREDECESSOR)
-------------
<S> <C>
Senior Credit Facility................................ $ 949,750
13 1/2% Senior Subordinated Discount Notes............ 336,304
14 1/4% Senior Discount Notes......................... 213,372
11 7/8% Senior Debentures............................. 100,000
----------
1,599,426
Less current maturities............................... 67,499
----------
$1,531,927
==========
</TABLE>
In conjunction with the Vulcan Acquisition and in accordance with purchase
accounting, the Company recorded its outstanding debt at its fair value. As a
result, the Company recognized a carrying value premium (fair market value of
outstanding debt less historical carrying amount) of $108,292 as of the date of
the Vulcan Acquisition. The carrying value premium is being amortized to
interest expense over the estimated remaining lives of the related indebtedness
using the effective interest method.
The Company, through MCOC, maintains a senior credit facility ("Senior
Credit Facility"), which provides for two term loan facilities, one with a
principal amount of $490,000 that matures on December 31, 2002 ("Tranche A") and
the other with a principal amount of $300,000 million that matures on April 30,
2004 ("Tranche B"). The Senior Credit Facility provides for scheduled
amortization of the two term loan facilities which began in September 1997. The
Senior Credit Facility also provides for a $360,000 revolving credit facility
("Revolving Credit Facility"), with a maturity date of December 31, 2002.
Amounts outstanding under the Senior Credit Facility bear interest at either
the: i) Eurodollar rate, ii) prime rate, or iii) CD base rate or Federal Funds
rate, plus a margin of up to 2.25%, which is subject to certain quarterly
adjustments based on the ratio of MCOC's total debt to annualized operating cash
flow, as defined. The variable interest rates ranged from 6.23% to 7.75% and
5.97% to 8.00% at December 23, 1998, and December 31, 1997, respectively. A
quarterly commitment fee ranging from 0.250% to 0.375% per annum is payable on
the unused commitment under the Senior Credit Facility.
On October 16, 1998, the Company entered into an agreement to amend its
Senior Credit Facility. The amendment provides for, among other items, a
reduction in the permitted leverage and cash flow ratios, a reduction in the
interest rate charge under the Senior Credit Facility and a change in the
restriction related to the use of cash proceeds from asset sales to allow such
proceeds to be used to redeem the 11 7/8% Senior Debentures.
F-56
<PAGE> 268
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1995, the Company issued $299,228 of 14 1/4% Senior Discount Notes due
December 15, 2005 (the "14 1/4% Notes") for net proceeds of $150,003. The
14 1/4% Notes are unsecured and rank pari passu to the 11 7/8% Debentures
(defined below). The 14 1/4% Notes are redeemable at the option of MCCLLC at
amounts decreasing from 107% to 100% of par beginning on June 15, 2000. No
interest is payable until December 15, 2000. Thereafter interest is payable
semi-annually until maturity. The discount on the 14 1/4% Notes is being
accreted using the effective interest method. The unamortized discount was
$85,856 at December 31, 1997.
In 1994, the Company, through MCOC, issued $413,461 face amount of 13 1/2%
Senior Subordinated Discount Notes due August 1, 2004 (the "13 1/2% Notes") for
net proceeds of $215,000. The 13 1/2% Notes are unsecured, are guaranteed by
MCCLLC and are redeemable, at the option of MCOC, at amounts decreasing from
105% to 100% of par beginning on August 1, 1999. No interest is payable on the
13 1/2% Notes until February 1, 2000. Thereafter, interest is payable
semi-annually until maturity. The discount on the 13 1/2% Notes is being
accreted using the effective interest method. The unamortized discount was
$77,157 at December 31, 1997.
In 1993, the Company issued $100,000 principal amount of 11 7/8% Senior
Debentures due October 1, 2005 (the "11 7/8% Debentures"). The 11 7/8%
Debentures were unsecured and were redeemable at the option of the Company on or
after October 1, 1998 at amounts decreasing from 105.9% to 100% of par at
October 1, 2002, plus accrued interest, to the date of redemption. Interest on
the 11 7/8% Debentures was payable semi-annually each April 1 and October 1
until maturity.
On July 1, 1998, $4,500 face amount of the 14 1/4% Notes and $500 face
amount of the 11 7/8% Notes were tendered for gross tender payments of $3,472
and $520 respectively. The payments resulted in a gain on the retirement of the
debt of $753. On December 11, 1998, the 11 7/8% Notes were redeemed for a gross
payment of $107,668, including accrued interest. The redemption resulted in a
gain on the retirement of the debt of $1,631.
The 14 1/4% Notes, 13 1/2% Notes, 11 7/8% Debentures and Senior Credit
Facility are all unsecured and 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.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying and fair values of the Company's significant financial
instruments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(PREDECESSOR)
-------------------
CARRYING FAIR
VALUE VALUE
-------- -----
<S> <C> <C>
Senior Credit Facility...................................... $949,750 $949,750
13 1/2% Notes............................................... 336,304 381,418
14 1/4% Notes............................................... 213,372 258,084
11 7/8% Debentures.......................................... 100,000 108,500
</TABLE>
The carrying amount of the Senior Credit Facility approximates fair value
as the outstanding borrowings bear interest at market rates. The fair values of
the 14 1/4% Notes, 13 1/2% Notes, and 11 7/8% Debentures, are based on quoted
market prices. The Company had interest rate swap agreements covering a notional
amount of $500,000 at December 31, 1997.
F-57
<PAGE> 269
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average interest pay rate for the interest rate swap
agreements was 5.7% at December 31, 1997. Certain of these agreements allow for
optional extension by the counterparty or for automatic extension in the event
that one month LIBOR exceeds a stipulated rate on any monthly reset date.
Approximately $100,000 notional amount included in the $500,000 notional amount
described above is also modified by an interest rate cap agreement which resets
monthly.
The notional amounts of the interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair values of the interest rate hedge agreements generally reflect the
estimated amounts that the Company would receive or (pay) (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's Senior Credit Facility thereby reducing the exposure
to credit loss. The Company has policies regarding the financial stability and
credit standing of the major counterparties. Nonperformance by the
counterparties is not anticipated nor would it have a material adverse effect on
the Company's consolidated financial position or results of operations.
(10) RELATED PARTY TRANSACTIONS
The Company and Charter entered into a management agreement on October 6,
1998 whereby Charter began to manage the day-to-day operations of the Company.
In consideration for the management consulting services provided by Charter,
Marcus pays Charter an annual fee equal to 3% of the gross revenues of the cable
system operations, plus expenses. From October 6, 1998 to December 23, 1998,
management fees under this agreement were $3,048.
Prior to the consummation of the Vulcan Acquisition, affiliates of Goldman
Sachs owned limited partnership interests in MCCLP. Maryland Cable Partners,
L.P. ("Maryland Cable"), which was controlled by an affiliate of Goldman Sachs,
owned the Maryland Cable systems. MCOC managed the Maryland Cable systems under
the Maryland Cable Agreement. Pursuant to such agreement, MCOC earned a
management fee equal to 4.7% of the revenues of Maryland Cable.
Effective January 31, 1997, Maryland Cable was sold to a third party.
Pursuant to the Maryland Cable Agreement, MCOC recognized incentive management
fees of $5,069 during the twelve months ended December 31, 1997 in conjunction
with the sale. Although MCOC is no longer involved in the active management of
the Maryland Cable systems, MCOC has entered into an agreement with Maryland
Cable to oversee the activities, if any, of Maryland Cable through the
liquidation of the partnership. Pursuant to such agreement, MCOC earns a nominal
monthly fee. During the periods from January 1, 1998 to April 22, 1998 and from
April 23, 1998 to December 23, 1998, MCOC earned total management fees of $374
and $181, respectively. Including the incentive management fees noted above,
during the years ended December 31, 1997 and 1996, MCOC earned total management
fees of $5,614 and $2,335, respectively.
F-58
<PAGE> 270
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) plan for its employees whereby employees that
qualify for participation under the plan can contribute up to 15% of their
salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matches participant
contributions up to a maximum of 2% of a participant's salary. For the periods
from January 1, 1998 to April 22, 1998 and from April 23, 1998 to December 23,
1998, and for the years ended December 31, 1997 and 1996, the Company made
contributions to the plan of $329, $536, $761 and $480, respectively.
(12) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Lease and rental costs charged to expense for the periods from
January 1, 1998 to April 22, 1998 and from April 23, 1998 to December 23, 1998,
and for the years ended December 31, 1997 and 1996 were $1,098, $2,222, $3,230,
and $2,767, respectively. The Company also rents utility poles in its
operations. Generally, pole rentals are cancelable on short notice, but the
Company anticipates that such rentals will recur. Rent expense for pole
attachments for the periods from January 1, 1998 to April 22, 1998 and from
April 23, 1998 to December 23, 1998 and for the years ended December 31, 1997
and 1996 were $1,372 , $2,620, $4,314, and $4,008, respectively.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 23,
1998, the amount returned by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous
F-59
<PAGE> 271
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
twelve-month period may be ordered upon certification if the Company is unable
to justify its basic rates. The Company is unable to estimate at this time the
amount of refunds, if any, that may be payable by the Company in the event
certain of its rates are successfully challenged by franchising authorities or
found to be unreasonable by the FCC. The Company does not believe that the
amount of any such refunds would have a material adverse effect on the financial
position or results of operations of the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
LITIGATION
In Alabama, Indiana, Texas and Wisconsin, customers have filed punitive
class action lawsuits on behalf of all person residing in those respective
states who are or were potential customers of the Company's cable television
service, and who have been charged a processing fee for delinquent payment of
their cable bill. The actions challenge the legality of the processing fee and
seek declaratory judgment, injunctive relief and unspecified damages. In Alabama
and Wisconsin, the Company has entered into joint speculation and case
management orders with attorneys for plaintiffs. A Motion to Dismiss is pending
in Indiana. The Company intends to vigorously defend the actions. At this stage
of the actions, the Company is not able to project the expenses of defending the
actions or the potential outcome of the actions, including the impact on the
consolidated financial position or results of operations.
The Company is also party to lawsuits which are generally incidental to its
business. In the opinion of management, after consulting with legal counsel, the
outcome of these lawsuits will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
(13) SUBSEQUENT EVENT (UNAUDITED)
In March 1999, concurrent with the issuance of Senior Notes and Senior
Discount Notes, the combined company (Charter and the Company, see note 1)
extinguished all long-term debt, excluding borrowings of Charter and the Company
under their respective credit agreements, and refinanced all existing credit
agreements at various subsidiaries of the Company and Charter with a new credit
agreement entered into by a wholly owned subsidiary of the combined company.
F-60
<PAGE> 272
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCA Group:
We have audited the accompanying combined balance sheet of CCA Holdings
Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc.
(collectively CCA Group) and subsidiaries as of December 31, 1997, and the
related combined statements of operations, shareholders' deficit and cash flows
for the period from January 1, 1998, through December 23, 1998, and for the
years ended December 31, 1997 and 1996. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of CCA Group and
subsidiaries as of December 31, 1997, and the combined results of their
operations and their cash flows for the period from January 1, 1998, through
December 23, 1998, and for the years ended December 31, 1997 and 1996, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
F-61
<PAGE> 273
CCA GROUP
COMBINED BALANCE SHEET -- DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,501
Accounts receivable, net of allowance for doubtful
accounts of $926....................................... 9,407
Prepaid expenses and other................................ 1,988
Deferred income tax asset................................. 5,915
----------
Total current assets.............................. 21,811
----------
RECEIVABLE FROM RELATED PARTY, including accrued interest... 13,090
----------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 352,860
Franchises, net of accumulated amortization of $132,871... 806,451
----------
1,159,311
----------
OTHER ASSETS................................................ 13,731
----------
$1,207,943
==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 25,625
Accounts payable and accrued expenses..................... 48,554
Payables to manager of cable television systems -- related
party.................................................. 1,975
----------
Total current liabilities......................... 76,154
----------
DEFERRED REVENUE............................................ 1,882
----------
DEFERRED INCOME TAXES....................................... 117,278
----------
LONG-TERM DEBT, less current maturities..................... 758,795
----------
DEFERRED MANAGEMENT FEES.................................... 4,291
----------
NOTES PAYABLE, including accrued interest................... 348,202
----------
SHAREHOLDERS' DEFICIT:
Common stock.............................................. 1
Additional paid-in capital................................ 128,499
Accumulated deficit....................................... (227,159)
----------
Total shareholders' deficit....................... (98,659)
----------
$1,207,943
==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-62
<PAGE> 274
CCA GROUP
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998, YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 23, --------------------
1998 1997 1996
------------ ---- ----
<S> <C> <C> <C>
REVENUES........................................ $ 324,432 $289,697 $233,392
--------- -------- --------
EXPENSES:
Operating costs............................... 135,705 122,917 102,977
General and administrative.................... 28,440 26,400 18,687
Depreciation and amortization................. 136,689 116,080 96,547
Management fees -- related parties............ 17,392 11,414 8,634
--------- -------- --------
318,226 276,811 226,845
--------- -------- --------
Income from operations..................... 6,206 12,886 6,547
--------- -------- --------
OTHER INCOME (EXPENSE):
Interest income............................... 4,962 2,043 1,883
Interest expense.............................. (113,824) (108,122) (88,999)
Other, net.................................... (294) 171 (2,504)
--------- -------- --------
(109,156) (105,908) (89,620)
--------- -------- --------
Net loss................................... $(102,950) $(93,022) $(83,073)
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-63
<PAGE> 275
CCA GROUP
COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- -----
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995........... $ 1 $ 99,999 $ (51,064) $ 48,936
Net loss........................... -- -- (83,073) (83,073)
--- -------- --------- ---------
BALANCE, December 31, 1996........... 1 99,999 (134,137) (34,137)
Capital contributions.............. -- 28,500 -- 28,500
Net loss........................... -- -- (93,022) (93,022)
--- -------- --------- ---------
BALANCE, December 31, 1997........... 1 128,499 (227,159) (98,659)
Capital contributions.............. -- 5,684 -- 5,684
Net loss........................... -- -- (102,950) (102,950)
--- -------- --------- ---------
BALANCE, December 23, 1998........... $ 1 $134,183 $(330,109) $(195,925)
=== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-64
<PAGE> 276
CCA GROUP
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998, YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 23, ---------------------
1998 1997 1996
------------ ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $(102,950) $(93,022) $ (83,073)
Adjustments to reconcile net loss to net cash provided
by operating activities --
Depreciation and amortization...................... 136,689 116,080 96,547
Amortization of debt issuance costs and non cash
interest cost.................................... 44,701 49,107 39,927
(Gain) loss on sale of property, plant and
equipment........................................ 511 (156) 1,257
Changes in assets and liabilities, net of effects
from acquisitions --
Accounts receivable, net......................... 4,779 222 (1,393)
Prepaid expenses and other....................... 243 (175) 216
Accounts payable and accrued expenses............ 3,849 8,797 3,855
Payables to manager of cable television systems,
including deferred management fees............ 3,485 784 448
Deferred revenue................................. 1,336 559 (236)
Other operating activities....................... 5,583 (3,207) 1,372
--------- -------- ---------
Net cash provided by operating activities........ 98,226 78,989 58,920
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............ (95,060) (82,551) (56,073)
Payments for acquisitions, net of cash acquired....... -- (147,187) (122,017)
Other investing activities............................ (2,898) (1,296) 54
--------- -------- ---------
Net cash used in investing activities.............. (97,958) (231,034) (178,036)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.......................... 300,400 162,000 127,000
Repayments of long-term debt.......................... (64,120) (39,580) (13,100)
Payments of debt issuance costs....................... (8,442) (3,360) (3,126)
Repayments under notes payable........................ (230,994) -- --
Capital contributions................................. -- 28,500 --
--------- -------- ---------
Net cash provided by (used in) financing
activities....................................... (3,156) 147,560 110,774
--------- -------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS............... (2,888) (4,485) (8,342)
CASH AND CASH EQUIVALENTS, beginning of period.......... 4,501 8,986 17,328
--------- -------- ---------
CASH AND CASH EQUIVALENTS, end of period................ $ 1,613 $ 4,501 $ 8,986
========= ======== =========
CASH PAID FOR INTEREST.................................. $ 179,781 $ 49,687 $ 51,434
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-65
<PAGE> 277
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
CCA Group consists of CCA Holdings Corp. (CCA Holdings), CCT Holdings Corp.
(CCT Holdings) and Charter Communications Long Beach, Inc. (CC-LB), all Delaware
corporations (collectively referred to as "CCA Group" or the "Company") and
their subsidiaries. The combined financial statements of each of these companies
have been combined by virtue of their common ownership and management. All
material intercompany transactions and balances have been eliminated.
CCA Holdings commenced operations in January 1995 in connection with
consummation of the Crown Transaction (as defined below). The accompanying
financial statements include the accounts of CCA Holdings; its wholly-owned
subsidiary, CCA Acquisition Corp. (CAC); CAC's wholly-owned subsidiary, Cencom
Cable Entertainment, Inc. (CCE); and Charter Communications Entertainment I,
L.P. (CCE-I), which is controlled by CAC through its general partnership
interest. Through December 23, 1998, CCA Holdings was approximately 85% owned by
Kelso Investment Associates V, L.P., an investment fund, together with an
affiliate (collectively referred to as "Kelso" herein) and certain other
individuals and approximately 15% by Charter Communications, Inc. (Charter),
manager of CCE-I's cable television systems.
CCT Holdings was formed on January 6, 1995. CCT Holdings commenced
operations in September 1995 in connection with consummation of the Gaylord
Transaction (as defined below). The accompanying financial statements include
the accounts of CCT Holdings and Charter Communications Entertainment II, L.P.
(CCE-II), which is controlled by CCT Holdings through its general partnership
interest. Through December 23, 1998, CCT Holdings was owned approximately 85% by
Kelso and certain other individuals and approximately 15% by Charter, manager of
CCE-II's cable television systems.
In January 1995, CAC completed the acquisition of certain cable television
systems from Crown Media, Inc. (Crown), a subsidiary of Hallmark Cards,
Incorporated (Hallmark) (the "Crown Transaction"). On September 29, 1995, CAC
and CCT Holdings entered into an Asset Exchange Agreement whereby CAC exchanged
a 1% undivided interest in all of its assets for a 1.22% undivided interest in
certain assets to be acquired by CCT Holdings from an affiliate of Gaylord
Entertainment Company, Inc. (Gaylord). Effective September 30, 1995, CCT
Holdings acquired certain cable television systems from Gaylord (the "Gaylord
Transaction"). Upon execution of the Asset Purchase Agreement, CAC and CCT
Holdings entered into a series of agreements to contribute the assets acquired
under the Crown Transaction to CCE-I and certain assets acquired in the Gaylord
acquisition to CCE-II. Collectively, CCA Holdings and CCT Holdings own 100% of
CCE-I and CCE-II.
CC-LB was acquired by Kelso and Charter in May 1997. The accompanying
financial statements include the accounts of CC-LB and its wholly owned
subsidiary, Long Beach Acquisition Corp. (LBAC) from the date of acquisition.
Through December 23, 1998, CC-LB was owned approximately 85% by Kelso and
certain other individuals and approximately 15% by Charter, manager of LBAC's
cable television systems.
F-66
<PAGE> 278
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through
a series of transactions. In conjunction with Mr. Allen's acquisition, Charter
acquired 100% of the outstanding stock of CCA Holdings, CCT Holdings and CC-LB
on December 23, 1998.
In 1998, CCE-I provided cable television service to customers in
Connecticut, Illinois, Massachusetts, Missouri and New Hampshire, CCE-II
provided cable television service to customers in California and LBAC provided
cable television service to customers in Long Beach, California, and certain
surrounding areas.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997,
cash equivalents consist primarily of repurchase agreements. These investments
are carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installation. The costs of disconnecting a residence are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, and equipment replacement costs and betterments are
capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems........................... 3-15 years
Buildings and leasehold improvements................. 5-15 years
Vehicles and equipment............................... 3-5 years
</TABLE>
In 1997, the Company shortened the estimated useful lives of certain property,
plant and equipment for depreciation purposes. As a result, additional
depreciation of $8,123 was recorded during 1997.
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable television systems represent management's
estimate of fair value and are amortized using the straight-line method over 15
years.
OTHER ASSETS
Debt issuance costs are amortized to interest expense over the term of the
related debt. The interest rate cap costs are being amortized over the terms of
the agreement, which approximates three years.
F-67
<PAGE> 279
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Income taxes are recorded in accordance with SFAS No. 109, "Accounting for
Income Taxes."
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS:
In 1997, CC-LB acquired the stock of LBAC for an aggregate purchase price,
net of cash acquired, of $147,200. In connection with the completion of this
acquisition, LBAC recorded $55,900 of deferred income tax liabilities resulting
from differences between the financial reporting and tax basis of certain assets
acquired. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the date of acquisition was $190,200 and is
included in franchises.
In 1996, the Company acquired cable television systems in three separate
transactions for an aggregate purchase price, net of cash acquired, of $122,000.
The excess of the cost of properties acquired over the amounts assigned to net
tangible assets at the dates of acquisition was $100,200 and is included in
franchises.
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 the acquisitions.
Unaudited pro forma operating results for the 1997 acquisitions as though
the acquisitions had been made on January 1, 1997, with pro forma adjustments to
give effect to amortization of franchises, interest expense and certain other
adjustments as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
(UNAUDITED)
-------------
<S> <C>
Revenues............................................ $303,797
Income from operations.............................. 14,108
Net loss............................................ (94,853)
</TABLE>
The unaudited 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.
3. RECEIVABLE FROM RELATED PARTY:
In connection with the transfer of certain assets acquired in the Gaylord
Transaction to Charter Communications Properties, Inc. (CCP), Charter
Communications Properties Holding Corp. (CCP Holdings), the parent of CCP and a
wholly owned subsidiary of Charter, entered into a $9,447 promissory note with
CCT Holdings. The promissory note
F-68
<PAGE> 280
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
bears interest at the rates paid by CCT Holdings on the Gaylord Seller Note.
Principal and interest are due on September 29, 2005. Interest income has been
accrued based on an average rate of interest over the life of the Gaylord Seller
Note, which approximates 15.4% and totaled $1,899 for the period from January 1,
1998, through December 23, 1998, and $1,806 and $1,547 for the years ended
December 31, 1997 and 1996, respectively. As of December 31, 1997, interest
receivable totaled $3,643.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1997:
<TABLE>
<S> <C>
Cable distribution systems............................ $ 426,241
Land, buildings and leasehold improvements............ 15,443
Vehicles and equipment................................ 24,375
---------
466,059
Less -- Accumulated depreciation...................... (113,199)
---------
$ 352,860
=========
</TABLE>
Depreciation expense for the period from January 1, 1998, through December
23, 1998, and for the years ended December 31, 1997 and 1996, was $72,914,
$59,599 and $39,575, respectively.
5. OTHER ASSETS:
Other assets consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Debt issuance costs..................................... $13,416
Note receivable......................................... 2,100
Other................................................... 1,342
-------
16,858
Less -- Accumulated amortization........................ (3,127)
-------
$13,731
=======
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1997:
<TABLE>
<S> <C>
Accrued interest........................................ $ 8,389
Franchise fees.......................................... 6,434
Programming expenses.................................... 5,855
Accounts payable........................................ 4,734
Public education and governmental costs................. 4,059
Salaries and related benefits........................... 3,977
Capital expenditures.................................... 3,629
Other................................................... 11,477
-------
$48,554
=======
</TABLE>
F-69
<PAGE> 281
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
CCE-I:
Term loans............................................. $274,120
Fund loans............................................. 85,000
Revolving credit facility.............................. 103,800
--------
462,920
--------
CCE-II:
Term loans............................................. 105,000
Revolving credit facility.............................. 123,500
--------
228,500
--------
LBAC:
Term loans............................................. 85,000
Revolving credit facility.............................. 8,000
--------
93,000
--------
Total debt..................................... 784,420
Less -- Current maturities............................... (25,625)
--------
Total long-term debt........................... $758,795
========
</TABLE>
CCE-I CREDIT AGREEMENT
CCE-I maintains a credit agreement (the "CCE-I Credit Agreement"), which
provides for a $280,000 term loan that matures on September 30, 2006, an $85,000
fund loan that matures on March 31, 2007, and a $175,000 revolving credit
facility with a maturity date of September 30, 2006. Amounts under the CCE-I
Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as
defined, plus a margin of up to 2.75%. The variable interest rate ranged from
6.88% to 8.06% at December 23, 1998, and from 7.63% to 8.50% and 7.63% to 8.38%
at December 31, 1997 and 1996, respectively.
Commencing June 30, 2002, and at the end of each calendar quarter
thereafter, available borrowings under the revolving credit facility and the
term loan shall be reduced on an annual basis by 12.0% in 2002 and 15.0% in
2003. Commencing June 30, 2002, and at the end of each calendar quarter
thereafter, the available borrowings for the fund loan shall be reduced on an
annual basis by 0.75% in 2002 and 1.0% in 2003. A quarterly commitment fee of
between 0.375% and 0.5% per annum is payable on the unborrowed balance of the
revolving credit facility.
COMBINED CREDIT AGREEMENT
CCE-II and LBAC maintain a credit agreement (the "Combined Credit
Agreement") which provides for two term loan facilities, one with the principal
amount of $100,000 that matures on March 31, 2005, and the other with the
principal amount of $90,000 that matures on March 31, 2006. The Combined Credit
Agreement also provides for a $185,000 revolving credit facility, with a
maturity date of March 31, 2005. Amounts under the Combined Credit Agreement
bear interest at either the LIBOR Rate or Base
F-70
<PAGE> 282
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Rate, as defined, plus a margin of up to 2.5%. The variable interest rate ranged
from 6.56% to 7.59% at December 23, 1998, and from 7.50% to 8.38% at December
31, 1997, respectively.
Commencing March 31, 2001, and at the end of each quarter thereafter,
available borrowings under the revolving credit facility and one term loan shall
be reduced on an annual basis by 5.0% in 2001, 15.0% in 2002 and 18.0% in 2003.
Commencing in December 31, 1999, and at the end of each quarter thereafter,
available borrowings under the other term loan shall be reduced on annual basis
by 0.5% in 1999, 0.8% in 2000, 1.0% in 2001, 1.0% in 2002 and 1.0% in 2003. A
quarterly commitment fee of between 0.25% and 0.375% per annum, based upon the
intercompany indebtedness of the Company, is payable on the unborrowed balance
of the revolving credit facility.
CCE CREDIT AGREEMENT
In October 1998, Charter Communications Entertainment, L.P. (CCE L.P.), a
98% direct and indirect owner of CCE-I and CCE-II and indirectly owned
subsidiary of the Company, entered into a credit agreement (the "CCE L.P. Credit
Agreement") which provides for a term loan facility with the principal amount of
$130,000 that matures on September 30, 2007. Amounts under the CCE L.P. Credit
Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a
margin of up to 3.25%. The variable interest rate at December 23, 1998, was
8.62%.
Commencing June 30, 2002, and the end of each calendar quarter thereafter,
the available borrowings for the term loan shall be reduced on an annual basis
by 0.75% in 2002 and 1.0% in 2003.
CCE-II HOLDINGS CREDIT AGREEMENT
CCE-II Holdings, LLC (CCE-II Holdings), a wholly owned subsidiary of CCE
L.P. and the parent of CCE-II, entered into a credit agreement (the "CCE-II
Holdings Credit Agreement") in November 1998, which provides for a term loan
facility with the principal amount of $95,000 that matures on September 30,
2006. Amounts under the CCE-II Holdings Credit Agreement bear interest at either
the LIBOR Rate or Base Rate, as defined, plus a margin of up to 3.25%. The
variable rate at December 23, 1998, was 8.56%.
Commencing June 30, 2002, and at the end of each quarter thereafter,
available borrowings under the revolving credit facility and one term loan shall
be reduced on an annual basis by 0.5% in 2002 and 1.0% in 2003.
The credit agreements require the Company to comply with various financial
and nonfinancial covenants, including the maintenance of annualized operating
cash flow to fixed charge ratio, as defined, not to exceed 1.0 to 1.0. These
debt instruments also contain substantial limitations on, or prohibitions of,
distributions, additional indebtedness, liens asset sales and certain other
items.
F-71
<PAGE> 283
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. NOTES PAYABLE:
Notes payable consists of the following at December 31, 1997:
<TABLE>
<S> <C>
HC Crown Note............................................ $ 82,000
Accrued interest on HC Crown Note........................ 36,919
Gaylord Seller Note...................................... 165,688
Accrued interest on Gaylord Seller Note.................. 63,595
--------
Total.......................................... $348,202
========
</TABLE>
In connection with the Crown Transaction, the Company entered into an
$82,000 senior subordinated loan agreement with a subsidiary of Hallmark, HC
Crown Corp., and pursuant to such loan agreement issued a senior subordinated
note (the "HC Crown Note"). The HC Crown Note was an unsecured obligation. The
HC Crown Note was limited in aggregate principal amount to $82,000 and has a
stated maturity date of December 31, 1999 (the "Stated Maturity Date"). Interest
has been accrued at 13% per annum, compounded semiannually, payable upon
maturity. In October 1998, the Crown Note and accrued interest was paid in full.
In connection with the Gaylord Transaction, CCT Holdings entered into a
$165,700 subordinated loan agreement with Gaylord (the "Gaylord Seller Note").
Interest expense has been accrued based on an average rate of interest over the
life of the Gaylord Seller Note, which approximated 15.4%.
In connection with the Gaylord Transaction, CCT Holdings, CCE L.P. and
Gaylord entered into a contingent payment agreement (the "Contingent
Agreement"). The Contingent Agreement indicates CCE L.P. will pay Gaylord 15% of
any amount distributed to CCT Holdings in excess of the total of the Gaylord
Seller Note, Crown Seller Note and $450,000. In conjunction with the Paul G.
Allen acquisition of Charter and the Company, Gaylord was paid an additional
$132,000 pursuant to the Contingent Agreement and the Gaylord Seller Note was
paid in full.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1997, is as follows:
<TABLE>
<CAPTION>
1997
--------------------------------
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
-------- -------- -----
<S> <C> <C> <C>
DEBT
Debt under credit agreements...................... $784,420 $ -- $784,420
HC Crown Note (including accrued interest)........ 118,919 -- 118,587
Gaylord Seller Note (including accrued
interest)....................................... 229,283 -- 214,074
INTEREST RATE HEDGE AGREEMENTS
Swaps............................................. -- 405,000 (1,214)
Caps.............................................. -- 120,000 --
Collars........................................... -- 190,000 (437)
</TABLE>
F-72
<PAGE> 284
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As the long-term debt under the credit agreements bear interest at current
market rates, their carrying amount approximates fair market value at December
31, 1997. Fair value of the HC Crown Note is based upon trading activity at
December 31, 1997. Fair value of the Gaylord Seller Note is based on current
redemption value.
The weighted average interest pay rate for the Company's interest rate swap
agreements was 7.82% at December 31, 1997. The weighted average interest rate
for the Company's interest rate cap agreements was 8.49% at December 31, 1997.
The weighted average interest rates for the Company's interest rate collar
agreements were 9.04% and 7.57% for the cap and floor components, respectively,
at December 31, 1997.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would receive or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's Senior Credit Facility thereby reducing the exposure
to credit loss. The Company has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the results of
operations or the financial position of the Company.
F-73
<PAGE> 285
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMON STOCK:
The Company's common stock consist of the following at December 31, 1997:
<TABLE>
<S> <C>
CCA Holdings:
Common stock -- Class A, voting, $.01 par value, 100,000
shares authorized; 75,515 shares issued and
outstanding............................................ $ 1
Common stock -- Class B, voting, $.01 par value, 20,000
shares authorized; 4,300 shares issued and
outstanding............................................ --
Common stock -- Class C, nonvoting, $.01 par value, 5,000
shares authorized; 185 shares issued and outstanding... --
---
1
---
CCT Holdings:
Common stock -- Class A, voting, $.01 par value, 20,000
shares authorized; 16,726 shares issued and
outstanding............................................ --
Common stock -- Class B, voting, $.01 par value, 4,000
shares authorized; 3,000 shares issued and
outstanding............................................ --
Common stock -- Class C, nonvoting, $.01 par value, 1,000
shares authorized; 275 shares issued and outstanding... --
---
CC-LB:
Common stock -- Class A, voting, $.01 par value, 31,000
shares authorized, 27,850 shares issued and
outstanding............................................ --
Common stock -- Class B, voting, $.01 par value, 2,000
shares authorized, 1,500 shares issued and
outstanding............................................ --
Common stock -- Class C, nonvoting, $.01 par value, 2,000
shares authorized, 650 shares issued and outstanding... --
---
Total common stock................................ $ 1
===
</TABLE>
CCA HOLDINGS
The Class A Voting Common Stock (CCA Class A Common Stock) and Class C
Nonvoting Common Stock (CCA Class C Common Stock) have certain preferential
rights upon liquidation of CCA Holdings. In the event of liquidation,
dissolution or "winding up" of CCA Holdings, holders of CCA Class A and Class C
Common Stock are entitled to a preference of $1,000 per share. After such amount
is paid, holders of Class B Voting Common Stock (CCA Class B Common Stock) are
entitled to receive $1,000 per share. Thereafter, Class A and Class C
shareholders shall ratably receive the remaining proceeds.
If upon liquidation, dissolution or "winding up" the assets of CCA Holdings
are insufficient to permit payment to Class A and Class C shareholders for their
full preferential amounts, all assets of CCA Holdings shall then be distributed
ratably to Class A and Class C shareholders. Furthermore, if the proceeds from
liquidation are inadequate to pay Class B shareholders their full preferential
amounts, the proceeds are to be distributed on a pro rata basis to Class B
shareholders.
Upon the occurrence of any Conversion Event (as defined within the Amended
and Restated Certificate of Incorporation) Class C shareholders may convert any
or all of their outstanding shares into the same number of Class A shares.
Furthermore, CCA Holdings
F-74
<PAGE> 286
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
may automatically convert outstanding Class C shares into the same number of
Class A shares.
CCA Holdings is restricted from making cash dividends on its common stock
until the balance outstanding under the HC Crown Note is repaid.
Charter and Kelso entered into a Stockholders' Agreement providing for
certain restrictions on the transfer, sale or purchase of CCA Holdings' common
stock.
CCT HOLDINGS
The Class A Voting Common Stock (CCT Class A Common Stock) and Class C
Nonvoting Common Stock (CCT Class C Common Stock) have certain preferential
rights upon liquidation of CCT Holdings. In the event of liquidation,
dissolution or "winding up" of CCT Holdings, holders of CCT Class A Common Stock
and Class C Common Stock are entitled to a preference of $1,000 per share. After
such amount is paid, holders of Class B Voting Common Stock (CCT Class B Common
Stock) are entitled to receive $1,000 per share. Thereafter, Class A and Class C
shareholders shall ratably receive the remaining proceeds.
If upon liquidation, dissolution or "winding up" the assets of CCT Holdings
are insufficient to permit payment to Class A Common Stock and Class C
shareholders for their full preferential amount, all assets of the Company shall
then be distributed ratably to Class A and Class C shareholders. Furthermore, if
the proceeds from liquidation are inadequate to pay Class B shareholders their
full preferential amount, the proceeds are to be distributed on a pro rata basis
to Class B shareholders.
Upon the occurrence of any Conversion Event (as defined within the Amended
and Restated Certificate of Incorporation), Class C shareholders may convert any
or all of their outstanding shares into the same number of Class A shares.
Furthermore, CCT Holdings may automatically convert outstanding Class C shares
into the same number of Class A shares.
CCT Holdings is restricted from making cash dividends on its common stock
until the balance outstanding under the note payable to seller is repaid.
Charter and Kelso entered into a Stockholders' Agreement providing for
certain restrictions on the transfer, sale or purchase of CCT Holdings' common
stock.
CC-LB
The Class A Voting Common Stock (CC-LB Class A Common Stock) and Class C
Nonvoting Common Stock (CC-LB Class C Common Stock) have certain preferential
rights upon liquidation of CC-LB. In the event of liquidation, dissolution or
"winding up" of CC-LB, holders of CC-LB Class A Common Stock and Class C Common
Stock are entitled to a preference of $1,000 per share. After such amount is
paid, holders of Class B Voting Common Stock (CC-LB Class B Common Stock) are
entitled to receive $1,000 per share. Thereafter, Class A, Class B and Class C
shareholders shall ratably receive the remaining proceeds.
If upon liquidation, dissolution or "winding up" the assets of CC-LB are
insufficient to permit payment to Class A and Class C shareholders for their
full preferential amount,
F-75
<PAGE> 287
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
all assets of the Company shall then be distributed ratably to Class A and Class
C shareholders. Furthermore, if the proceeds from liquidation are inadequate to
pay Class B shareholders their full preferential amount, the proceeds are to be
distributed on a pro rata basis to Class B shareholders.
CC-LB Class C Common Stock may be converted into CC-LB Class A Common Stock
upon the transfer of CC-LB Class C Common Stock to a person not affiliated with
the seller. Furthermore, CC-LB may automatically convert outstanding Class C
shares into the same number of Class A shares.
11. RELATED PARTY TRANSACTIONS:
Charter provides management services to the Company under the terms of a
contract which provides for annual base fees equal to $9,277 and $9,485 for the
period from January 1, 1998, through December 23, 1998, and for the year ended
December 31, 1997, respectively, plus an additional fee equal to 30% of the
excess, if any, of operating cash flow (as defined in the management agreement)
over the projected operating cash flow. Payment of the additional fee is
deferred due to restrictions provided within the Company's credit agreements.
Deferred management fees bear interest at 8.0% per annum. The additional fees
for the periods from January 1, 1998, through December 23, 1998, and the years
ended December 31, 1997 and 1996, totaled $2,160, $1,990 and $1,255,
respectively. In addition, the Company receives financial advisory services from
an affiliate of Kelso, under terms of a contract which provides for fees equal
to $1,064 and $1,113 per annum as of January 1, 1998, through December 23, 1998,
and December 31, 1997, respectively. Management and financial advisory service
fees currently payable of $2,281 are included in payables to manager of cable
television systems -- related party at December 31, 1997.
The Company pays certain acquisition advisory fees to an affiliate of Kelso
and Charter, which typically equal approximately 1% of the total purchase price
paid for cable television systems acquired. Total acquisition fees paid to the
affiliate of Kelso for the period from January 1, 1998, through December 23,
1998, were $-0-. Total acquisition fees paid to the affiliate of Kelso in 1997
and 1996 were $-0- and $1,400, respectively. Total acquisition fees paid to
Charter for the period from January 1, 1998, through December 23, 1998, were
$-0-. Total acquisition fees paid to Charter in 1997 and 1996 were $-0- and
$1,400, respectively.
The Company and all entities managed by Charter collectively utilize a
combination of insurance coverage and self-insurance programs for medical,
dental and workers' compensation claims. Medical coverage provides for $2,435
aggregate stop loss protection and a loss limitation of $100 per person per
year. Workers' compensation coverage provides for $800 aggregate stop loss
protection and a loss limitation of $150 per person per year. Charges are
determined by independent actuaries at the present value of the actuarially
computed present and future liabilities for such benefits. The Company is
allocated its share of the charges monthly based upon its total number of
employees, historical claims and medical cost trend rates. Management considers
this allocation to be reasonable for the operations of the Company. For the
period from January 1, 1998, through December 23, 1998, the Company expensed
$1,950 relating to insurance allocations. During 1997 and 1996, the Company
expensed $1,689 and $2,065, respectively, relating to insurance allocations.
F-76
<PAGE> 288
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Beginning in 1996, the Company and other entities managed by Charter
employed the services of Charter's National Data Center (the "National Data
Center"). The National Data Center performs certain customer billing services
and provides computer network, hardware and software support to the Company and
other affiliated entities. The cost of these services is allocated based on the
number of customers. Management considers this allocation to be reasonable for
the operations of the Company. For the period from January 1, 1998, through
December 23, 1998, the Company expensed $843 relating to these services. During
1997 and 1996, the Company expensed $723 and $466 relating to these services,
respectively.
CCE-I maintains a regional office. The regional office performs certain
operational services on behalf of CCE-I and other affiliated entities. The cost
of these services is allocated to CCE-I and affiliated entities based on their
number of customers. Management considers this allocation to be reasonable for
the operations of CCE-I. From the period January 1, 1998, through December 23,
1998, the Company expensed $1,926 relating to these services. During 1997 and
1996, CCE-I expensed $861 and $799, respectively, relating to these services.
12. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Lease and rental costs charged to expense for the period from
January 1, 1998, through December 23, 1998, was $2,222. Rent expense incurred
under these leases during 1997 and 1996 was $1,956 and $1,704, respectively.
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expensed incurred for pole attachments for the period
from January 1, 1998, through December 23, 1998, was $2,430. Rent expense
incurred for pole attachments during 1997 and 1996 was $2,601 and $2,330,
respectively.
LITIGATION
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
13. REGULATION IN THE CABLE TELEVISION INDUSTRY:
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
F-77
<PAGE> 289
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 23,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation. The Company is subject to state regulation in
Connecticut.
14. INCOME TAXES:
Deferred tax assets and liabilities are recognized for the estimated future
tax consequence attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets
F-78
<PAGE> 290
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and liabilities are measured using the enacted tax rates in effect for the year
in which those temporary differences are expected to be recovered or settled.
Deferred income tax expense or benefit is the result of changes in the liability
or asset recorded for deferred taxes. A valuation allowance must be established
for any portion of a deferred tax asset for which it is more likely than not
that a tax benefit will not be realized.
For the period from January 1, 1998, through December 23, 1998, and the
years ended December 31, 1997 and 1996, no current provision (benefit) for
income taxes was recorded. The effective income tax rate is less than the
federal rate of 35% primarily due to providing a valuation allowance on deferred
income tax assets.
Deferred taxes are comprised of the following at December 31, 1997:
<TABLE>
<S> <C>
Deferred income tax assets:
Accounts receivable................................... $ 252
Other assets.......................................... 7,607
Accrued expenses...................................... 4,740
Deferred revenue...................................... 624
Deferred management fees.............................. 1,654
Tax loss carryforwards................................ 80,681
Tax credit carryforward............................... 1,360
Valuation allowance................................... (40,795)
---------
Total deferred income tax assets.............. 56,123
---------
Deferred income tax liabilities:
Property, plant and equipment......................... (38,555)
Franchise costs....................................... (117,524)
Other................................................. (11,407)
---------
Total deferred income tax liabilities......... (167,486)
---------
Net deferred income tax liability............. $(111,363)
=========
</TABLE>
At December 31, 1997, the Company had net operating loss (NOL)
carryforwards for regular income tax purposes aggregating $204,400, which expire
in various years from 1999 through 2012. Utilization of the NOLs carryforwards
is subject to certain limitations.
15. EMPLOYEE BENEFIT PLANS:
The Company's employees may participate in the Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 15% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Company contributes an amount equal to 50% of the first 5% of contributions by
each employee. For the period from January 1, 1998, through December 23, 1998,
the Company contributed $585 to the 401(k) plan. During 1997 and 1996, the
Company contributed approximately $499 and $435 to the 401(k) Plan,
respectively.
Certain employees of the Company are participants in the 1996 Charter
Communications/Kelso Group Appreciation Rights Plan (the "Plan"). The Plan
covers certain key employees and consultants within the group of companies and
partnerships
F-79
<PAGE> 291
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
controlled by affiliates of Kelso and managed by Charter. The Plan permits the
granting of up to 1,000,000 units, of which 705,000 were outstanding at December
31, 1997. Unless otherwise provided in a particular instance, units vest at a
rate of 20% per annum. The Plan entitles participants to receive payment of the
appreciated unit value for vested units, upon the occurrence of certain events
specified in the Plan (i.e. change in control, employee termination) The units
do not represent a right to an equity interest to any entities within the CCA
Group. Compensation expense is based on the appreciated unit value and is
amortized over the vesting period.
As a result of the acquisition of Charter and the Company, the Plan was
terminated, all outstanding units became 100% vested and all amounts were paid
by Charter in 1999. For the period from January 1, 1998, through December 23,
1998, the Company recorded $5,684 of expense, included in management fees, and a
contribution from Charter related to the Appreciation Rights Plan.
16. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings
(loss).
17. SUBSEQUENT EVENT:
Subsequent to December 23, 1998, CCA Holdings, CCT Holdings and CC-LB
converted to limited liability companies and are now known as CCA Holdings LLC,
CCT Holdings LLC and Charter Communications Long Beach, LLC, respectively.
F-80
<PAGE> 292
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CharterComm Holdings, L.P.:
We have audited the accompanying consolidated balance sheet of CharterComm
Holdings, L.P. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, partners' capital and cash flows for the
period from January 1, 1998, through December 23, 1998, and for the years ended
December 31, 1997 and 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CharterComm Holdings, L.P.
and subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for the period from January 1, 1998, through December 23,
1998, and for the years ended December 31, 1997 and 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
F-81
<PAGE> 293
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,742
Accounts receivable, net of allowance for doubtful
accounts of $330....................................... 3,158
Prepaid expenses and other................................ 342
--------
Total current assets.............................. 6,242
--------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 235,808
Franchises, net of accumulated amortization of $119,968... 480,201
--------
716,009
--------
OTHER ASSETS................................................ 16,176
--------
$738,427
========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 5,375
Accounts payable and accrued expenses..................... 30,507
Payables to manager of cable television systems -- related
party.................................................. 1,120
--------
Total current liabilities......................... 37,002
--------
DEFERRED REVENUE............................................ 1,719
--------
LONG-TERM DEBT, less current maturities..................... 666,662
--------
DEFERRED MANAGEMENT FEES.................................... 7,805
--------
DEFERRED INCOME TAXES....................................... 5,111
--------
REDEEMABLE PREFERRED LIMITED UNITS -- 577.81 units,
issued and outstanding.................................... 20,128
--------
PARTNERS' CAPITAL:
General Partner........................................... --
Common Limited Partners -- 220.24 units issued and
outstanding............................................ --
--------
Total partners' capital........................... --
--------
$738,427
========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-82
<PAGE> 294
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998, YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 23, --------------------
1998 1997 1996
------------ ---- ----
<S> <C> <C> <C>
REVENUES........................................ $196,801 $175,591 $120,280
-------- -------- --------
OPERATING EXPENSES:
Operating costs............................... 83,745 75,728 50,970
General and administrative.................... 14,586 12,607 9,327
Depreciation and amortization................. 86,741 76,535 53,133
Management fees -- related party.............. 14,780 8,779 6,014
-------- -------- --------
199,852 173,649 119,444
-------- -------- --------
Income (loss) from operations.............. (3,051) 1,942 836
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income............................... 211 182 233
Interest expense.............................. (66,121) (61,498) (41,021)
Other, net.................................... (1,895) 17 (468)
-------- -------- --------
(67,805) (61,299) (41,256)
-------- -------- --------
Loss before extraordinary item............. (70,856) (59,357) (40,420)
EXTRAORDINARY ITEM -- Loss on early retirement
of debt....................................... (6,264) -- --
-------- -------- --------
Net loss................................... (77,120) (59,357) (40,420)
REDEMPTION PREFERENCE ALLOCATION:
Special Limited Partner units................. -- -- (829)
Redeemable Preferred Limited units............ -- -- (4,081)
NET LOSS ALLOCATED TO REDEEMABLE PREFERRED
LIMITED UNITS................................. 20,128 2,553 4,063
-------- -------- --------
Net loss applicable to partners' capital
accounts................................. $(56,992) $(56,804) $(41,267)
======== ======== ========
NET LOSS ALLOCATION TO PARTNERS' CAPITAL
ACCOUNTS:
General Partner............................... $(56,992) $(21,708) $(38,391)
Common Limited Partners....................... -- (35,096) (2,876)
-------- -------- --------
$(56,992) $(56,804) $(41,267)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-83
<PAGE> 295
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- -----
<S> <C> <C> <C>
BALANCE, December 31, 1995........................ $ 29,396 $ 2,202 $ 31,598
Capital contributions........................... 30,703 2,300 33,003
Allocation of net loss.......................... (38,391) (2,876) (41,267)
-------- -------- --------
BALANCE, December 31, 1996........................ 21,708 1,626 23,334
Capital contributions........................... -- 33,470 33,470
Allocation of net loss.......................... (21,708) (35,096) (56,804)
-------- -------- --------
BALANCE, December 31, 1997........................ -- -- --
Capital contributions........................... 4,920 -- 4,920
Allocation of net loss.......................... (56,992) -- (56,992)
-------- -------- --------
BALANCE, December 23, 1998........................ $(52,072) $ -- $(52,072)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-84
<PAGE> 296
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998,
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 23, -----------------------
1998 1997 1996
------------ ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $ (77,120) $ (59,357) $ (40,420)
Adjustments to reconcile net loss to net cash
provided by operating activities --
Extraordinary item -- Loss on early
retirement of debt......................... 6,264 -- --
Depreciation and amortization................ 86,741 76,535 53,133
Amortization of debt issuance costs, debt
discount and interest rate cap
agreements................................. 14,563 14,212 9,564
Loss on disposal of property, plant and
equipment.................................. 1,714 203 367
Changes in assets and liabilities, net of
effects from acquisition --
Accounts receivable, net................... 2,000 369 (303)
Prepaid expenses and other................. (203) 943 245
Accounts payable and accrued expenses...... (1,970) 3,988 9,911
Payables to manager of cable television
systems, including deferred management
fees.................................... 9,456 3,207 3,479
Deferred revenue........................... 770 (82) 452
Other operating activities................. 5,378 -- --
--------- --------- ---------
Net cash provided by operating
activities.............................. 47,593 40,018 36,428
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (85,044) (72,178) (48,324)
Payments for acquisitions, net of cash
acquired..................................... (5,900) (159,563) (145,366)
Other investing activities...................... 5,280 1,577 (2,089)
--------- --------- ---------
Net cash used in investing activities........ (85,664) (230,164) (195,779)
--------- --------- ---------
</TABLE>
<TABLE>
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Borrowings of long-term debt.................... 547,400 231,250 260,576
Repayments of long-term debt.................... (505,300) (67,930) (34,401)
Partners' capital contributions................. -- 29,800 --
Payment of debt issuance costs.................. (3,651) (3,593) (11,732)
Payment of Special Limited Partnership units.... -- -- (43,243)
Repayments of note payable -- related party..... -- -- (15,000)
Payments for interest rate cap agreements....... -- -- (35)
--------- --------- ---------
Net cash provided by financing activities.... 38,449 189,527 156,165
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 378 (619) (3,186)
CASH AND CASH EQUIVALENTS, beginning of period.... 2,742 3,361 6,547
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.......... $ 3,120 $ 2,742 $ 3,361
========= ========= =========
CASH PAID FOR INTEREST............................ $ 61,559 $ 42,538 $ 28,860
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-85
<PAGE> 297
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
CharterComm Holdings, L.P. (CharterComm Holdings) was formed in March 1996
with the contributions of Charter Communications Southeast Holdings, L.P.
(Southeast Holdings), Charter Communications, L.P. (CC-I) and Charter
Communications II, L.P. (CC-II). This contribution was accounted for as a
reorganization under common control and, accordingly, the consolidated financial
statements and notes have been restated to include the results and financial
position of Southeast Holdings, CC-I and CC-II.
Through December 23, 1998, CharterComm Holdings was owned 75.3% by
affiliates of Charterhouse Group International, Inc., a privately owned
investment firm (collectively referred to herein as "Charterhouse"), indirectly
owned 5.7% by Charter Communications, Inc. (Charter), manager of the
Partnership's (as defined below) cable television systems, and owned 19.0%
primarily by other institutional investors.
Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through
a series of transactions. In conjunction with Mr. Allen's acquisition, Charter
acquired 100% of the outstanding partnership interests in CharterComm Holdings
on December 23, 1998.
The accompanying consolidated financial statements include the accounts of
CharterComm Holdings and its subsidiaries collectively referred to as the
"Partnership" herein. All significant intercompany balances and transactions
have been eliminated in consolidation.
In 1998, the Partnership through its subsidiaries provided cable television
service to customers in Alabama, Georgia, Kentucky, Louisiana, North Carolina,
South Carolina and Tennessee.
CASH EQUIVALENTS
The Partnership considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997,
cash equivalents consist primarily of repurchase agreements. These investments
are carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installation. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, and equipment replacement and betterments are capitalized.
F-86
<PAGE> 298
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems............................. 3-15 years
Buildings and leasehold improvements................... 5-15 years
Vehicles and equipment................................. 3-5 years
</TABLE>
In 1997, the Partnership shortened the estimated useful lives of certain
property, plant and equipment for depreciation purposes. As a result, an
additional $4,775 of depreciation was recorded during 1997.
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable television systems represent management's
estimate of fair value and are generally amortized using the straight-line
method over a period of 15 years. In addition, approximately $100,000 of
franchise rights are being amortized over a period of 3 to 11 years.
OTHER ASSETS
Debt issuance costs are being amortized to interest expense over the term
of the related debt. The interest rate cap costs are being amortized over the
terms of the agreement, which approximates three years.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of December 31, 1997, no installation revenue has
been deferred, as direct selling costs exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Partnership ranging up to a federally
mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are
collected from the Partnership's customers and
F-87
<PAGE> 299
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are periodically remitted to local franchises. Franchise fees collected and paid
are reported as revenue.
INTEREST RATE HEDGE AGREEMENTS
The Partnership manages fluctuations in interest rates by using interest
rate hedge agreements, as required by certain debt agreements. Interest rate
swaps, caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Partnership's interest rate swap agreements require the Partnership to
pay a fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Partnership to reduce the
impact of rising interest rates on floating rate debt.
The Partnership's participation in interest rate hedging transactions
involves instruments that have a close correlation with its debt, thereby
managing its risk. Interest rate hedge agreements have been designed for hedging
purposes and are not held or issued for speculative purposes.
OTHER INCOME (EXPENSE)
Other, net includes gain and loss on disposition of property, plant and
equipment, and other miscellaneous items, all of which are not directly related
to the Partnership's primary line of business. In 1996, the Partnership recorded
$367 of nonoperating losses for its portion of insurance deductibles pertaining
to damage caused by hurricanes to certain cable television systems.
INCOME TAXES
Income taxes are the responsibility of the partners and are not provided
for in the accompanying financial statements except for Peachtree Cable TV, Inc.
(Peachtree), an indirect wholly owned subsidiary, which is a C corporation and
for which taxes are presented in accordance with SFAS No. 109.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS:
In 1998, the Partnership acquired cable television systems in one
transaction for a purchase price net of cash acquired, of $5,900. The excess
cost of properties acquired over
F-88
<PAGE> 300
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the amounts assigned to net tangible assets at the date of acquisition was
$5,000 and is included in franchises.
In 1997, the Partnership acquired cable television systems in three
separate transactions for an aggregate purchase price, net of cash acquired, of
$159,600. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the date of acquisition was $126,400 and is
included in franchises.
In 1996, the Partnership acquired cable television systems in three
separate transactions for an aggregate purchase price, net of cash acquired, of
$145,400. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the date of acquisition was $118,200 and is
included in franchises.
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.
Unaudited pro forma operating results for the 1997 acquisitions as though
the acquisitions had been made on January 1, 1997, with pro forma adjustments to
give effect to amortization of franchises, interest expense and certain other
adjustments are as follows.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C>
Revenues............................................... $182,770
Income from operations................................. 2,608
Net loss............................................... (61,389)
</TABLE>
The unaudited pro forma information does not purport to be indicative of
the results of operations had these transactions been completed as of the
assumed date or which may be obtained in the future.
3. DISTRIBUTIONS AND ALLOCATIONS:
For financial reporting purposes, redemption preference allocations,
profits and losses are allocated to partners in accordance with the liquidation
provision of the applicable partnership agreement.
As stated in the Partnership Agreement, the Partnership may make
distributions to the partners out of all available funds at such times and in
such amounts as the General Partner may determine in its sole discretion.
4. REDEEMABLE PREFERRED LIMITED UNITS:
As of December 31, 1995, certain Redeemable Preferred Limited Partner units
of CC-I and CC-II were outstanding. During 1996, the Partnership issued certain
Redeemable Preferred Limited Partner units of CharterComm Holdings.
The Preferred Limited Partners' preference return has been reflected as an
addition to the Redeemable Preferred Limited Partner units, and the decrease has
been allocated to
F-89
<PAGE> 301
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the General Partner and Common Limited Partner consistent with the liquidation
and distribution provisions in the partnership agreements.
At December 23, 1998, the balance related to the CharterComm Holdings
Preferred Limited Partner units was as follows:
<TABLE>
<S> <C>
Contribution, March 1996................................. $ 20,052
1996 redemption preference allocation.................. 2,629
Allocation of net loss................................. --
--------
Balance, December 31, 1996............................... 22,681
1997 redemption preference allocation.................. --
Allocation of net loss................................. (2,553)
--------
Balance, December 31, 1997............................... 20,128
1998 redemption preference allocation.................. --
Allocation of net loss................................. (20,128)
--------
Balance, December 23, 1998............................... $ --
========
</TABLE>
The 1998 and 1997 redemption preference allocations of $4,617 and $4,020,
respectively, have not been reflected in the Preferred Limited Partners' capital
accounts since the General Partner and Common Limited Partners' capital accounts
have been reduced to $-0-.
5. SPECIAL LIMITED PARTNER UNITS (CC-I):
Prior to March 28, 1996, certain Special Limited Partner units of CC-I were
outstanding. CC-I's profits were allocated to the Special Limited Partners until
allocated profits equaled the unrecovered preference amount (preference amounts
range from 6% to 17.5% of the unrecovered initial cost of the partnership units
and unrecovered preference amounts per annum). When there was no profit to
allocate, the preference return was reflected as a decrease in Partners'
Capital.
In accordance with a purchase agreement and through the use of a capital
contribution from Charter Communications Southeast, L.P. (Southeast), a wholly
owned subsidiary of Southeast Holdings, resulting from the proceeds of the Notes
(see Note 9), CC-I paid the Special Limited Partners $43,243 as full
consideration for their partnership interests on March 28, 1996.
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1997:
<TABLE>
<S> <C>
Cable distribution systems............................... $274,837
Land, buildings and leasehold improvements............... 5,439
Vehicles and equipment................................... 14,669
--------
294,945
Less -- Accumulated depreciation......................... (59,137)
--------
$235,808
========
</TABLE>
F-90
<PAGE> 302
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense for the period from January 1, 1998, through December
23, 1998, and for the years ended December 31, 1997 and 1996, was $44,307,
$33,634 and $16,997, respectively.
7. OTHER ASSETS:
Other assets consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Debt issuance costs....................................... $18,385
Other assets.............................................. 3,549
-------
21,934
Less -- Accumulated amortization.......................... (5,758)
-------
$16,176
=======
</TABLE>
As a result of the payment and termination of the CC-I Credit Agreement and
CC-II Credit Agreement (see Note 9), debt issuance costs of $6,264 were written
off as an extraordinary loss on early retirement of debt for the period from
January 1, 1998, through December 23, 1998.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1997:
<TABLE>
<S> <C>
Accrued interest.......................................... $ 9,804
Franchise fees............................................ 3,524
Programming costs......................................... 3,391
Accounts payable.......................................... 2,479
Capital expenditures...................................... 2,099
Salaries and related benefits............................. 2,079
Other..................................................... 7,131
-------
$30,507
=======
</TABLE>
9. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Senior Secured Discount Debentures....................... $146,820
11 1/4% Senior Notes..................................... 125,000
Credit Agreements:
CC-I................................................... 112,200
CC-II.................................................. 339,500
--------
723,520
Less:
Current maturities..................................... (5,375)
Unamortized discount................................... (51,483)
--------
$666,662
========
</TABLE>
F-91
<PAGE> 303
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SENIOR SECURED DISCOUNT DEBENTURES
On March 28, 1996, Southeast Holdings and CharterComm Holdings Capital
Corporation (Holdings Capital), a wholly owned subsidiary of Southeast Holdings
(collectively the "Debentures Issuers"), issued $146,820 of Senior Secured
Discount Debentures (the "Debentures") for proceeds of $75,000. Proceeds from
the Debentures were used to pay fees and expenses related to the issuance of the
Debentures and the balance of $72,400 was a capital contribution to Southeast.
The Debentures are secured by all of Southeast Holdings' ownership interest in
Southeast and rank pari passu in right and priority of payment to all other
existing and future indebtedness of the Debentures Issuers. The Debentures are
effectively subordinated to the claims of creditors of Southeast Holdings'
subsidiaries, including the Combined Credit Agreement (as defined herein). The
Debentures are redeemable at the Debentures Issuers' option at amounts
decreasing from 107% to 100% of principal, plus accrued and unpaid interest to
the redemption date, beginning on March 15, 2001. The Debentures Issuers are
required to make an offer to purchase all of the Debentures, at a purchase price
equal to 101% of the principal amount, together with accrued and unpaid
interest, upon a Change in Control, as defined in the Debentures Indenture. No
interest is payable on the Debentures prior to March 15, 2001. Thereafter,
interest on the Debentures is payable semiannually in arrears beginning
September 15, 2001, until maturity on March 15, 2007. The discount on the
Debentures is being accreted using the effective interest method at an interest
rate of 14% from the date of issuance to March 15, 2001.
11 1/4% SENIOR NOTES
Southeast and CharterComm Capital Corporation (Southeast Capital), a wholly
owned subsidiary of Southeast (collectively the "Notes Issuers"), issued
$125,000 aggregate principal amount of 11 1/4% Senior Notes (the "Notes"). The
Notes are senior unsecured obligations of the Notes Issuers and rank pari passu
in right and priority of payment to all other existing and future indebtedness
of the Notes Issuers. The Notes are effectively subordinated to the claims of
creditors of Southeast's subsidiaries, including the lenders under the Combined
Credit Agreement. The Notes are redeemable at the Notes Issuers' option at
amounts decreasing from 105.625% to 100% of principal, plus accrued and unpaid
interest to the date of redemption, beginning on March 15, 2001. The Notes
Issuers are required to make an offer to purchase all of the Notes, at a
purchase price equal to 101% of the principal amount, together with accrued and
unpaid interest, upon a Change in Control, as defined in the Notes Indenture.
Interest is payable semiannually on March 15 and September 15 until maturity on
March 15, 2006.
Southeast and Southeast Holdings are holding companies with no significant
assets other than their direct and indirect investments in CC-I and CC-II.
Southeast Capital and Holdings Capital were formed solely for the purpose of
serving as co-issuers and have no operations. Accordingly, the Notes Issuers and
Debentures Issuers must rely upon distributions from CC-I and CC-II to generate
funds necessary to meet their obligations, including the payment of principal
and interest on the Notes and Debentures.
F-92
<PAGE> 304
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED CREDIT AGREEMENT
In June 1998, CC-I and CC-II (the "Borrowers") replaced their existing
credit agreements and entered into a combined credit agreement (the "Combined
Credit Agreement"), which provides for two term loan facilities, one with the
principal amount of $200,000 that matures on June 30, 2007, and the other with
the principal amount of $150,000 that matures on December 31, 2007. The Combined
Credit Agreement also provides for a $290,000 revolving credit facility, with a
maturity date of June 30, 2007. Amounts under the Combined Credit Agreement bear
interest at the LIBOR Rate or Base Rate, as defined, plus a margin of up to
2.0%. The variable interest rates ranged from 6.69% to 7.31% at December 23,
1998.
Commencing March 31, 2002, and at the end of each calendar quarter
thereafter, the available borrowings for the revolving credit facility and the
$200,000 term loan shall be reduced on an annual basis by 11.0% in 2002 and
14.6% in 2003. Commencing March 31, 2002, and at the end of each calendar
quarter thereafter, the available borrowings for the $150,000 term loan shall be
reduced on an annual basis by 1.0% in 2002 and 1.0% in 2003. A quarterly
commitment fee of between 0.25% and 0.375% per annum is payable on the
unborrowed balance of the revolving credit facility.
The Debentures, Notes and Combined Credit Agreement require the Partnership
to comply with various financial and nonfinancial covenants including the
maintenance of a ratio of debt to annualized operating cash flow, as defined,
not to exceed 5.25 to 1 at December 23, 1998. These debt instruments also
contain substantial limitations on, or prohibitions of, distributions,
additional indebtedness, liens, asset sales and certain other items.
CC-I CREDIT AGREEMENT
CC-I maintained a credit agreement (the "CC-I Credit Agreement") with a
consortium of banks for borrowings up to $127,200, consisting of a revolving
line of credit of $63,600 and a term loan of $63,600. Interest accrued, at
CC-I's option, at rates based upon the Base Rate, as defined in the CC-I Credit
Agreement, LIBOR, or prevailing bid rates of certificates of deposit plus the
applicable margin based upon CC-I's leverage ratio at the time of the
borrowings. The variable interest rates ranged from 7.75% to 8.00% and 7.44% to
7.50% at December 31, 1997 and 1996, respectively.
In June 1998, the CC-I Credit Agreement was repaid and terminated in
conjunction with the establishment of the Combined Credit Agreement.
CC-II CREDIT AGREEMENT
CC-II maintained a credit agreement (the "CC-II Credit Agreement") with a
consortium of banks for borrowings up to $390,000, consisting of a revolving
credit facility of $215,000, and two term loans totaling $175,000. Interest
accrued, at CC-II's option, at rates based upon the Base Rate, as defined in the
CC-II Credit Agreement, LIBOR, or prevailing bid rates of certificates of
deposit plus the applicable margin based upon CC-II's leverage ratio at the time
of the borrowings. The variable interest rates ranged from 7.63% to 8.25% and
7.25% to 8.125% at December 31, 1997 and 1996, respectively.
F-93
<PAGE> 305
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the CC-II Credit Agreement was repaid and terminated in
conjunction with the establishment of the Combined Credit Agreement.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1997, is as follows:
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
-------- -------- -----
<S> <C> <C> <C>
DEBT
Senior Secured Discount Debentures........ $ 95,337 $ -- $115,254
11 1/4% Senior Notes...................... 125,000 -- 136,875
CC-I Credit Agreement..................... 112,200 -- 112,200
CC-II Credit Agreement.................... 339,500 -- 339,500
INTEREST RATE HEDGE AGREEMENTS
CC-I:
Swaps................................... -- 100,000 (797)
CC-II:
Swaps................................... -- 170,000 (1,030)
Caps.................................... -- 70,000 --
Collars................................. -- 55,000 (166)
</TABLE>
As the CC-I and CC-II Credit Agreements bear interest at current market
rates, their carrying amounts approximate fair market values at December 31,
1997. The fair value of the Notes and the Debentures is based on current
redemption value.
The weighted average interest pay rate for CC-I interest rate swap
agreements was 8.07% at December 31, 1997.
The weighted average interest pay rate for CC-II interest rate swap
agreements was 8.03% at December 31, 1997. The weighted average interest rate
for CC-II interest cap agreements was 8.48% at December 31, 1997. The weighted
average interest rates for CC-II interest rate collar agreements were 9.01% and
7.61% for the cap and floor components, respectively, at December 31, 1997.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the
Partnership's exposure through its use of interest rate hedge agreements. The
amounts exchanged are determined by reference to the notional amount and the
other terms of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Partnership would receive or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Partnership's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Partnership's credit
F-94
<PAGE> 306
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
facilities thereby reducing the exposure to credit loss. The Partnership has
policies regarding the financial stability and credit standing of major
counterparties. Nonperformance by the counterparties is not anticipated nor
would it have a material adverse effect on the results of operations or the
financial position of the Partnership.
11. INCOME TAXES:
The book value of the Partnership's net assets (excluding Peachtree)
exceeds its tax reporting basis by $2,919 as of December 31, 1997.
As of December 31, 1997, temporary differences and carryforwards that gave
rise to deferred income tax assets and liabilities for Peachtree are as follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Accounts receivable..................................... $ 4
Accrued expenses........................................ 29
Deferred management fees................................ 111
Deferred revenue........................................ 24
Tax loss carryforwards.................................. 294
Tax credit carryforwards................................ 361
-------
Total deferred income tax assets................ 823
-------
Deferred income tax liabilities:
Property, plant and equipment........................... (1,372)
Franchises and other assets............................. (4,562)
-------
Total deferred income tax liabilities........... (5,934)
-------
Net deferred income tax liability............... $(5,111)
=======
</TABLE>
12. RELATED PARTY TRANSACTIONS:
Charter provides management services to the Partnership under the terms of
contracts which provide for fees equal to 5% of the Partnership's gross service
revenues. The debt agreements prohibit payment of a portion of such management
fees (40% for both CC-I and CC-II) until repayment in full of the outstanding
indebtedness. The remaining 60% of management fees, are paid quarterly through
December 31, 1998. Thereafter, the entire fee may be deferred if a multiple of
EBITDA, as defined, does not exceed outstanding indebtedness of CC-I and CC-II.
In addition, payments due on the Notes and Debentures shall be paid before any
deferred management fees are paid. Expenses recognized under the contracts for
the period from January 1, 1998, through December 23, 1998, were $9,860.
Expenses recognized under the contracts during 1997 and 1996 were $8,779 and
$6,014, respectively. Management fees currently payable of $1,432 are included
in payables to manager of cable television systems -- related party at December
31, 1997.
The Partnership and all entities managed by Charter collectively utilize a
combination of insurance coverage and self-insurance programs for medical,
dental and workers' compensation claims. Medical coverage provides for $2,435
aggregate stop loss protection and a loss limitation of $100 per person per
year. Workers' compensation coverage provides for $800 aggregate stop loss
protection and a loss limitation of $150 per person per year.
F-95
<PAGE> 307
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Charges are determined by independent actuaries at the present value of the
actuarially computed present and future liabilities for such benefits. The
Partnership is allocated its share of the charges monthly based upon its total
number of employees, historical claims and medical cost trend rates. Management
considers this allocation to be reasonable for the operations of the
Partnership. For the period from January 1, 1998, through December 23, 1998, the
Partnership expensed $1,831 relating to insurance allocations. During 1997 and
1996, the Partnership expensed $1,524 and $1,136, respectively, relating to
insurance allocations.
The Partnership employs the services of Charter's National Data Center (the
"National Data Center"). The National Data Center performs certain customer
billing services and provides computer network, hardware and software support
for the Partnership and other entities managed by Charter. The cost of these
services is allocated based on the number of basic customers. Management
considers this allocation to be reasonable for the operations of the
Partnership. For the period from January 1, 1998, through December 23, 1998, the
Partnership expensed $685 relating to these services. During 1997 and 1996, the
Partnership expensed $606 and $345, respectively, relating to these services.
CC-I, CC-II and other entities managed by Charter maintain regional
offices. The regional offices perform certain operational services. The cost of
these services is allocated based on number of basic customers. Management
considers this allocation to be reasonable for the operations of the
Partnership. For the period from January 1, 1998, through December 23, 1998, the
Partnership expensed $3,009 relating to these services. During 1997 and 1996,
the Partnership expensed $1,992 and $1,294, respectively, relating to these
services.
The Partnership pays certain acquisition advisory fees to Charter and
Charterhouse for cable television systems acquired. Total acquisition fees paid
to Charter for the period from January 1, 1998, through December 23, 1998, were
$-0-. Total acquisition fees paid to Charter in 1997 and 1996 were $982 and
$1,738, respectively. Total acquisition fees paid to Charterhouse for the period
from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition
fees paid to Charterhouse in 1997 and 1996 were $982 and $1,738, respectively.
During 1997, the ownership of CharterComm Holdings changed as a result of
CharterComm Holdings receiving a $25,000 cash contribution from an institutional
investor, a $3,000 cash contribution from Charterhouse and a $2,000 cash
contribution from Charter, as well as the transfer of assets and liabilities of
a cable television system through a series of transactions initiated by Charter
and Charterhouse. Costs of $200 were incurred in connection with the cash
contributions. These contributions were contributed to Southeast Holdings which,
in turn, contributed them to Southeast.
13. COMMITMENTS AND CONTINGENCIES:
LEASES
The Partnership leases certain facilities and equipment under noncancelable
operating leases. Lease and rental costs charged to expense for the period from
January 1, 1998,
F-96
<PAGE> 308
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
through December 23, 1998, was $642. Rent expense incurred under leases during
1997 and 1996 was $615 and $522, respectively.
The Partnership also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Partnership anticipates that
such rentals will recur. Rent expense incurred for pole rental attachments for
the period from January 1, 1998, through December 23, 1998, was $3,261. Rent
expense incurred for pole attachments during 1997 and 1996 was $2,930 and
$2,092, respectively.
LITIGATION
The Partnership is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Partnership's consolidated financial position or results of
operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 23,
1998, the amount returned by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The
F-97
<PAGE> 309
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
14. EMPLOYEE BENEFIT PLANS:
The Partnership's employees may participate in Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 15% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Partnership contributes an amount equal to 50% of the first 5% of contributions
by each employee. For the period from January 1, 1998, through December 23,
1998, the Partnership contributed $305. During 1997 and 1996, the Partnership
contributed $262 and $149, respectively.
Certain Partnership employees participate in the 1996 Charter
Communications/ Charterhouse Group Appreciation Rights Plan (the "Appreciation
Rights Plan"). The Appreciation Rights Plan covers certain key employees and
consultants within the group of companies and partnerships controlled by
Charterhouse and managed by Charter. The Plan permits the granting of up to
1,000,000 units, of which 925,000 were outstanding at December 31, 1997. Unless
otherwise provided in a particular instance, units vest at a rate of 20% per
annum. The Plan entitles participants to receive payment of the appreciated unit
value for vested units, upon the occurrence of certain events specified in the
Plan (i.e. change in control, employee termination). The units do not represent
a right to an equity interest in CharterComm Holdings. Compensation expense is
based on the appreciated unit value and is amortized over the vesting period.
As a result of the acquisition of Charter and the Partnership, the Plan was
terminated, all outstanding units became 100% vested and all amounts were paid
by Charter in 1999. For the period from January 1, 1998, through December 23,
1998, the Partnership recorded $4,920 of expense, included in management fees,
and a contribution from Charter related to the Appreciation Rights Plan.
F-98
<PAGE> 310
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Partnership
has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings
(loss).
16. SUBSEQUENT EVENT:
Subsequent to December 31, 1998, CharterComm Holdings, L.P. and all of its
subsidiaries converted to limited liability companies and are now known as
CharterComm Holdings LLC and subsidiaries.
F-99
<PAGE> 311
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Greater Media, Inc.:
We have audited the accompanying combined balance sheets of Greater Media
Cablevision Systems (see Note 1) (collectively, the "Combined Systems") included
in Greater Media, Inc., as of September 30, 1998 and 1997, and the related
combined statements of income, changes in net assets, and cash flows for each of
the three years in the period ended September 30, 1998. These combined financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Combined Systems, as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 2, 1999
F-100
<PAGE> 312
GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, ------------------
1999 1998 1997
--------- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 2,440 $ 4,080 $ 3,680
Accounts receivable (less allowance for doubtful
accounts of $308 (unaudited), $244 and
$337)........................................ 2,577 2,755 2,739
Prepaid expenses and other current assets....... 3,052 2,746 1,949
------- ------- -------
Total current assets.................... 8,069 9,581 8,368
Property and equipment, net....................... 58,196 54,468 41,971
Intangible assets, net............................ 2,653 2,690 1,647
Other assets...................................... 80 77 103
------- ------- -------
Total assets............................ $68,998 $66,816 $52,089
======= ======= =======
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable and accrued expenses........... $ 6,022 $ 7,125 $ 5,299
Customers' prepayments and deferred installation
revenue...................................... 1,904 1,910 1,815
------- ------- -------
Total current liabilities............... 7,926 9,035 7,114
Other long-term liabilities....................... 3,618 3,650 3,920
Net assets........................................ 57,454 54,131 41,055
------- ------- -------
Total liabilities and net assets........ $68,998 $66,816 $52,089
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined balance
sheets.
F-101
<PAGE> 313
GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1)
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, YEAR ENDED SEPTEMBER 30,
----------------- ---------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES....................... $40,515 $37,389 $77,127 $73,436 $66,816
------- ------- ------- ------- -------
OPERATING EXPENSES:
Operating expenses............... 17,356 16,009 32,665 31,115 29,460
General and administrative....... 5,850 5,313 10,869 11,211 10,321
Corporate charges................ 2,057 1,882 3,888 3,696 3,365
Depreciation and amortization.... 4,628 3,631 8,183 7,368 7,353
------- ------- ------- ------- -------
29,891 26,835 55,605 53,390 50,499
------- ------- ------- ------- -------
Income from operations........ 10,624 10,554 21,522 20,046 16,317
OTHER EXPENSES:
Interest expense, net.............. (297) (177) (504) (307) (764)
Other.............................. 17 (15) (532) (957) (366)
------- ------- ------- ------- -------
INCOME BEFORE PROVISION IN LIEU OF
INCOME TAXES..................... 10,344 10,362 20,486 18,782 15,187
Provision in lieu of income taxes
(Note 6)......................... 4,199 4,025 8,008 7,964 5,987
------- ------- ------- ------- -------
Net income......................... $ 6,145 $ 6,337 $12,478 $10,818 $ 9,200
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-102
<PAGE> 314
GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1)
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
-----
<S> <C>
Balance, September 30, 1995................................. $ 42,185
Net income................................................ 9,200
Provision in lieu of income taxes......................... 5,987
Net payments to affiliates................................ (17,038)
--------
Balance, September 30, 1996................................. 40,334
Net income................................................ 10,818
Provision in lieu of income taxes......................... 7,964
Net payments to affiliates................................ (18,061)
--------
Balance, September 30, 1997................................. 41,055
Net income................................................ 12,478
Provision in lieu of income taxes......................... 8,008
Net payments to affiliates................................ (7,410)
--------
Balance, September 30, 1998................................. 54,131
Net income (unaudited).................................... 6,145
Provision in lieu of income taxes (unaudited)............. 4,199
Net payments to affiliates (unaudited).................... (7,021)
--------
Balance, March 31, 1999 (unaudited)......................... $ 57,454
========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-103
<PAGE> 315
GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MARCH 31, YEAR ENDED SEPTEMBER 30,
------------------- ----------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income............................ $ 6,145 $ 6,337 $12,478 $10,818 $ 9,200
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision in lieu of income taxes... 4,199 4,025 8,008 7,964 5,987
Depreciation and amortization....... 4,628 3,631 8,183 7,368 7,353
(Gain) loss on sale of fixed
assets........................... -- (19) 300 715 274
Changes in assets and liabilities:
Accounts receivable, prepaid
expenses and other assets........ (129) (3,277) (813) (1,115) (498)
Other assets........................ (3) 27 24 (30) (11)
Accounts payable and accrued
expenses......................... (1,103) 700 1,825 (440) (1,900)
Customers' prepayments and deferred
installation revenue............. (6) 25 96 367 94
Customers' deposits and deferred
revenue.......................... (32) (67) (270) (69) 466
-------- -------- ------- ------- --------
Net cash provided by operating
activities.......................... 13,699 11,382 29,831 25,578 20,965
-------- -------- ------- ------- --------
Cash flow from investing activities:
Capital expenditures.................. (8,319) (10,447) (21,049) (7,587) (5,122)
Proceeds from disposition of property
and equipment....................... -- 19 72 -- 128
Purchase of licenses.................. -- (50) (1,044) (99) --
-------- -------- ------- ------- --------
Net cash used in investing
activities.......................... (8,319) (10,478) (22,021) (7,686) (4,994)
-------- -------- ------- ------- --------
Cash flow from financing activities:
Net payments to affiliates............ (7,020) (1,759) (7,410) (18,061) (17,038)
-------- -------- ------- ------- --------
Net increase (decrease) in cash....... (1,640) (855) 400 (169) (1,067)
Cash and cash equivalents, beginning
of year............................. 4,080 3,680 3,680 3,849 4,916
-------- -------- ------- ------- --------
Cash and cash equivalents, end of
year................................ $ 2,440 $ 2,825 $ 4,080 $ 3,680 $ 3,849
======== ======== ======= ======= ========
Supplemental disclosure of cash flow
information:
Non-affiliate interest paid during
the year......................... $ 65 $ 90 $ 296 $ 155 $ 447
======== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-104
<PAGE> 316
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BASIS OF PRESENTATION AND OPERATIONS
Greater Media Cablevision Systems is the owner and operator of the
following Massachusetts-based cable television systems: Auburn, Boylston,
Chicopee, Dudley, East Longmeadow, Easthampton, Grafton, Hampden, Holden,
Leicester, Ludlow, Millbury, Northborough, Northbridge, Oxford, Paxton,
Southampton, Southborough, Southbridge, Spencer, Sturbridge, Upton, Webster,
West Boylston, West Brookfield, Westborough, Wilbraham and Worcester ("the
Combined Systems"). The Combined Systems are wholly-owned by Greater Media
Cablevision, Inc. ("the Company"). The combined financial statements do not
include the accounts of Greater Philadelphia Cablevision, Inc. or Greater
Philadelphia Cablevision Limited Partnership (the "Philadelphia System"), which
are also wholly-owned by the Company. The Company is a wholly-owned subsidiary
of Greater Media, Inc. ("the Parent"). In February, 1999 the Parent and the
Company entered into an agreement ("Sales Agreement") to sell the net assets of
the Company including the Combined Systems but excluding the Philadelphia
Systems to Charter Communications Holdings, LLC.
Significant intercompany accounts and transactions between the Combined
Systems have been eliminated in the combined financial statements. Significant
accounts and transactions with the Parent and other affiliates are disclosed as
related party transactions (See Note 7).
The Combined Systems primarily provide cable television services to
subscribers in central and western Massachusetts.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Maintenance and repair costs are expensed when incurred. For financial
reporting purposes, depreciation is provided on the straight-line method based
on the following estimated useful lives:
<TABLE>
<CAPTION>
CLASSIFICATION YEARS
-------------- -----
<S> <C>
Land improvements........................................ 20
Buildings................................................ 15-40
Furniture, fixtures and equipment........................ 3-15
Trunk and distribution systems........................... 7-12
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill amortized over forty years
and costs incurred in obtaining and renewing cable franchises which are
amortized over the life of the respective franchise agreements.
F-105
<PAGE> 317
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUES
Cable revenues from basic and premium services are recognized when the
related services are provided.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
QUARTERLY RESULTS
The financial statements included herein as of December 31, 1998 and for
the three months ended December 31, 1998 and 1997 have been prepared by the
Company without audit. In the opinion of management, all adjustments have been
made which are of a normal recurring nature necessary to present fairly the
Combined Systems' financial position as of December 31, 1998 and the results of
operations, changes in net assets and cash flows for the three months ended
December 31, 1998 and 1997. Certain information and footnote disclosures have
been condensed or omitted for these periods. The results for interim periods are
not necessarily indicative of results for the entire year.
2. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid and other current assets consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Franchise grant.................................. $1,445 $ 604
Corporate business tax........................... 1,015 882
Other............................................ 286 463
------ ------
Prepaid expenses and other current assets........ $2,746 $1,949
====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and land improvements................... $ 1,229 $ 1,134
Buildings.................................... 4,521 4,521
Furniture, fixtures and equipment............ 5,503 4,822
Trunk and distribution systems............... 109,253 97,042
Construction in progress..................... 9,026 4,450
-------- --------
129,532 111,969
Accumulated depreciation..................... 75,064 69,998
-------- --------
Property and equipment, net.................. $ 54,468 $ 41,971
======== ========
</TABLE>
F-106
<PAGE> 318
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense for the years ended September 30, 1998, 1997 and 1996
was $8,081, $7,337, and $7,314, respectively. Construction in progress results
primarily from costs to upgrade the systems to fiber optic technologies in the
areas served by the Combined Systems.
4. INTANGIBLE ASSETS
Intangible assets consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Franchise agreements............................. $3,230 $2,883
Customer lists................................... 1,751 1,751
Organization expenses............................ 146 146
Goodwill......................................... 2,260 1,510
Covenant not to compete.......................... 40 40
------ ------
7,427 6,330
Accumulated amortization......................... 4,737 4,683
------ ------
Intangible assets, net........................... $2,690 $1,647
====== ======
</TABLE>
Amortization expense for the years ended September 30, 1998, 1997 and 1996
was $102, $31 and $39, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at September
30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accounts payable................................. $4,733 $3,544
Rate refund liability............................ 923 481
Programming expenses............................. 586 557
Other............................................ 883 717
------ ------
$7,125 $5,299
====== ======
</TABLE>
6. INCOME TAXES
The Combined Systems are included in the consolidated federal income tax
return of the Parent. However, the Parent is responsible for tax payments
applicable to the Combined Systems. The combined financial statements reflect a
provision in lieu of income taxes as if the combined systems were filing on a
separate company basis. Accordingly, the Combined Systems have included the
provision in lieu of income taxes as a component of net assets for all periods
presented.
The provision in lieu of income taxes approximates the amount of tax
computed using U.S. statutory rates, after reflecting state income tax expense
of $2,053, $1,924 and $1,486, for 1998, 1997 and 1996, respectively.
F-107
<PAGE> 319
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As the Sales Agreement represents a sale of assets, Charter Communications
Holdings, LLC will have new tax basis in the Combined Systems' assets and
liabilities acquired.
7. RELATED PARTY TRANSACTIONS
The Company and each of its subsidiaries are guarantors of the Parent
Company's debt.
The combined statements include the charge for certain corporate expenses
incurred by the Parent on behalf of the Combined Systems. Such charges amounted
to $3,888, $3,696, and $3,365 for the three years ended September 30, 1998, 1997
and 1996. Management believes that these costs are reasonable and reflect costs
of doing business that the Combined Systems would have incurred on a stand-alone
basis.
The Combined Systems charge an affiliate interest on certain balances,
aggregating $15,000 per year, at an annual rate of 12%. Interest income on such
balances amounted to $1,800 for each of the three years in the period ended
September 30, 1998. In addition, the Combined Systems are required to pay the
Parent interest on certain balances, at an annual rate of 12%. Interest expense
on such balances amounted to $2,340 for each of these years in the period ended
September 30, 1998, all which were due during the periods presented. The amounts
described above and certain non-interest bearing amounts due affiliates are
included in Net Assets in the Combined Systems balance sheet. As a result of the
Sales Agreement, such amounts will be assumed by the Parent. The interest income
and expense have been netted in the accompanying statement of operations.
8. EMPLOYEE BENEFIT PLAN
401(k) PLAN
The Combined Systems' employees participate in the Greater Media, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 12% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Parent contributes an amount equal to 50% of the participant's contribution,
limited to the lessor of 3% of the participant's compensation or $1 per year.
The Combined Systems expense relating to the 401(k) Plan was $140, $127,
and $96 in 1998, 1997, and 1996, respectively.
PENSION
Employees of the Combined Systems participate in a pension plan sponsored
by the Parent. The Combined Systems allocable share of the pension expense
amounted to $105, $204 and $217 during the years ended September 30, 1998, 1997
and 1996, respectively. As a result of the Sales Agreement, the Combined
Systems' employees will be fully vested with respect to their plan benefits,
although no additional benefits will accrue to such employees in the future. In
addition, the Parent will be responsible for the allocable pension liability
($838 at September 30, 1998) and will continue to administer the plan on behalf
of the Combined Systems' employees after the sale is consummated.
F-108
<PAGE> 320
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment under noncancellable
operating leases. Leases and rental costs charged to expense for the years ended
September 30, 1998, 1997 and 1996, was $2,124, $2,133 and $1,636, respectively.
Rent expense incurred under leases for the years ended September 30, 1998, 1997
and 1996, was $678, $665 and $660, respectively. Future minimum lease payments
are as follows:
<TABLE>
<S> <C>
1999........................................ $ 690
2000........................................ 618
2001........................................ 524
2002........................................ 402
2003........................................ 396
Thereafter.................................. 3,267
</TABLE>
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
years ended September 30, 1998, 1997 and 1996, was $1,008, $840 and $578,
respectively.
LITIGATION
The Company is party to lawsuits that arise in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's combined financial position or results of operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
F-109
<PAGE> 321
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. The Company may be
required to refund additional amounts in the future.
The Combined Systems believe that they have complied in all material
respects with the provisions of the 1992 Cable Act, including the rate setting
provisions promulgated by the FCC. However, in jurisdictions that have chosen
not to certify, refunds covering the previous twelve-month period may be ordered
upon certification if a company is unable to justify its basic rates. The
Combined Systems are unable to estimate at this time the amount of refunds, if
any, that may be payable by the Combined Systems in the event certain of its
rates are successfully challenged by franchising authorities or found to be
unreasonable by the FCC. The Combined Systems do not believe that the amount of
any such refunds would have a material adverse effect on their financial
position or results of operations.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Combined Systems cannot predict the ultimate effect of the 1996 Telecom
Act on their financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Combined Systems.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation. The Combined Systems are subject to state
regulation in Massachusetts.
F-110
<PAGE> 322
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Renaissance Media Group LLC
We have audited the accompanying consolidated balance sheet of Renaissance
Media Group LLC as of December 31, 1998 and the related consolidated statements
of operations, changes in members' equity, and cash flows for the year ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Renaissance
Media Group LLC at December 31, 1998, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
February 22, 1999
except for Note 11, as to which
the date is February 24, 1999
F-111
<PAGE> 323
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 8,482
Accounts receivable -- trade (less allowance for doubtful
accounts of $92).......................................... 726
Accounts receivable -- other................................ 584
Prepaid expenses and other assets........................... 340
Escrow deposit.............................................. 150
Investment in cable television systems:
Property, plant and equipment............................. 71,246
Less: Accumulated depreciation............................ (7,294)
--------
63,952
--------
Cable television franchises............................... 236,489
Less: Accumulated amortization............................ (11,473)
--------
225,016
--------
Intangible assets......................................... 17,559
Less: Accumulated amortization............................ (1,059)
--------
16,500
--------
Total investment in cable television systems......... 305,468
--------
Total assets...................................... $315,750
========
LIABILITIES AND MEMBERS' EQUITY
Accounts payable............................................ $ 2,042
Accrued expenses(a)......................................... 6,670
Subscriber advance payments and deposits.................... 608
Deferred marketing support.................................. 800
Advances from Holdings...................................... 135
Debt........................................................ 209,874
--------
Total Liabilities................................. 220,129
--------
Members' Equity:
Paid in capital............................................. 108,600
Accumulated deficit......................................... (12,979)
--------
Total members' equity................................ 95,621
--------
Total liabilities and members' equity............. $315,750
========
</TABLE>
- ---------------
(a) includes accrued costs from transactions with affiliated companies of $921.
See accompanying notes to financial statements.
F-112
<PAGE> 324
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES.................................................... $ 41,524
--------
COSTS & EXPENSES
Service Costs(a).......................................... 13,326
Selling, General & Administrative......................... 7,711
Depreciation & Amortization............................... 19,107
--------
Operating Income....................................... 1,380
Interest Income........................................ 158
Interest (Expense) (b)................................. (14,358)
--------
(Loss) Before Provision for Taxes...................... (12,820)
Provision for Taxes.................................... 135
--------
Net (Loss)............................................. $(12,955)
========
</TABLE>
- ---------------
(a) includes costs from transactions with affiliated companies of $7,523.
(b) includes $676 of amortization of deferred financing costs.
See accompanying notes to financial statements.
F-113
<PAGE> 325
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PAID TOTAL
IN ACCUMULATED MEMBER'S
CAPITAL (DEFICIT) EQUITY
------- ----------- --------
<S> <C> <C> <C>
Contributed Members' Equity -- Renaissance Media
Holdings LLC and Renaissance Media LLC......... $ 15,000 $ (24) $14,976
Additional capital contributions................. 93,600 -- 93,600
Net (Loss)....................................... -- (12,955) (12,955)
-------- -------- -------
Balance December 31, 1998........................ $108,600 $(12,979) $95,621
======== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-114
<PAGE> 326
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net (loss).................................................. $(12,955)
Adjustments to non-cash and non-operating items:
Depreciation and amortization............................. 19,107
Accretion on Senior Discount Notes........................ 7,363
Other non-cash charges.................................... 730
Changes in operating assets and liabilities:
Accounts receivable -- trade, net...................... (726)
Accounts receivable -- other........................... (584)
Prepaid expenses and other assets...................... (338)
Accounts payable....................................... 2,031
Accrued expenses....................................... 6,660
Subscriber advance payments and deposits............... 608
Deferred marketing support............................. 800
--------
Net cash provided by operating activities................... 22,696
--------
INVESTING ACTIVITIES:
Purchased cable television systems:
Property, plant and equipment.......................... (65,580)
Cable television franchises............................ (235,412)
Cash paid in excess of identifiable assets............. (8,608)
Escrow deposit............................................ (150)
Capital expenditures...................................... (5,683)
Cable television franchises............................... (1,077)
Other intangible assets................................... (526)
--------
Net cash (used in) investing activities..................... (317,036)
--------
FINANCING ACTIVITIES:
Debt acquisition costs.................................... (8,323)
Principal repayments on bank debt......................... (7,500)
Advances from Holdings.................................... 33
Proceeds from bank debt................................... 110,000
Proceeds from 10% Senior Discount Notes................... 100,012
Capital contributions..................................... 108,600
--------
Net cash provided by financing activities................... 302,822
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 8,482
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1997.............. --
--------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1998.............. $ 8,482
========
SUPPLEMENTAL DISCLOSURES:
INTEREST PAID............................................. $ 4,639
========
</TABLE>
See accompanying notes to financial statements.
F-115
<PAGE> 327
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Renaissance Media Group LLC ("Group") was formed on March 13, 1998 by
Renaissance Media Holdings LLC ("Holdings"). Holdings is owned by Morgan Stanley
Capital Partners III, L.P. ("MSCP III"), Morgan Stanley Capital Investors, L.P.
("MSCI"), MSCP III 892 Investors, L.P. ("MSCP Investors" and, collectively, with
its affiliates, MSCP III and MSCI and their respective affiliates, the "Morgan
Stanley Entities"), Time Warner and the Management Investors. On March 20, 1998,
Holdings contributed to Group its membership interests in two wholly-owned
subsidiaries; Renaissance Media (Louisiana) LLC ("Louisiana") and Renaissance
Media (Tennessee) LLC ("Tennessee"), which were formed on January 7, 1998.
Louisiana and Tennessee acquired a 76% interest and 24% interest, respectively,
in Renaissance Media LLC ("Media") from Morgan Stanley Capital Partners III,
Inc. ("MSCP"), on February 13, 1998 through an acquisition of entities under
common control accounted for as if it were a pooling of interests. As a result,
Media became a subsidiary of Group and Holdings. Group and its aforementioned
subsidiaries are collectively referred to as the "Company". On April 9, 1998,
the Company acquired (the "Acquisition") six cable television systems (the
"Systems") from TWI Cable, Inc. ("TWI Cable"), a subsidiary of Time Warner Inc.
("Time Warner"). See Note 3. Prior to this Acquisition, the Company had no
operations other than start-up related activities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING STANDARDS
During fiscal 1998, the Financial Accounting Standards Board ("FASB")
issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133").
FAS 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The Company
will adopt FAS 133 as of January 1, 2000. The impact of the adoption on the
Company's consolidated financial statements is not expected to be material.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of the Company and its wholly owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated.
CONCENTRATION OF CREDIT RISK
A significant portion of the customer base is concentrated within the local
geographical area of each of the individual cable television systems. The
Company generally extends credit to customers and the ultimate collection of
accounts receivable could be affected by the local economy. Management performs
continuous credit evaluations of its customers and may require cash in advance
or other special arrangements from certain customers. Management does not
believe that there is any significant credit risk which could have a material
effect on the Company's financial condition.
F-116
<PAGE> 328
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
REVENUE AND COSTS
Subscriber fees are recorded as revenue in the period the related services
are provided and advertising revenues are recognized in the period the related
advertisements are exhibited. Rights to exhibit programming are purchased from
various cable networks. The costs of such rights are generally expensed as the
related services are made available to subscribers.
ADVERTISING COSTS
Advertising costs are expensed upon the first exhibition of the related
advertisements. Advertising expense amounted to $491 in 1998.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and investments in short-term,
highly liquid securities, which have maturities when purchased of three months
or less.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at purchased and capitalized
cost. Capitalized internal costs principally, consist of employee costs and
interest on funds borrowed during construction. Capitalized labor, materials and
associated overhead amounted to approximately $1,429 in 1998. Replacements,
renewals and improvements to installed cable plant are capitalized. Maintenance
and repairs are charged to expense as incurred. Depreciation expense for the
year ended December 31, 1998 amounted to $7,314. Property, plant and equipment
is depreciated using the straight-line method over the following estimated
service lives:
<TABLE>
<S> <C>
Buildings and leasehold improvements........................ 5 - 30 years
Cable systems, equipment and subscriber devices............. 5 - 30 years
Transportation equipment.................................... 3 - 5 years
Furniture, fixtures and office equipment.................... 5 - 10 years
</TABLE>
Property, plant and equipment at December 31, 1998 consisted of:
<TABLE>
<S> <C>
Land...................................................... $ 432
Buildings and leasehold improvements...................... 1,347
Cable systems, equipment and subscriber devices........... 62,740
Transportation equipment.................................. 2,181
Furniture, Fixtures and office equipment.................. 904
Construction in progress.................................. 3,642
-------
71,246
Less: accumulated depreciation.............................. (7,294)
-------
Total............................................. $63,952
=======
</TABLE>
F-117
<PAGE> 329
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
CABLE TELEVISION FRANCHISES AND INTANGIBLE ASSETS
Cable television franchise costs include the assigned fair value, at the
date of acquisition, of the franchises from purchased cable television systems.
Intangible assets include goodwill, deferred financing and other intangible
assets. Cable television franchises and intangible assets are amortized using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Cable television franchises................................. 15 years
Goodwill.................................................... 25 years
Deferred financing and other intangible assets.............. 2 - 10 years
</TABLE>
Intangible assets at December 31, 1998 consisted of:
<TABLE>
<S> <C>
Goodwill.................................................... $ 8,608
Deferred Financing Costs.................................... 8,323
Other intangible assets..................................... 628
-------
17,559
Less: accumulated amortization.............................. (1,059)
-------
Total............................................. $16,500
=======
</TABLE>
The Company periodically reviews the carrying value of its long-lived
assets, including property, plant and equipment, cable television franchises and
intangible assets, whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. To the extent the estimated future cash
inflows attributable to the asset, less estimated future cash outflows, is less
than the carrying amount, an impairment loss is recognized to the extent that
the carrying value of such asset is greater than its fair value.
ESTIMATES USED IN FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
3. ACQUISITIONS
TWI CABLE
On April 9, 1998, the Company acquired six cable television systems from
TWI Cable. The systems are clustered in southern Louisiana, western Mississippi
and western Tennessee. This Acquisition represented the first acquisition by the
Company. The purchase price for the systems was $309,500 which was paid as
follows: TWI Cable received $300,000 in cash, inclusive of an escrow deposit of
$15,000, and a $9,500 (9,500 units) equity interest in Renaissance Media
Holdings LLC, the parent company of Group. In addition to the purchase price,
the Company incurred approximately $1,385 in transaction costs, exclusive of
financing costs.
F-118
<PAGE> 330
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
The Acquisition was accounted for using the purchase method and,
accordingly, results of operations are reported from the date of the Acquisition
(April 9, 1998). The excess of the purchase price over the estimated fair value
of the tangible assets acquired has been allocated to cable television
franchises and goodwill in the amount of $235,387 and $8,608, respectively.
DEFFNER CABLE
On August 31, 1998, the Company acquired the assets of Deffner Cable, a
cable television company located in Gadsden, Tennessee. The purchase price was
$100 and was accounted for using the purchase method. The allocation of the
purchase price is subject to change, although management does not believe that
any material adjustment to such allocation is expected.
BAYOU VISION, INC.
On February 3, 1999, Media acquired the cable television assets of Bayou
Vision, Inc. and Gulf South Cable, Inc. serving approximately 1,950 subscribers
in the Villages of Estherwood, Morse and Mermentau and Acadia and Livingston
Parish, Louisiana. The cash purchase price was approximately $2,700 and was paid
out of available Company funds.
Unaudited Pro Forma summarized results of operations for the Company for
the year ended December 31, 1998 and 1997, assuming the Acquisition, Notes (as
hereinafter defined) offering and Credit Agreement (as hereinafter defined) had
been consummated on January 1, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1998
---- ----
<S> <C> <C>
Revenues............................................. $ 50,987 $ 56,745
Expenses............................................. 53,022 55,210
-------- --------
Operating (loss) income.............................. (2,035) 1,535
Interest expense and other expenses.................. (19,740) (19,699)
-------- --------
Net (Loss)........................................... $(21,775) $(18,164)
======== ========
</TABLE>
4. DEBT
As of December 31, 1998, debt consisted of:
<TABLE>
<S> <C>
10.00% Senior Discount Notes at Accreted Value(a)........... $107,374
Credit Agreement(b)......................................... 102,500
--------
$209,874
========
</TABLE>
(a) On April 9, 1998, in connection with the Acquisition described in Note
3, the Company issued $163,175 principal amount at maturity, $100,012 initial
accreted value, of 10.00% senior discount notes due 2008 ("Notes"). The Notes
pay no interest until April 15, 2003. From and after April 15, 2003 the Notes
will bear interest, payable semi-
F-119
<PAGE> 331
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
annually in cash, at a rate of 10% per annum on April 15 and October 15 of each
year, commencing October 15, 2003. The Notes are due on April 15, 2008.
(b) On April 9, 1998, Renaissance Media entered into a credit agreement
among Morgan Stanley & Co. Incorporated as Placement Agent, Morgan Stanley
Senior Funding Inc., as Syndication Agent, the Lenders, CIBC Inc., as
Documentation Agent and Bankers Trust Company as Administrative Agent (the
"Credit Agreement"). The aggregate commitments under the Credit Agreement total
$150,000, consisting of a $40,000 revolver, $60,000 Tranche A Term Loans and
$50,000 Tranche B Term Loans (collectively the "Term Loans"). The revolving
credit and term loans are collateralized by a first lien position on all present
and future assets and the member's interest of Media, Louisiana and Tennessee.
The Credit Agreement provides for interest at varying rates based upon various
borrowing options and the attainment of certain financial ratios and for
commitment fees of 1/2% on the unused portion of the revolver. The effective
interest rate, including commitment fees and amortization of related deferred
financing costs and the interest-rate cap, for the year ended December 31, 1998
was 8.82%.
On April 9, 1998, $110,000 was borrowed under the Credit Agreement's
Tranche A and B Term Loans. On June 23, 1998, $7,500 was repaid resulting in
$102,500 of outstanding Tranche A and B Term Loans as of December 31, 1998.
As of December 31, 1998, the Company had unrestricted use of the $40,000
revolver. No borrowings had been made by the Company under the revolver through
that date.
Annual maturities of borrowings under the Credit Agreement for the years
ending December 31 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 776
2000........................................................ 1,035
2001........................................................ 2,701
2002........................................................ 9,506
2003........................................................ 11,590
2004........................................................ 11,590
Thereafter.................................................. 65,302
--------
102,500
Less: Current portion....................................... (776)
--------
$101,724
========
</TABLE>
The Credit Agreement and the Indenture pursuant to which the Notes were
issued contain restrictive covenants on the Company and subsidiaries regarding
additional indebtedness, investment guarantees, loans, acquisitions, dividends
and merger or sale of the subsidiaries and require the maintenance of certain
financial ratios.
Total interest cost incurred for the year ended December 31, 1998,
including commitment fees and amortization of deferred financing and
interest-rate cap costs was $14,358, net of capitalized interest of $42.
F-120
<PAGE> 332
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
5. INTEREST RATE-CAP AGREEMENT
The Company purchases interest-rate cap agreements that are designed to
limit its exposure to increasing interest rates and are designated to its
floating rate debt. The strike price of these agreements exceeds the current
market levels at the time they are entered into. The interest rate indices
specified by the agreements have been and are expected to be highly correlated
with the interest rates the Company incurs on its floating rate debt. Payments
to be received as a result of the specified interest rate index exceeding the
strike price are accrued in other assets and are recognized as a reduction of
interest expense (the accrual accounting method). The cost of these agreements
is included in other assets and amortized to interest expense ratably during the
life of the agreement. Upon termination of an interest-rate cap agreement, any
gain is deferred in other liabilities and amortized over the remaining term of
the original contractual life of the agreement as a reduction of interest
expense.
On December 1, 1997, the Company purchased an interest-rate cap agreement
from Morgan Stanley Capital Services Inc. The carrying value as of December 31,
1998 was $47. The fair value of the interest-rate cap, which is based upon the
estimated amount that the Company would receive or pay to terminate the cap
agreement as of December 31, 1998, taking into consideration current interest
rates and the credit worthiness of the counterparties, approximates its carrying
value.
The following table summarizes the interest-rate cap agreement:
<TABLE>
<CAPTION>
NOTIONAL INITIAL
PRINCIPAL EFFECTIVE TERMINATION CONTRACT FIXED RATE
AMOUNT TERM DATE DATE COST (PAY RATE)
- --------- ---- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
$100,000 2 years 12/1/97 12/1/99 $100 7.25%
</TABLE>
6. TAXES
For the year ended December 31, 1998, the provision for income taxes has
been calculated on a separate company basis. The components of the provision for
income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Federal:
Current.................................................. $ --
Deferred................................................. --
State:
Current.................................................. 135
Deferred................................................. --
----
Provision for income taxes............................ $135
====
</TABLE>
The Company's current state tax liability results from its obligation to
pay franchise tax in Tennessee and Mississippi and tax on capital in New York.
F-121
<PAGE> 333
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
The Company has a net operating loss ("NOL") carryforward for income tax
purposes which is available to offset future taxable income. This NOL totals
approximately $14,900 and expires in the year 2018. The Company has established
a valuation allowance to offset the entire potential future tax benefit of the
NOL carryforward and, therefore, has recognized no deferred tax asset with
respect to the NOL.
Louisiana and Tennessee have elected to be treated as corporations for
federal income tax purposes and have not recorded any tax benefit for their
losses as the realization of theses losses by reducing future taxable income in
the carry forward period is uncertain at this time.
7. RELATED PARTY TRANSACTIONS
(a) TRANSACTIONS WITH MORGAN STANLEY ENTITIES
In connection with the Acquisition, Media entered into the Credit Agreement
with Morgan Stanley Senior Funding Inc. and Morgan Stanley & Co. Incorporated
acted as the Placement Agent for the Notes. In connection with these services
the Morgan Stanley Entities received customary fees and expense reimbursement.
(b) TRANSACTIONS WITH TIME WARNER AND RELATED PARTIES
In connection with the Acquisition, Media entered into an agreement with
Time Warner, pursuant to which Time Warner manages the Company's programming in
exchange for providing the Company access to certain Time Warner programming
arrangements.
(c) Transactions with Management
Prior to the consummation of the Acquisition described in Note 3, Media
paid fees in 1998 to six senior executives of the Company who are investors in
the Company (the "Management Investors") for services rendered prior to their
employment by Media relating to the Acquisition and the Credit Agreement. These
fees totaled $287 and were recorded as transaction and financing costs.
(d) DUE TO MANAGEMENT INVESTORS
Prior to the formation of the Company, the Management Investors advanced
$1,000 to Holdings, which was used primarily for working capital purposes. Upon
formation of the Company, Holdings contributed certain assets and liabilities to
Group and the $1,000 advance from the Management Investors was recorded as paid
in capital.
(e) TRANSACTIONS WITH BOARD MEMBER
The Company has utilized the law firm of one of its board members for legal
services for the Acquisition, financing agreements and various ongoing legal
matters. These fees totaled approximately $1,348 for the year ended December 31,
1998.
F-122
<PAGE> 334
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
8. ACCRUED EXPENSES
Accrued expenses as of December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Accrued programming costs................................... $1,986
Accrued interest............................................ 1,671
Accrued franchise fees...................................... 1,022
Accrued legal and professional fees,........................ 254
Accrued salaries, wages and benefits........................ 570
Accrued property and sales tax.............................. 637
Other accrued expenses...................................... 530
------
$6,670
======
</TABLE>
9. EMPLOYEE BENEFIT PLAN
Effective April 9, 1998, the Company began sponsoring a defined
contribution plan which covers substantially all employees (the "Plan"). The
Plan provides for contributions from eligible employees up to 15% of their
compensation. The Company's contribution to the Plan is limited to 50% of each
eligible employee's contribution up to 10% of his or her compensation. The
Company has the right in any year to set the amount of the Company's
contribution percentage. Company matching contributions to the Plan for the year
ended December 31, 1998 were approximately $97. All participant contributions
and earnings are fully vested upon contribution and company contributions and
earnings vest 20% per year of employment with the Company, becoming fully vested
after five years.
10. COMMITMENTS AND CONTINGENCIES
(a) LEASES
The Company had rental expense under various lease and rental agreements
primarily for offices, tower sites and warehouses of approximately $125 in 1998.
In addition, the Company rents utility poles in its operations generally under
short term arrangements, but the Company expects these arrangements to recur.
Total rent expense for utility poles was approximately $620 in 1998. Future
minimum annual rental payments under noncancellable leases are as follows:
<TABLE>
<S> <C>
1999...................................... $162
2000...................................... 38
2001...................................... 24
2002...................................... 20
2003 and thereafter....................... 66
----
Total................................ $310
====
</TABLE>
(b) EMPLOYMENT AGREEMENTS
Media has entered into employment agreements with six senior executives who
are also investors in Holdings. Under the conditions of five of the agreements
the employment term is five years, expiring in April 2003 and requires Media to
continue salary payments
F-123
<PAGE> 335
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
(including any bonus) through the term if the executive's employment is
terminated by Media without cause, as defined in the employment agreement.
Media's obligations under the employment agreements may be reduced in certain
situations based on actual operating performance relative to the business plan,
death or disability or by actions of the other senior executives.
The employment agreement for one senior executive has a term of one year
and may be renewed annually. This agreement has been renewed through April 8,
2000.
(c) OTHER AGREEMENTS
In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996, Time
Warner agreed with the Federal Communications Commission ("FCC") to invest in
certain upgrades to its cable infrastructure (consisting primarily of materials
and labor in connection with the plant upgrades up to 750 megahertz) by 1999
(approximately $23 million). This agreement with the FCC has been assumed by the
Company as part of the Acquisition.
11. SUBSEQUENT EVENT
On February 23, 1999, Holdings entered into an agreement with Charter
Communications, LLC and Charter Communications, Inc., to sell 100% of its
members' equity in the Company for approximately $459,000, subject to certain
closing conditions. This transaction is expected to close during the third
quarter of 1999.
12. YEAR 2000 ISSUES (UNAUDITED)
The Company relies on computer systems, related software applications and
other control devices in operating and monitoring all major aspects of its
business, including, but not limited to, its financial systems (such as general
ledger, accounts payable, payroll and fixed asset modules), subscriber billing
systems, internal networks and telecommunications equipment. The Company also
relies, directly and indirectly, on the external systems of various independent
business enterprises, such as its suppliers and financial organizations, for the
accurate exchange of data.
The Company continues to assess the likely impact of Year 2000 issues on
its business operations, including its material information technology ("IT")
and non-IT applications. These material applications include all billing and
subscriber information systems, general ledger software, payroll systems,
accounting software, phone switches and certain headend applications, all of
which are third party supported.
The Company believes it has identified all systems that may be affected by
Year 2000 Issues. Concurrent with the identification phase, the Company is
securing compliance determinations relative to all identified systems. For those
systems that the Company believes are material, compliance programs have been
received or such systems have been certified by independent parities as Year
2000 compliant. For those material systems that are subject to compliance
programs, the Company expects to receive Year 2000 certifications from
independent parties by the second quarter 1999. Determinations of Year
F-124
<PAGE> 336
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
2000 compliance requirements for less mission critical systems are in progress
and are expected to be completed in the second quarter of 1999.
With respect to third parties with which the Company has a material
relationship, the Company believes its most significant relationships are with
financial institutions, who receive subscriber monthly payments and maintain
Company bank accounts, and subscriber billing and management systems providers.
We have received compliance programs which if executed as planned should provide
a high degree of assurance that all Year 2000 issues will be addressed by mid
1999.
The Company has not incurred any material Year 2000 costs to date, and
excluding the need for contingency plans, does not expect to incur any material
Year 2000 costs in the future because most of its applications are maintained by
third parties who have borne Year 2000 compliance costs.
The Company cannot be certain that it or third parties supporting its
systems have resolved or will resolve all Year 2000 issues in a timely manner.
Failure by the Company or any such third party to successfully address the
relevant Year 2000 issues could result in disruptions of the Company's business
and the incurrence of significant expenses by the Company. Additionally, the
Company could be affected by any disruption to third parties with which the
Company does business if such third parties have not successfully addressed
their Year 2000 issues.
Failure to resolve Year 2000 issues could result in improper billing to the
Company's subscribers which could have a major impact on the recording of
revenue and the collection of cash as well as create significant customer
dissatisfaction. In addition, failure on the part of the financial institutions
with which the Company relies on for its cash collection and management services
could also have a significant impact on collections, results of operations and
the liquidity of the Company.
The Company has not yet finalized contingency plans necessary to handle the
most likely worst case scenarios. Before concluding as to possible contingency
plans, the Company must determine whether the material service providers
contemplate having such plans in place. In the event that contingency plans from
material service providers are not in place or are deemed inadequate, management
expects to have such plans in place by the third quarter of 1999.
F-125
<PAGE> 337
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
TWI Cable, Inc.
We have audited the accompanying combined balance sheet of the Picayune MS,
Lafourche LA, St. Tammany LA, St. Landry LA, Pointe Coupee LA, and Jackson TN
cable television systems, (collectively, the "Combined Systems") included in TWI
Cable, Inc. ("TWI Cable"), as of April 8, 1998, and the related combined
statements of operations, changes in net assets and cash flows for the period
from January 1, 1998 through April 8, 1998. These combined financial statements
are the responsibility of the Combined Systems' management. Our responsibility
is to express an opinion on these combined financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Combined Systems, included in TWI Cable, at April 8, 1998, and the combined
results of their operations and their cash flows for the period from January 1,
1998 through April 8, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
New York, New York
February 22, 1999
F-126
<PAGE> 338
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 8, 1998
-------------
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 7
Receivables, less allowance of $116......................... 576
Prepaid expenses and other assets........................... 438
Property, plant and equipment, net.......................... 35,992
Cable television franchises, net............................ 195,907
Goodwill and other intangibles, net......................... 50,023
--------
Total assets...................................... $282,943
========
LIABILITIES AND NET ASSETS
Accounts payable............................................ $ 63
Accrued programming expenses................................ 978
Accrued franchise fees...................................... 616
Subscriber advance payments and deposits.................... 593
Deferred income taxes....................................... 61,792
Other liabilities........................................... 747
--------
Total liabilities................................. 64,789
Total net assets.................................. 218,154
--------
Total liabilities and net assets.................. $282,943
========
</TABLE>
See accompanying notes to combined financial statements.
F-127
<PAGE> 339
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1, 1998
THROUGH
APRIL 8, 1998
---------------
<S> <C>
REVENUES.................................................... $15,221
COSTS AND EXPENSES:
Operating and programming................................... 3,603
Selling, general and administrative......................... 4,134
Depreciation and amortization............................... 5,031
(Gain) on disposal of fixed assets.......................... (96)
-------
Total costs and expenses.......................... 12,672
-------
Operating income............................................ 2,549
Provision for income taxes.................................. 1,191
-------
Net income.................................................. $ 1,358
=======
</TABLE>
See accompanying notes to combined financial statements.
F-128
<PAGE> 340
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1997................................ $224,546
Repayment of advances from Parent......................... (17,408)
Advances from Parent...................................... 9,658
Net income................................................ 1,358
--------
Balance at April 8, 1998.................................... $218,154
========
</TABLE>
See accompanying notes to combined financial statements.
F-129
<PAGE> 341
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1, 1998
THROUGH
APRIL 8, 1998
---------------
<S> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 1,358
Adjustments for noncash and nonoperating items:
Income tax expense........................................ 1,191
Depreciation and amortization............................. 5,031
(Gain) on disposal of fixed assets........................ (96)
Changes in operating assets and liabilities:
Receivables, prepaids and other assets................. 289
Accounts payable, accrued expenses and other
liabilities........................................... (770)
Other balance sheet changes............................ (4)
--------
Net cash provided by operations............................. 6,999
--------
INVESTING ACTIVITIES:
Capital expenditures........................................ (613)
--------
Net cash used in investing activities....................... (613)
--------
FINANCING ACTIVITIES:
Net repayment of advances from Parent....................... (7,750)
--------
Net cash (used in) financing activities..................... (7,750)
INCREASE IN CASH AND CASH EQUIVALENTS....................... (1,364)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 1,371
--------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 7
========
</TABLE>
See accompanying notes to combined financial statements.
F-130
<PAGE> 342
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The cable television systems operating in the metropolitan areas of
Picayune, Mississippi; Lafourche, Louisiana; St. Tammany, Louisiana; St. Landry,
Louisiana; Pointe Coupee, Louisiana; and Jackson, Tennessee (the "Combined
Systems") are principally engaged in the cable television business under
non-exclusive franchise agreements, which expire at various times beginning in
1999. The Combined Systems' operations consist primarily of selling video
programming which is distributed to subscribers for a monthly fee through a
network of coaxial and fiber-optic cables.
Prior to January 4, 1996, the Combined Systems were included in certain
subsidiaries of Cablevision Industries Corporation ("CVI"). On January 4, 1996,
CVI merged into a wholly owned subsidiary of Time Warner Inc. (the "CVI
Merger"). On October 1, 1996, Time Warner Inc. ("Time Warner") completed a
reorganization amongst certain of its wholly owned cable television subsidiaries
whereby CVI was renamed TWI Cable Inc. ("TWI Cable").
BASIS OF PRESENTATION
TWI Cable has sold the Combined Systems to Renaissance Media Holdings LLC
("Renaissance") pursuant to an Asset Purchase Agreement with Renaissance, dated
November 14, 1997 (see Note 8). Accordingly, the accompanying combined financial
statements of the Combined Systems reflect the "carved out" historical financial
position, results of operations, cash flows and changes in net assets of the
operations of the Combined Systems as if they had been operating as a separate
company. Effective as of January 1, 1996, the Combined Systems' financial
statements reflect the new basis of accounting arising from Time Warner's merger
with CVI. Based on Time Warner's allocation of the purchase price, the assets
and liabilities of the Combined Systems were revalued resulting in goodwill
allocated to the Combined Systems of approximately $52,971,000, which is being
amortized over its estimated life of 40 years. In addition, approximately
$220,981,000 was allocated to cable television franchises and other intangible
assets, which is being amortized over periods up to 20 years.
The combined statements have been adjusted to include the allocation of
certain corporate expenses incurred by Time Warner Cable and/or TWI Cable on the
Combined Systems' behalf, based upon the number of Combined System subscribers
managed by Time Warner Cable and the ratio of Combined System subscribers to
total TWI Cable subscribers, respectively. These allocations reflect all costs
of doing business that the Combined Systems would have incurred on a stand alone
basis as disclosed in Note 3. Management believes that these allocations are
reasonable.
BASIS OF COMBINATION
The combined financial statements include the assets, liabilities,
revenues, expenses, income, loss and cash flows of the Combined Systems, as if
the Combined Systems were a single company. Significant intercompany accounts
and transactions between the Combined
F-131
<PAGE> 343
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Systems have been eliminated. Significant accounts and transactions with Time
Warner and its affiliates are disclosed as related party transactions (see Note
3).
USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined financial
statements and footnotes thereto. Actual results could differ from those
estimates.
CONCENTRATION OF CREDIT RISK
A significant portion of the customer base is concentrated within the local
geographical area of each of the individual cable television systems. The
Combined Systems generally extend credit to customers and the ultimate
collection of accounts receivable could be affected by the local economy.
Management performs continuous credit evaluations of its customers and may
require cash in advance or other special arrangements from certain customers.
Management does not believe that there is any significant credit risk which
could have a material effect on the financial condition of the Combined Systems.
REVENUE AND COSTS
Subscriber fees are recorded as revenue in the period the related services
are provided and advertising revenues are recognized in the period the related
advertisements are exhibited. Rights to exhibit programming are purchased from
various cable networks. The costs of such rights are generally expensed as the
related services are made available to subscribers.
FRANCHISE FEES
Local governmental authorities impose franchise fees on the cable
television systems owned by the Combined Systems ranging up to a federally
mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are
collected from the Combined Systems' customers and such fees are not included as
revenue or as a franchise fee expense.
ADVERTISING COSTS
Advertising costs are expensed upon the first exhibition of the related
advertisements. Advertising expense amounted to $105,000 for the period from
January 1, 1998 through April 8, 1998.
STATEMENT OF CASH FLOWS
The Combined Systems participate in a cash management system with
affiliates whereby cash receipts are transferred to a centralized bank account
from which centralized payments to various suppliers and creditors are made on
behalf of the Combined Systems. The excess of such cash receipts over payments
is included in net assets. Amounts shown
F-132
<PAGE> 344
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
as cash represent the Combined Systems' net cash receipts not transferred to the
centralized account as of December 31, 1996 and 1997. The average net
intercompany payable balances was $166,522,000 for the period from January 1,
1998 through April 8, 1998.
For purposes of this statement, cash and cash equivalents includes all
highly liquid investments purchased with original maturities of three months or
less.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to property,
plant and equipment generally include material, labor, overhead and interest.
Depreciation is provided on the straight-line method over estimated useful lives
as follows:
<TABLE>
<S> <C>
Buildings and improvements........................... 5-20 years
Cable television equipment........................... 5-15 years
Furniture, fixtures and other equipment.............. 3-10 years
</TABLE>
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
APRIL 8, 1998
-------------
(IN THOUSANDS)
<S> <C>
Land and buildings.................................. $ 2,255
Cable television equipment.......................... 40,276
Furniture, fixtures and other equipment............. 2,308
Construction in progress............................ 1,183
--------
46,022
Less accumulated depreciation....................... (10,030)
--------
Total..................................... $ 35,992
========
</TABLE>
INTANGIBLE ASSETS
The Combined Systems amortized goodwill over periods up to 40 years and
cable television franchises over periods up to 20 years, both using the
straight-line method. For the period from January 1, 1998 through April 8, 1998
amortization of goodwill amounted to $360,000 and amortization of cable
television franchises amounted to $3,008,000. Accumulated amortization of
intangible assets amounted to $28,114,000 at April 8, 1998.
IMPAIRMENT
Management separately reviews the carrying value of acquired long-lived
assets for each acquired entity on a quarterly basis to determine whether an
impairment may exist. Management considers relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of long-lived
assets can be recovered. Upon a determination that the carrying value of
long-lived assets will not be recovered from the undiscounted future cash flows
of the acquired business, the carrying value of such long-lived assets would be
considered impaired and would be reduced by a charge to operations in the amount
of the
F-133
<PAGE> 345
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
impairment. An impairment charge is measured as a deficiency in estimated
discounted future cash flows of the acquired business to recover the carrying
value related to the long-lived assets.
INCOME TAXES
Income taxes have been provided using the liability method prescribed by
FASB Statement No. 109, "Accounting for Income Taxes." Under the liability
method, deferred income taxes reflect tax carryforwards and the net tax effects
of temporary differences between the carrying amount of assets and liabilities
for financial statements and income tax purposes, as determined under enacted
tax laws and rates.
2. EMPLOYEE BENEFIT PLANS
Following the CVI Merger, the Combined Systems began participation in the
Time Warner Cable Pension Plan (the "Pension Plan"), a non-contributory defined
benefit pension plan, and the Time Warner Cable Employee Savings Plan (the
"Savings Plan") which are administered by a committee appointed by the Board of
Representatives of Time Warner Entertainment Company, L.P. ("TWE"), an affiliate
of Time Warner, and which cover substantially all employees.
Benefits under the Pension Plan are determined based on formulas which
reflect an employee's years of service and compensation levels during the
employment period. Pension expense for the period from January 1, 1998 through
April 8, 1998 totaled $61,000.
The Combined Systems' contributions to the Savings Plan are limited to
6.67% of an employee's eligible compensation during the plan year. The Board of
Representatives of TWE has the right in any year to set the maximum amount of
the Combined Systems' contribution. Defined contribution plan expense for the
period from January 1, 1998 through April 8, 1998 totaled $38,000.
The Combined Systems have no material obligations for other post retirement
benefits.
3. RELATED PARTIES
In the normal course of conducting business, the Combined Systems had
various transactions with Time Warner and its affiliates, generally on terms
resulting from a negotiation between the affected units that in management's
view resulted in reasonable allocations.
PROGRAMMING
Included in the Combined Systems' operating expenses are charges for
programming and promotional services provided by Home Box Office, Turner
Broadcasting System, Inc. and other affiliates of Time Warner. These charges are
based on customary rates and are in the ordinary course of business. These
charges totaled $1,164,000 for the period from January 1, 1998 through April 8,
1998. Accrued related party expenses for these
F-134
<PAGE> 346
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
programming and promotional services included in accrued programming expenses
approximated $409,000 for the period from January 1, 1998 through April 8, 1998.
MANAGEMENT FEES
TWI Cable entered into a management service arrangement with Time Warner
Cable ("TWC"), pursuant to which TWC is responsible for the management and
operation of TWI Cable, which includes the Combined Systems. The management fees
paid to TWC by TWI Cable are based on an allocation of the corporate expenses of
TWC's cable division in proportion to the respective number of subscribers of
all cable systems managed by TWC's cable division. The allocation of the TWI
Cable management fee to the Combined Systems approximated $486,000 for the
period from January 1, 1998 through April 8, 1998.
Other divisional expenses allocated to the Combined Systems approximated
$299,000 for the period from January 1, 1998 through April 8, 1998.
4. INTEREST EXPENSE
Prior to the CVI Merger, the Jackson, Tennessee system was included in
Cablevision Industries Limited Partnership and Combined Entities ("CILP"). The
Jackson system was charged interest expense in connection with CILP's (a) senior
and subordinated bank credit agreements; and (b) senior unsecured subordinated
Series A and Series B notes payable to CVI. The remaining five systems
comprising the Combined Systems were included in Cablevision Industries of the
Southeast, Inc. and Combined Entities ("CIOS"). These systems were charged
interest expense in connection with CIOS's (a) bank revolving credit agreement;
and (b) junior and senior subordinated debt to CVI.
5. INCOME TAXES
Effective January 4, 1996, the Combined Systems are included in the
consolidated federal income tax return of Time Warner. Prior to January 4, 1996,
the Combined Systems were included in the consolidated federal income tax return
of CVI. The provision for income taxes has been calculated on a separate company
basis. The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 1, 1998
THROUGH
APRIL 8, 1998
--------------------
(IN THOUSANDS)
<S> <C>
Federal:
Current........................................ $ --
Deferred....................................... 962
State:
Current........................................ --
Deferred....................................... 229
------
Net provision for income taxes.............. $1,191
======
</TABLE>
F-135
<PAGE> 347
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Combined Systems did not, and will not, have a tax sharing agreement
with either Time Warner, TWI Cable or CVI. Therefore, the Combined Systems have
not and will not be compensated for the utilization of the Combined Systems' tax
losses, by Time Warner, TWI Cable or CVI. In addition, the Combined Systems have
not and will not be required to make payments to either Time Warner or TWI Cable
for the current tax provision of the Combined Systems.
The differences between the income tax provision expected at the U.S.
federal statutory income tax rate and the total income tax provision are due to
nondeductible goodwill amortization and state taxes.
Significant components of the Combined Systems' deferred tax assets and
liabilities, as calculated on a separate company basis, are as follows:
<TABLE>
<CAPTION>
APRIL 8, 1998
-------------
(IN THOUSANDS)
<S> <C>
Deferred tax liabilities:
Amortization..................................... $57,817
Depreciation..................................... 4,181
-------
Total gross deferred tax liabilities..... 61,998
-------
Deferred tax assets:
Tax loss carryforwards........................... 160
Allowance for doubtful accounts.................. 46
-------
Total deferred tax assets................ 206
-------
Net deferred tax liability............... $61,792
=======
</TABLE>
On a separate company basis, the Combined Systems have tax loss
carryforwards of approximately $400,000 at April 8, 1998. However, if the
Combined Systems are acquired in an asset purchase, the tax loss carryforwards,
and net deferred tax liabilities relating to temporary differences will not
carry over to Renaissance (see Note 8).
6. COMMITMENTS AND CONTINGENCIES
The Combined Systems had rental expense of approximately $244,000 for the
period from January 1, 1998 through April 8, 1998 under various lease and rental
agreements for offices, utility poles, warehouses and computer equipment. Future
minimum annual rental payments under noncancellable leases will approximate
$1,000,000 annually over the next five years.
In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996, TWC
has agreed with the Federal Communications Commission ("FCC") to invest in
certain upgrades to its cable infrastructure (consisting primarily of materials
and labor in connection with the plant upgrades up to 750 megahertz) over the
next three years (approximately $25 million at December 31, 1997). This
agreement with the FCC, which extends to the Combined Systems, will be assumed
by Renaissance as it relates to the Combined Systems in accordance with the
Asset Purchase Agreement.
F-136
<PAGE> 348
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. OTHER LIABILITIES
Other liabilities consist of:
<TABLE>
<CAPTION>
APRIL 8, 1998
-------------
(IN THOUSANDS)
<S> <C>
Compensation........................................ $279
Data Processing Costs............................... 161
Sales and other taxes............................... 146
Copyright Fees...................................... 35
Pole Rent........................................... 93
Other............................................... 33
----
Total..................................... $747
====
</TABLE>
8. SUBSEQUENT EVENT
The sale of the Combined Systems, in connection with the Asset Purchase
Agreement with Renaissance, closed on April 9, 1998 at the purchase price of
$309,500,000.
F-137
<PAGE> 349
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
TWI Cable Inc.
We have audited the accompanying combined balance sheets of the Picayune
MS, Lafourche LA, St. Tammany LA, St. Landry LA, Pointe Coupee LA, and Jackson
TN cable television systems, (collectively, the "Combined Systems") included in
TWI Cable, Inc. ("TWI Cable"), as of December 31, 1996 and 1997, the related
combined statements of operations, changes in net assets and cash flows for the
years then ended. In addition, we have audited the combined statement of
operations and cash flows for the year ended December 31, 1995 of the
Predecessor Combined Systems. These combined financial statements are the
responsibility of the Combined Systems' or the Predecessor's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Combined
Systems, included in TWI Cable or the Predecessor, at December 31, 1996 and
1997, and the combined results of their operations and their cash flows for the
years ended December 31, 1995, 1996 and 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
March 16, 1998
F-138
<PAGE> 350
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 570 $ 1,371
Receivables, less allowance of $71 and $116 for the years
ended December 31, 1996 and 1997, respectively............ 794 1,120
Prepaid expenses and other assets........................... 45 183
Property, plant and equipment, net.......................... 36,966 36,944
Cable television franchises, net............................ 209,952 198,913
Goodwill and other intangibles, net......................... 51,722 50,383
-------- --------
Total assets...................................... $300,049 $288,914
======== ========
LIABILITIES AND NET ASSETS
Accounts payable............................................ $ 1,640 $ 652
Accrued programming expenses................................ 847 904
Accrued franchise fees...................................... 736 835
Subscriber advance payments and deposits.................... 66 407
Deferred income taxes....................................... 58,340 60,601
Other liabilities........................................... 945 969
-------- --------
Total liabilities................................. 62,574 64,368
Total net assets.................................. 237,475 224,546
-------- --------
Total liabilities and net assets.................. $300,049 $288,914
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-139
<PAGE> 351
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
---- ---- ----
(PREDECESSOR) (INCLUDED IN TWI CABLE INC.)
<S> <C> <C> <C>
REVENUES..................................... $43,549 $47,327 $50,987
COSTS AND EXPENSES:
Operating and programming.................... 13,010 12,413 12,101
Selling, general and administrative.......... 9,977 12,946 13,823
Depreciation and amortization................ 17,610 18,360 18,697
(Gain) loss on disposal of fixed assets...... -- (244) 620
------- ------- -------
Total costs and expenses........... 40,597 43,475 45,241
------- ------- -------
Operating income............................. 2,952 3,852 5,746
Interest expense............................. 11,871 -- --
------- ------- -------
(Loss) income before income tax (benefit)
expense.................................... (8,919) 3,852 5,746
Income tax (benefit) expense................. (3,567) 1,502 2,262
------- ------- -------
Net (loss) income............................ $(5,352) $ 2,350 $ 3,484
======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-140
<PAGE> 352
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<S> <C>
Contribution by Parent...................................... $250,039
Repayment of advances from Parent......................... (47,895)
Advances from Parent...................................... 32,981
Net income................................................ 2,350
--------
Balance at December 31, 1996................................ 237,475
Repayment of advances from Parent......................... (50,661)
Advances from Parent...................................... 34,248
Net income................................................ 3,484
--------
Balance at December 31, 1997................................ $224,546
========
</TABLE>
See accompanying notes to combined financial statements.
F-141
<PAGE> 353
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
---- ---- ----
(PREDECESSOR) (INCLUDED IN TWI CABLE INC.)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income............................... $(5,352) $ 2,350 $ 3,484
Adjustments for noncash and nonoperating
items:
Income tax (benefit) expense............... (3,567) 1,502 2,262
Depreciation and amortization.............. 17,610 18,360 18,697
(Gain) loss on disposal
of fixed assets.......................... -- (244) 620
Changes in operating assets and
liabilities:
Receivables, prepaids and other
assets................................ (196) 944 (464)
Accounts payable, accrued expenses and
other liabilities..................... (972) 176 (466)
Other balance sheet changes.............. -- -- (529)
------- --------- --------
Net cash provided by operations................. 7,523 23,088 23,604
INVESTING ACTIVITIES:
Purchase of Predecessor cable systems, net of
cash acquired................................. -- (249,473) --
Capital expenditures............................ (7,376) (8,170) (6,390)
------- --------- --------
Net cash used in investing activities........... (7,376) (257,643) (6,390)
FINANCING ACTIVITIES:
Advance from Parent for purchase of
Predecessor................................... -- 250,039 --
Net repayment of advances from Parent........... -- (14,914) (16,413)
------- --------- --------
Net cash provided by (used in) financing
activities.................................... -- 235,125 (16,413)
INCREASE IN CASH AND CASH EQUIVALENTS........... 147 570 801
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD........................................ 419 0 570
------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $ 566 $ 570 $ 1,371
======= ========= ========
</TABLE>
See accompanying notes to combined financial statements.
F-142
<PAGE> 354
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The cable television systems operating in the metropolitan areas of
Picayune, Mississippi; Lafourche, Louisiana; St. Tammany, Louisiana; St. Landry,
Louisiana; Pointe Coupee, Louisiana; and Jackson, Tennessee (the "Combined
Systems") are principally engaged in the cable television business under
non-exclusive franchise agreements, which expire at various times beginning in
1999. The Combined Systems' operations consist primarily of selling video
programming which is distributed to subscribers for a monthly fee through a
network of coaxial and fiber-optic cables.
Prior to January 4, 1996, the Combined Systems were included in certain
subsidiaries of Cablevision Industries Corporation ("CVI"). On January 4, 1996,
CVI merged into a wholly owned subsidiary of Time Warner Inc. (the "CVI
Merger"). On October 1, 1996, Time Warner Inc. ("Time Warner") completed a
reorganization amongst certain of its wholly owned cable television subsidiaries
whereby CVI was renamed TWI Cable Inc. ("TWI Cable").
BASIS OF PRESENTATION
TWI Cable has committed to sell the Combined Systems to Renaissance Media
Holdings LLC ("Renaissance") pursuant to an Asset Purchase Agreement with
Renaissance, dated November 14, 1997. Accordingly, the accompanying combined
financial statements of the Combined Systems reflect the "carved out" historical
financial position, results of operations, cash flows and changes in net assets
of the operations of the Combined Systems as if they had been operating as a
separate company. Effective as of January 1, 1996, the Combined Systems'
financial statements reflect the new basis of accounting arising from Time
Warner's merger with CVI. Based on Time Warner's allocation of the purchase
price, the assets and liabilities of the Combined Systems were revalued
resulting in goodwill allocated to the Combined Systems of approximately
$52,971,000, which is being amortized over its estimated life of 40 years. In
addition, approximately $220,981,000 was allocated to cable television
franchises and other intangible assets, which is being amortized over periods up
to 20 years. The Combined Systems' financial statements through December 31,
1995 reflect the historical cost of their assets and liabilities and results of
their operations.
The combined statements have been adjusted to include the allocation of
certain corporate expenses incurred by Time Warner Cable and/or TWI Cable on the
Combined Systems' behalf, based upon the number of Combined System subscribers
managed by Time Warner Cable and the ratio of Combined System subscribers to
total TWI Cable subscribers, respectively. These allocations reflect all costs
of doing business that the Combined Systems would have incurred on a stand alone
basis as disclosed in Note 3. Management believes that these allocations are
reasonable.
F-143
<PAGE> 355
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
BASIS OF COMBINATION
The combined financial statements include the assets, liabilities,
revenues, expenses, income, loss and cash flows of the Combined Systems, as if
the Combined Systems were a single company. Significant intercompany accounts
and transactions between the Combined Systems have been eliminated. Significant
accounts and transactions with Time Warner and its affiliates are disclosed as
related party transactions (see Note 3).
USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined financial
statements and footnotes thereto. Actual results could differ from those
estimates.
CONCENTRATION OF CREDIT RISK
A significant portion of the customer base is concentrated within the local
geographical area of each of the individual cable television systems. The
Combined Systems generally extend credit to customers and the ultimate
collection of accounts receivable could be affected by the local economy.
Management performs continuous credit evaluations of its customers and may
require cash in advance or other special arrangements from certain customers.
Management does not believe that there is any significant credit risk which
could have a material effect on the financial condition of the Combined Systems.
REVENUE AND COSTS
Subscriber fees are recorded as revenue in the period the related services
are provided and advertising revenues are recognized in the period the related
advertisements are exhibited. Rights to exhibit programming are purchased from
various cable networks. The costs of such rights are generally expensed as the
related services are made available to subscribers.
FRANCHISE FEES
Local governmental authorities impose franchise fees on the cable
television systems owned by the Combined Systems ranging up to a federally
mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are
collected from the Combined Systems' customers. Prior to January 1997, franchise
fees were not separately itemized on customers' bills. Such fees were considered
part of the monthly charge for basic services and equipment, and therefore were
reported as revenue and expense in the Combined Systems' financial results.
Management began the process of itemizing such fees on all customers' bills
beginning in January 1997. In conjunction with itemizing these charges, the
Combined Systems began separately collecting the franchise fee on all revenues
subject to franchise fees. As a result, such fees are no longer included as
revenue or as franchise
F-144
<PAGE> 356
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
fee expense. The net effect of this change is a reduction in 1997 revenue and
franchise fee expense of approximately $1,500,000 versus the comparable period
in 1996.
ADVERTISING COSTS
Advertising costs are expensed upon the first exhibition of the related
advertisements. Advertising expense amounted to $308,000, $632,000 and $510,000
for the years ended 1995, 1996 and 1997, respectively.
STATEMENT OF CASH FLOWS
The Combined Systems participate in a cash management system with
affiliates whereby cash receipts are transferred to a centralized bank account
from which centralized payments to various suppliers and creditors are made on
behalf of the Combined Systems. The excess of such cash receipts over payments
is included in net assets. Amounts shown as cash represent the Combined Systems'
net cash receipts not transferred to the centralized account as of December 31,
1996 and 1997. The average net intercompany payable balances were $173,348,000
and $170,438,000 for the years ended December 31, 1996 and 1997, respectively.
For purposes of this statement, cash and cash equivalents includes all
highly liquid investments purchased with original maturities of three months or
less.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to property,
plant and equipment generally include material, labor, overhead and interest.
Depreciation is provided on the straight-line method over estimated useful lives
as follows:
<TABLE>
<S> <C>
Buildings and improvements............................. 5-20 years
Cable television equipment............................. 5-15 years
Furniture, fixtures and other equipment................ 3-10 years
</TABLE>
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
---- ----
<S> <C> <C>
Land and buildings..................................... $ 2,003 $ 2,265
Cable television equipment............................. 32,324 39,589
Furniture, fixtures and other equipment................ 1,455 2,341
Construction in progress............................... 5,657 1,028
------- -------
41,439 45,223
Less accumulated depreciation.......................... (4,473) (8,279)
------- -------
Total........................................ $36,966 $36,944
======= =======
</TABLE>
F-145
<PAGE> 357
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
During 1996 and 1997, the Combined Systems amortized goodwill over periods
up to 40 years and cable television franchises over periods up to 20 years, both
using the straight-line method. Prior to the CVI Merger, goodwill and cable
television franchises were amortized over 15 years using the straight-line
method. For the years ended 1995, 1996, and 1997, amortization of goodwill
amounted to $8,199,000, $1,325,000, and $1,325,000, respectively, and
amortization of cable television franchises amounted to $1,284,000, $11,048,000,
and $11,048,000, respectively. Accumulated amortization of intangible assets at
December 31, 1996 and 1997 amounted to $12,373,000 and $24,746,000,
respectively.
IMPAIRMENT
Management separately reviews the carrying value of acquired long-lived
assets for each acquired entity on a quarterly basis to determine whether an
impairment may exist. Management considers relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of long-lived
assets can be recovered. Upon a determination that the carrying value of
long-lived assets will not be recovered from the undiscounted future cash flows
of the acquired business, the carrying value of such long-lived assets would be
considered impaired and would be reduced by a charge to operations in the amount
of the impairment. An impairment charge is measured as a deficiency in estimated
discounted future cash flows of the acquired business to recover the carrying
value related to the long-lived assets.
INCOME TAXES
Income taxes have been provided using the liability method prescribed by
FASB Statement No. 109, "Accounting for Income Taxes." Under the liability
method, deferred income taxes reflect tax carryforwards and the net tax effects
of temporary differences between the carrying amount of assets and liabilities
for financial statements and income tax purposes, as determined under enacted
tax laws and rates.
2. EMPLOYEE BENEFIT PLANS
Following the CVI Merger, the Combined Systems began participation in the
Time Warner Cable Pension Plan (the "Pension Plan"), a non-contributory defined
benefit pension plan, and the Time Warner Cable Employee Savings Plan (the
"Savings Plan") which are administered by a committee appointed by the Board of
Representatives of Time Warner Entertainment Company, L.P. ("TWE"), an affiliate
of Time Warner, and which cover substantially all employees.
Benefits under the Pension Plan are determined based on formulas which
reflect an employee's years of service and compensation levels during the
employment period. Pension expense for the years ended December 31, 1996 and
1997 totaled $184,000 and $192,000, respectively.
F-146
<PAGE> 358
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Combined Systems' contributions to the Savings Plan are limited to
6.67% of an employee's eligible compensation during the plan year. The Board of
Representatives of TWE has the right in any year to set the maximum amount of
the Combined Systems' contribution. Defined contribution plan expense for the
years ended December 31, 1996 and 1997 totaled $107,000 and $117,000,
respectively.
Prior to the CVI Merger, substantially all employees were eligible to
participate in a profit sharing plan or a defined contribution plan. The profit
sharing plan provided that the Combined Systems may contribute, at the
discretion of their board of directors, an amount up to 15% of compensation for
all eligible participants out of its accumulated earnings and profits, as
defined. Profit sharing expense amounted to approximately $31,000 for the year
ended December 31, 1995.
The defined contribution plan contained a qualified cash or deferred
arrangement pursuant to Internal Revenue Code Section 401(k). This plan provided
that eligible employees may contribute from 2% to 10% of their compensation to
the plan. The Combined Systems matched contributions of up to 4% of the
employees' compensation. The expense for this plan amounted to approximately
$96,000 for the year ended December 31, 1995.
The Combined Systems have no material obligations for other post retirement
benefits.
3. RELATED PARTIES
In the normal course of conducting business, the Combined Systems had
various transactions with Time Warner and its affiliates, generally on terms
resulting from a negotiation between the affected units that in management's
view resulted in reasonable allocations.
PROGRAMMING
Included in the Combined Systems' 1996 and 1997 operating expenses are
charges for programming and promotional services provided by Home Box Office,
Turner Broadcasting System, Inc. and other affiliates of Time Warner. These
charges are based on customary rates and are in the ordinary course of business.
For the year ended December 31, 1996 and 1997, these charges totaled $3,260,000
and $3,458,000, respectively. Accrued related party expenses for these
programming and promotional services included in accrued programming expenses
approximated $327,000 and $291,000 for the years ended December 31, 1996 and
1997, respectively. There were no such programming and promotional service
related party transactions in 1995.
MANAGEMENT FEES
TWI Cable entered into a management service arrangement with Time Warner
Cable ("TWC"), pursuant to which TWC is responsible for the management and
operation of TWI Cable, which includes the Combined Systems. The management fees
paid to TWC by TWI Cable are based on an allocation of the corporate expenses of
TWC's cable
F-147
<PAGE> 359
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
division in proportion to the respective number of subscribers of all cable
systems managed by TWC's cable division. The allocation of the TWI Cable
management fee to the Combined Systems approximated $1,432,000 and $1,715,000
for the years ended December 31, 1996 and 1997, respectively.
Other divisional expenses allocated to the Combined Systems approximated
$1,301,000 and $1,067,000 for the years ended December 31, 1996 and 1997,
respectively.
4. INTEREST EXPENSE
Prior to the CVI Merger, the Jackson, Tennessee system was included in
Cablevision Industries Limited Partnership and Combined Entities ("CILP"). The
Jackson system was charged interest expense in connection with CILP's (a) senior
and subordinated bank credit agreements; and (b) senior unsecured subordinated
Series A and Series B notes payable to CVI. The remaining five systems
comprising the Combined Systems were included in Cablevision Industries of the
Southeast, Inc. and Combined Entities ("CIOS"). These systems were charged
interest expense in connection with CIOS's (a) bank revolving credit agreement;
and (b) junior and senior subordinated debt to CVI.
5. INCOME TAXES
Effective January 4, 1996, the Combined Systems are included in the
consolidated federal income tax return of Time Warner. Prior to January 4, 1996,
the Combined Systems were included in the consolidated federal income tax return
of CVI. The provision (benefit) for income taxes has been calculated on a
separate company basis. The components of the provision (benefit) for income
taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
FEDERAL:
Current...................... $ -- $ -- $ --
Deferred..................... (2,881) 1,213 1,826
STATE:
Current...................... -- -- --
Deferred..................... (686) 289 436
------- ------ ------
Net provision (benefit) for
income taxes.............. $(3,567) $1,502 $2,262
======= ====== ======
</TABLE>
The Combined Systems did not, and will not, have a tax sharing agreement
with either Time Warner, TWI Cable or CVI. Therefore, the Combined Systems have
not and will not be compensated for the utilization of the Combined Systems' tax
losses, by Time Warner, TWI Cable or CVI. In addition, the Combined Systems have
not and will not be required to make payments to either Time Warner or TWI Cable
for the current tax provision of the Combined Systems.
F-148
<PAGE> 360
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the income tax provision (benefit) expected at the
U.S. federal statutory income tax rate and the total income tax provision
(benefit) are due to nondeductible goodwill amortization and state taxes.
Significant components of the Combined Systems' deferred tax assets and
liabilities, as calculated on a separate company basis, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Amortization....................... $61,266 $58,507
Depreciation....................... 3,576 4,060
------- -------
Total gross deferred tax
liabilities.............. 64,842 62,567
------- -------
DEFERRED TAX ASSETS:
Tax loss carryforwards............. 6,474 1,920
Allowance for doubtful accounts.... 28 46
------- -------
Total deferred tax
assets................... 6,502 1,966
------- -------
Net deferred tax liability......... $58,340 $60,601
======= =======
</TABLE>
On a separate company basis, the Combined Systems have tax loss
carryforwards of approximately $4.8 million at December 31, 1997. However, if
the Combined Systems are acquired in an asset purchase, the tax loss
carryforwards, and net deferred tax liabilities relating to temporary
differences will not carry over to Renaissance (see Note 8).
6. COMMITMENTS AND CONTINGENCIES
The Combined Systems had rental expense of approximately $642,000,
$824,000, and $843,000 for the years ended December 31, 1995, 1996 and 1997,
respectively, under various lease and rental agreements for offices, utility
poles, warehouses and computer equipment. Future minimum annual rental payments
under noncancellable leases will approximate $1,000,000 annually over the next
five years.
In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996, TWC
has agreed with the Federal Communications Commission ("FCC") to invest in
certain upgrades to its cable infrastructure (consisting primarily of materials
and labor in connection with the plant upgrades up to 750 megahertz) over the
next three years (approximately $22 million). This agreement with the FCC, which
extends to the Combined Systems, will be assumed by Renaissance as it relates to
the Combined Systems in accordance with the Asset Purchase Agreement.
F-149
<PAGE> 361
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. OTHER LIABILITIES
Other liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Compensation............................................ $217 $250
Data Processing Costs................................... 100 90
Sales and other taxes................................... 101 90
Copyright Fees.......................................... 85 83
Pole Rent............................................... 66 63
Other................................................... 376 393
---- ----
Total.............................................. $945 $969
==== ====
</TABLE>
8. SUBSEQUENT EVENT (UNAUDITED)
The sale of the Combined Systems, in connection with the Asset Purchase
Agreement with Renaissance, closed on April 9, 1998 at the purchase price of
$309,500,000.
F-150
<PAGE> 362
INDEPENDENT AUDITORS' REPORT
The Partners
Helicon Partners I, L.P.:
We have audited the accompanying combined balance sheets of Helicon Partners I,
L.P. and affiliates as of December 31, 1997 and 1998, and the related combined
statements of operations, changes in partners' deficit, and cash flows for each
of the years in the three-year period ended December 31, 1998. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Helicon Partners I,
L.P. and affiliates as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
March 26, 1999
F-151
<PAGE> 363
HELICON PARTNERS I, L.P. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
ASSETS (NOTES 8 AND 9)
Cash and cash equivalents (note 2).............. $ 4,372,281 $ 5,130,561
Receivables from subscribers.................... 1,439,720 1,631,931
Prepaid expenses and other assets............... 2,205,794 3,469,228
Property, plant and equipment, net (notes 3, 4,
and 11)....................................... 80,104,377 86,737,580
Intangible assets and deferred costs, net (notes
3 and 5)...................................... 85,066,665 94,876,847
------------- -------------
Total assets.......................... $ 173,188,837 $ 191,846,147
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accounts payable.............................. $ 7,416,901 $ 8,037,193
Accrued expenses.............................. 1,539,116 1,589,240
Subscriptions received in advance............. 1,018,310 819,564
Accrued interest.............................. 3,760,360 3,742,456
Due to principal owner (note 7)............... 5,000,000 5,000,000
Senior secured notes (note 8)................. 115,000,000 115,000,000
Loans payable to banks (note 9)............... 85,776,641 120,266,922
12% subordinated notes, net of unamortized
discount of $2,889,541 in 1997 and
$2,543,869 in 1998 (note 10)............... 37,249,948 42,672,085
Redeemable partnership interests (note 10).... 6,437,142 16,253,906
Other notes payable (note 11)................. 5,747,076 5,448,804
Due to affiliates, net (note 6)............... 71,474 247,042
------------- -------------
Total liabilities..................... 269,016,968 319,077,212
------------- -------------
Commitments (notes 8, 9, 10, 11 and 13)
Partners' deficit (note 12):
Preferred limited partners.................... 7,649,988 8,567,467
Accumulated partners' deficit................. (103,477,119) (135,797,532)
Less capital contribution receivable.......... (1,000) (1,000)
------------- -------------
Total partners' deficit............... (95,828,131) (127,231,065)
------------- -------------
Total liabilities and partners'
deficit............................ $ 173,188,837 $ 191,846,147
============= =============
</TABLE>
See accompanying notes to combined financial statements.
F-152
<PAGE> 364
HELICON PARTNERS I, L.P. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues............................... $ 42,061,537 $ 59,957,434 $ 75,576,810
------------ ------------ ------------
Operating expenses:
Operating expenses (note 13)......... 11,395,509 17,408,265 22,687,850
General and administrative expenses
(notes 6 and 13).................. 7,244,663 9,762,931 13,365,824
Marketing expenses................... 1,235,553 2,266,627 3,521,893
Depreciation and amortization........ 12,556,023 19,411,813 24,290,088
Management fee charged by affiliate
(note 6).......................... 2,103,077 2,997,872 3,496,271
Corporate and other expenses......... 426,672 549,222 602,987
------------ ------------ ------------
Total operating expenses..... 34,961,497 52,396,730 67,964,913
------------ ------------ ------------
Operating income..................... 7,100,040 7,560,704 7,611,897
------------ ------------ ------------
Interest expense (note 7).............. (17,418,266) (23,586,227) (27,633,714)
Interest income........................ 563,362 154,037 92,967
------------ ------------ ------------
(16,854,904) (23,432,190) (27,540,747)
------------ ------------ ------------
Loss before extraordinary item....... (9,754,864) (15,871,486) (19,928,850)
------------ ------------ ------------
Extraordinary item -- write-off of
deferred financing costs (note 9).... -- -- (1,657,320)
------------ ------------ ------------
Net loss............................. $ (9,754,864) $(15,871,486) $(21,586,170)
============ ============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-153
<PAGE> 365
HELICON PARTNERS I, L.P. AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
PARTNERS' DEFICIT
-------------------------
PREFERRED CLASS A CAPITAL
LIMITED GENERAL LIMITED CONTRIBUTION
PARTNERS PARTNER PARTNERS RECEIVABLE TOTAL
---------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ $ -- $(307,994) $ (67,144,287) $(1,000) $ (67,453,281)
Issuance of preferred limited
partnership interests (note 10)... 6,250,000 (62,500) (6,187,500) -- --
Partner capital contributions (note
10)............................... -- 1,500 -- -- 1,500
Distribution of additional preferred
partnership interests (note 10)... 558,430 (5,584) (552,846) -- --
Net loss............................ -- (97,549) (9,657,315) -- (9,754,864)
---------- --------- ------------- ------- -------------
Balance at December 31, 1996........ 6,808,430 (472,127) (83,541,948) (1,000) (77,206,645)
Distribution of additional preferred
partnership interests (note 10)... 841,558 (8,416) (833,142) -- --
Accretion of redeemable partnership
interests (note 10)............... -- (27,500) (2,722,500) -- (2,750,000)
Net loss............................ -- (158,715) (15,712,771) -- (15,871,486)
---------- --------- ------------- ------- -------------
Balance at December 31, 1997........ 7,649,988 (666,758) (102,810,361) (1,000) (95,828,131)
Distribution of additional preferred
partnership interests (note 10)... 917,479 (9,175) (908,304) -- --
Accretion of redeemable partnership
interests (note 10)............... -- (98,168) (9,718,596) -- (9,816,764)
Net loss............................ -- (215,861) (21,370,309) -- (21,586,170)
---------- --------- ------------- ------- -------------
Balance at December 31, 1998........ $8,567,467 $(989,962) $(134,807,570) $(1,000) $(127,231,065)
========== ========= ============= ======= =============
</TABLE>
See accompanying notes to combined financial statements.
F-154
<PAGE> 366
HELICON PARTNERS I, L.P. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (9,754,864) $(15,871,486) $(21,586,170)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Extraordinary item...................................... -- -- 1,657,320
Depreciation and amortization........................... 12,556,023 19,411,813 24,290,088
Gain on sale of equipment............................... (20,375) (1,069) (29,323)
Interest on 12% subordinated notes paid through the
issuance of additional notes.......................... 1,945,667 4,193,819 4,961,241
Interest on other notes payable added to principal...... 168,328 185,160 --
Amortization of debt discount and deferred financing
costs................................................. 2,115,392 849,826 919,439
Change in operating assets and liabilities, net of
acquisitions:
Decrease (increase) in receivables from subscribers... 176,432 (496,146) (79,535)
Increase in prepaid expenses and other assets......... (269,156) (976,491) (1,255,018)
Increase in financing costs incurred.................. (4,525,331) (434,000) (2,200,000)
Increase in accounts payable and accrued expenses..... 2,182,762 2,957,524 681,037
Increase (decrease) in subscriptions received in
advance............................................ 119,277 325,815 (208,803)
Increase (decrease) in accrued interest............... 1,613,630 376,158 (17,904)
------------ ------------ ------------
Total adjustments.................................. 16,062,649 26,392,409 28,718,542
------------ ------------ ------------
Net cash provided by operating activities.......... 6,307,785 10,520,923 7,132,372
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment................ (8,987,766) (15,824,306) (13,538,978)
Proceeds from sale of equipment........................... 21,947 23,270 118,953
Cash paid for net assets of cable television systems
acquired................................................ (35,829,389) (70,275,153) (26,063,284)
Cash paid for net assets of internet businesses
acquired................................................ (40,000) (993,760) --
Increase in intangible assets and deferred costs.......... (127,673) (308,759) (183,018)
------------ ------------ ------------
Net cash used in investing activities.............. (44,962,881) (87,378,708) (39,666,327)
------------ ------------ ------------
Cash flows from financing activities:
Capital contributions..................................... 1,500 -- --
Decrease in restricted cash............................... -- 1,000,000 --
Proceeds from issuance of 12% subordinated notes and
redeemable partnership interests........................ 34,000,000 -- --
Proceeds from bank loans.................................. 8,900,000 77,285,000 104,000,000
Repayment of bank loans................................... (952,777) (1,505,581) (69,509,719)
Repayment of other notes payable.......................... (527,514) (1,145,989) (1,362,995)
Advances to affiliates.................................... (3,207,996) (3,412,411) (8,856,491)
Repayments of advances to affiliates...................... 3,479,336 2,986,778 9,021,440
------------ ------------ ------------
Net cash provided by financing activities.......... 41,692,549 75,207,797 33,292,235
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... 3,037,453 (1,649,988) 758,280
Cash and cash equivalents at beginning of year.............. 2,984,816 6,022,269 4,372,281
------------ ------------ ------------
Cash and cash equivalents at end of year.................... $ 6,022,269 $ 4,372,281 $ 5,130,561
============ ============ ============
Supplemental cash flow information:
Interest paid............................................. $ 11,575,250 $ 17,981,264 $ 21,770,938
============ ============ ============
Other non-cash items:
Acquisition of property, plant and equipment through
issuance of other notes payable....................... $ 1,222,000 $ 917,815 $ 1,025,319
============ ============ ============
Issuance of notes payable in connection with the
acquisition of cable television and internet systems,
net of imputed interest............................... $ 569,500 $ 1,914,479 --
============ ============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-155
<PAGE> 367
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
1. ORGANIZATION AND NATURE OF BUSINESS
Helicon Partners I, L.P. ("the Partnership") was organized as a limited
partnership on November 30, 1994 under the laws of the State of Delaware. On
April 8, 1996, Baum Investments, Inc. acquired a 1% general partnership interest
in the Partnership through an initial capital contribution of $1,500 and the
existing limited partners of The Helicon Group, L.P. ("THGLP"), formed in 1993,
exchanged their limited partnership interests in THGLP for all Class A Common
Limited Partnership Interests and Preferred Limited Partnership Interests in the
Partnership. As a result of this exchange, THGLP became 99% owned by the
Partnership. The Partnership now owns all of the limited partnership interests
in THGLP and Baum Investments, Inc. continues to be the general partner of THGLP
and to own a 1% general partnership interest in THGLP. The Partnership also owns
a 99% interest and THGLP a 1% interest in HPI Acquisition Co., LLC ("HPIAC"), a
Delaware limited liability company formed on February 7, 1996. The Partnership
also owned an 89% limited partnership interest and Baum Investments, Inc. a 1%
general partnership interest in Helicon OnLine, L. P. ("HOL"), a Delaware
limited partnership formed May 31, 1997. On June 29, 1998, the net assets of HOL
were transferred to THGLP in settlement of the inter-company loans THGLP had
made to HOL. The Partnership, THGLP, HPIAC and HOL are referred to collectively
herein as the Company.
On March 22, 1999, Helicon Partners I, L. P. (HPI), Baum Investments, Inc.
and all the holders of partnership interests in HPI entered into a purchase
agreement by and among Charter Communications, Inc, Charter Communications, LLC
and Charter Helicon, LLC (collectively the "Charter Entities") providing for the
sale of all such partnership interests and Helicon Corp.'s interest in the
management agreements with THGLP and HPIAC to the Charter Entities. The sale
price is $550 million which amount will be reduced by any outstanding
indebtedness assumed by the Charter Entities.
The Company operates cable television systems located in Pennsylvania, West
Virginia, North Carolina, South Carolina, Louisiana, Vermont, New Hampshire,
Georgia and Tennessee. The Company also offers a broad range of Internet access
service, including dial-up access, dedicated high speed access, both two-way and
asymmetrical ("Hybrid"), high speed cable modem access, World Wide Web design
and hosting services and other value added services such as paging and private
network systems within the Company's cable service and contiguous areas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) PRINCIPLES OF COMBINATION
The accompanying financial statements include the accounts of the
Partnership, THGLP and HPIAC and HOL which have been combined because of common
ownership and control. They also reflect the accounts of THGLP's subsidiary,
Helicon Capital Corp. ("HCC"), which has nominal assets and no operations since
its incorporation. All intercompany accounts and transactions have been
eliminated in combination.
F-156
<PAGE> 368
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
b) PARTNERSHIP PROFITS, LOSSES AND DISTRIBUTIONS
Under the terms of the partnership agreements of the Partnership and THGLP,
profits, losses and distributions will be made to the general and Class A
Limited Partners pro-rata based on their respective partnership interest.
Holders of Preferred Limited Partnership Interests are entitled to an
aggregate preference on liquidation of $6,250,000 plus cumulative in-kind
distributions of additional Preferred Limited Partnership interests at an annual
rate of 12%.
c) REVENUE RECOGNITION
Revenue is recognized as services are provided to subscribers. Subscription
revenues billed in advance for services are deferred and recorded as income in
the period in which services are rendered.
d) Property, Plant and Equipment
Property, plant and equipment are carried at cost and are depreciated using
the straight-line method over the estimated useful lives of the respective
assets.
e) INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs are carried at cost and are amortized
using the straight-line method over the estimated useful lives of the respective
assets. The Company periodically reviews the amortization periods of their
intangible assets and deferred costs. The Company evaluates whether there has
been a permanent impairment in the value of these assets by considering such
factors including projected undiscounted cash flows, current market conditions
and changes in the cable television industry that would impact the
recoverability of such assets, among other things.
f) INCOME TAXES
No provision for Federal or state income taxes has been made in the
accompanying combined financial statements since any liability for such income
taxes is that of the partners and not of the Partnership or its affiliates.
Certain assets have a basis for income tax purposes that differs from the
carrying value for financial reporting purposes, primarily due to differences in
depreciation methods. As a result of these differences, at December 31, 1997 and
1998 the net carrying value of these assets for financial reporting purposes
exceeded the net basis for income tax purposes by approximately $22 million and
$27 million respectively.
g) CASH AND CASH EQUIVALENTS
Cash and cash equivalents, consisting of amounts on deposit in money market
accounts, checking accounts and certificates of deposit, were $4,372,281 and
$5,130,561 at December 31, 1997 and 1998, respectively.
h) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues, expenses and the
disclosure of contingent assets and liabilities to prepare these combined
financial statements in
F-157
<PAGE> 369
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
i) INTEREST RATE CAP AGREEMENTS
The cost paid is amortized over the life of the agreements.
j) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Receivables, Accounts Payable and Accrued Expenses
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, current receivables, notes receivable, accounts payable,
and accrued expenses approximate fair values.
Senior Secured Notes and Long-term Debt
For the Senior Secured Notes, fair values are based on quoted market
prices. The fair market value at December 31, 1997 and 1998 was approximately
$123,000,000 and $120,000,000, respectively. For long-term debt, their values
approximate carrying value due to the short-term maturity of the debt and/or
fluctuating interest.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the consolidated
statements of stockholder's equity and comprehensive income. The Statement
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of operations.
The Company has no items that qualify as comprehensive income.
3. ACQUISITIONS
Cable Acquisitions
On January 31, 1995, THGLP acquired a cable television system, serving
approximately 1,100 (unaudited) subscribers in the Vermont communities of
Bradford, South Royalton and Chelsea. The aggregate purchase price was
approximately $350,000 and was allocated to the net assets acquired which
included property and equipment and intangible assets.
In June and July, 1996, HPIAC completed the acquisitions of all the
operating assets of the cable television systems, serving approximately 26,000
(unaudited) subscribers, in the areas of Jasper and Skyline, Tennessee and
Summerville, Trenton, Menlo, Decatur and Chatsworth, Georgia (collectively
referred to as the Tennessee cluster).
F-158
<PAGE> 370
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate purchase price of $36,398,889, including acquisition costs of
$742,837, was allocated to the net assets acquired based on their estimated fair
value. Such allocation is summarized as follows:
<TABLE>
<S> <C>
Land............................................ $ 25,000
Cable television system......................... 17,876,244
Other property, plant and equipment............. 185,000
Subscriber lists................................ 17,474,762
Noncompete agreement............................ 1,000
Other intangible assets......................... 742,837
Other net operating items....................... 94,046
-----------
Total aggregate purchase price.................. $36,398,889
===========
</TABLE>
A portion of the purchase price was paid through the issuance of notes to
the sellers of one of the systems totaling $750,000. Such notes were reported
net of imputed interest of $180,500 computed at 9% per annum (see note 11).
On January 16, 1997, HPIAC acquired an adjacent cable television system
serving approximately 2,256 (unaudited) subscribers in the communities of Ten
Mile and Hamilton, Tennessee. The aggregate purchase price was approximately
$2,960,294 and was allocated to the net assets acquired which included property,
equipment and intangible assets, based on their estimated fair value.
On January 31, 1997, THGLP acquired a cable television system, serving
approximately 823 (unaudited) subscribers in the West Virginia counties of Wirt
and Wood. The aggregate purchase price was approximately $1,053,457, and was
allocated to the net assets acquired which included property, equipment and
intangible assets, based on their estimated fair value.
On April 18, 1997, HPIAC acquired a cable television system serving
approximately 839 (unaudited) subscribers in the communities of Charleston and
Calhoun, Tennessee. The aggregate purchase price was approximately $1,055,693
and was allocated to the net assets acquired which included property and
equipment and intangible assets, based on their estimated fair value.
On June 26, 1997, HPIAC acquired the net assets of cable television systems
serving approximately 21,500 (unaudited) subscribers primarily in the North
Carolina communities of Avery County and surrounding areas and in the South
Carolina community of Anderson County. The aggregate purchase price was
approximately $45,258,279, including acquisition costs of $547,235, and was
allocated to the net assets acquired which included property, plant, equipment
and intangible assets, based on their estimated fair value.
On June 26, 1997, THGLP acquired the net assets of a cable television
system serving approximately 11,000 (unaudited) subscribers in the North
Carolina communities of Watauga County, Blowing Rock, Beech Mountain and the
town of Boone. The aggregate purchase price was $19,947,430 and was allocated to
the net assets acquired which included, property, plant, equipment and
intangible assets, based on their estimated fair value.
F-159
<PAGE> 371
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate purchase price of the 1997 cable acquisitions was $70,275,153
and was allocated to the net assets acquired based on their estimated fair
market value as follows:
<TABLE>
<S> <C>
Land.............................................. $ 158,500
Cable television system........................... 21,320,900
Vehicles.......................................... 1,473,600
Computer equipment................................ 240,000
Subscriber lists.................................. 46,925,173
Organization and other costs...................... 688,816
Other net operating items......................... (531,836)
-----------
Total aggregate purchase price.................... $70,275,153
===========
</TABLE>
On December 31, 1998, HPIAC acquired the net assets of cable television
systems serving approximately 11,225 (unaudited) subscribers primarily in the
North Carolina community of Roanoke Rapids. The aggregate purchase price was
$26,063,284 including acquisition costs of $535,875 and was allocated to the net
assets acquired, which included, property, equipment and intangible assets,
based on their estimated fair value.
<TABLE>
<S> <C>
Land.............................................. $ 250,000
Cable television system........................... 4,258,000
Other property, plant and equipment............... 1,103,375
Subscriber lists.................................. 19,805,000
Organization and other costs...................... 535,875
Other net operating items......................... 111,034
-----------
Total aggregate purchase price.................... $26,063,284
===========
</TABLE>
Internet Acquisitions
On March 22, 1996, THGLP acquired the net assets of a telephone dial-up
internet access provider ("ISP") serving approximately 350 (unaudited) customers
in and around the area of Uniontown, Pennsylvania. The aggregate purchase price
was approximately $40,000.
On April 1, 1997, the Partnership acquired the net assets of a telephone
dial-up ISP serving approximately 2,500 (unaudited) customers in and around the
area of Uniontown, Pennsylvania. The aggregate purchase price was $757,029.
On May 31, 1997, the Partnership acquired the net assets of a telephone
dial-up ISP serving approximately 1,800 (unaudited) customers in and around the
area of Uniontown, Pennsylvania. The aggregate purchase price was $213,629.
On November 14, 1997, HOL acquired the net assets of a telephone dial-up
ISP serving approximately 1,744 (unaudited) customers in and around the area of
Johnstown, Pennsylvania. The aggregate purchase price was $348,927.
F-160
<PAGE> 372
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On December 17, 1997, HOL acquired the net assets of a telephone dial-up
ISP serving 1,571 (unaudited) customers in and around the area of Plainfield,
Vermont. The aggregate purchase price was $497,307.
On December 17, 1997, HOL acquired the net assets of a telephone dial-up
ISP serving approximately 2,110 (unaudited) customers in and around the area of
Wells River, Vermont. The aggregate purchase price was $673,170.
The aggregate purchase price of the 1997 ISP acquisitions was $2,490,062
and was allocated to the net assets acquired, based on their estimated fair
value. Such allocation is summarized as follows:
<TABLE>
<S> <C>
Internet service equipment......................... $ 237,064
Customer lists..................................... 1,409,768
Non-compete Agreement.............................. 883,097
Other intangible assets............................ 35,000
Other net operating items.......................... (74,867)
----------
Total aggregate purchase price..................... $2,490,062
==========
</TABLE>
A portion of the purchase price was paid through the issuance of notes to
the Sellers totaling $1,801,000. Such notes were reported net of imputed
interest of $304,698 computed at 9% per annum (see Note 11).
The operating results relating to the above acquisitions, effective with
their acquisition dates, are included in the accompanying combined financial
statements.
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net is summarized as follows at December 31:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
1997 1998 LIFE IN YEARS
------------ ------------ ----------------
<S> <C> <C> <C>
Land...................... $ 121,689 $ 320,689 --
Cable television system... 124,684,403 140,441,324 5 to 20
Internet service
equipment............... 1,281,362 2,483,602 2 to 3
Office furniture and
fixtures................ 677,672 728,253 5 and 10
Vehicles.................. 3,536,358 4,570,990 3 and 5
Building.................. 805,525 1,585,384 5 and 10
Building and leasehold
Improvements............ 398,843 445,820 1 to 5
Computers................. 3,232,355 4,159,506 3 to 5
------------ ------------
134,738,207 154,735,568
Less accumulated
depreciation............ (54,633,830) (67,997,988)
------------ ------------
$ 80,104,377 $ 86,737,580
============ ============
</TABLE>
F-161
<PAGE> 373
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs are summarized as follows at December
31:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
1997 1998 LIFE IN YEARS
------------ ------------ ----------------
<S> <C> <C> <C>
Covenants not-to-compete.... $ 14,270,120 $ 14,270,120 5
Franchise agreements........ 19,650,889 19,650,889 9 to 17
Goodwill.................... 1,703,760 1,703,760 20
Subscriber lists............ 82,292,573 102,097,573 6 to 10
Financing costs............. 9,414,809 9,291,640 8 to 10
Organization and other
costs..................... 3,631,650 4,306,777 5 to 10
------------ ------------
130,963,801 151,320,760
Less accumulated
amortization.............. (45,897,136) (56,443,913)
------------ ------------
$ 85,066,665 $ 94,876,847
============ ============
</TABLE>
6. TRANSACTIONS WITH AFFILIATES
Amounts due from/to affiliates result from management fees, expense
allocations and temporary non-interest bearing loans. The affiliates are related
to the Company through common-ownership.
The Partnership is managed by Helicon Corp., an affiliated management
company. During 1996, 1997 and 1998, the Partnership was charged management fees
of $2,103,077, $2,997,872, and $3,496,271, respectively. In 1997 and 1998,
$2,685,172 and $3,231,362 of the management fees were paid and $312,700 and
$172,476 were deferred, in accordance with the terms of the Partnership's credit
agreements, respectively. Management fees are calculated based on the gross
revenues of the systems. Additionally, during 1996, 1997 and 1998, THGLP was
also charged $980,000, $713,906, and $1,315,315, respectively, for certain costs
incurred by this related party on their behalf.
In May 1997, immediately after the formation of HOL, HPI sold 10% of its
limited partner interest in HOL to certain employees of Helicon Corp. Such
interests were sold at HPI's proportionate carrying value of HOL of $83,631 in
exchange for notes receivable from these individuals. These notes are due upon
the liquidation of HOL or the sale of all or substantially all of its assets.
On June 26, 1998, the notes were cancelled in consideration of the return
by the Helicon employees of their 10% limited partnership interests.
7. DUE TO PRINCIPAL OWNER
Mr. Theodore Baum, directly or indirectly, is the principal owner of 96.17%
of the general and limited partnership interests of the Partnership (the
"Principal Owner"). Due to Principal Owner consists of $5,000,000 at December
31, 1997 and 1998 payable by THGLP. Beginning on November 3, 1993, interest on
the $5,000,000 due to the Principal Owner did not accrue and in accordance with
the provisions of the Senior Secured Notes
F-162
<PAGE> 374
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
was not paid for twenty four months. Interest resumed on November 3, 1995 (see
Note 8). The principal may only be repaid thereafter subject to the passage of
certain limiting tests under the covenants of the Senior Secured Notes. Prior to
the issuance of the Senior Secured Notes, amounts due to Principal Owner bore
interest at varying rates per annum based on the prime rate and were due on
demand. Interest expense includes $521,701 in 1996 and $530,082 in 1997 and
$524,880 in 1998 related to this debt.
8. SENIOR SECURED NOTES
On November 3, 1993, THGLP and HCC (the "Issuers"), through a private
placement offering, issued $115,000,000 aggregate principal amount of 11% Senior
Secured Notes due 2003 (the "Senior Secured Notes"), secured by substantially
all the assets of THGLP. The Senior Secured Notes were issued at a substantial
discount from their principal amount and generated net proceeds to the Issuers
of approximately $105,699,000. Interest is payable on a semi-annual basis in
arrears on November 1 and May 1, beginning on May 1, 1994. Until November 1,
1996 the Senior Secured Notes bore interest at the rate of 9% per annum. After
November 1, 1996, the Senior Secured Notes bear interest at the rate of 11% per
annum. The discount on the Senior Secured Notes has been amortized over the term
of the Senior Secured Notes so as to result in an effective interest rate of 11%
per annum.
The Senior Secured Notes may be redeemed at the option of the Issuers in
whole or in part at any time on or after November 1, 1997 at the redemption
price of 108% reducing ratably to 100% of the principal amount, in each case
together with accrued interest to the redemption date. The Issuers are required
to redeem $25,000,000 principal amount of the Senior Secured Notes on each of
November 1, 2001 and November 1, 2002. The indenture under which the Senior
Secured Notes were issued contains various restrictive covenants, the more
significant of which are, limitations on distributions to partners, the
incurrence or guarantee of indebtedness, the payment of management fees, other
transactions with officers, directors and affiliates, and the issuance of
certain types of equity interests or distributions relating thereto.
9. LOANS PAYABLE TO BANKS
On July 12, 1996, HPIAC entered into $85,000,000 of senior secured credit
facilities ("Facilities") with a group of banks and The First National Bank of
Chicago, as agent. The Facilities were comprised of a $55,000,000 senior secured
two and one-half year revolving credit facility, converting on December 31, 1998
to a five and one-half year amortizing term loan due June 30, 2004 ("Facility
A"); and, a $30,000,000 senior secured, amortizing, multiple draw nine year term
loan facility due June 30, 2005 ("Facility B"). The Facilities financed certain
permitted acquisitions, transaction expenses and general corporate purposes.
Interest on outstanding borrowings was payable at specified margins over either
LIBOR or the higher of the corporate base rate of The First National Bank of
Chicago or the rates on overnight Federal funds transactions with members of the
Federal Reserve System. The margins varied based on the Company's total leverage
ratio, as defined, at the time of an advance. As of December 31, 1997, the
amounts outstanding were $30,000,000 under Facility B and $35,500,000
outstanding under Facility A. Interest
F-163
<PAGE> 375
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
was payable at LIBOR plus 3.50% for Facility B and LIBOR plus 3.00% for Facility
A. In addition, HPIAC paid a commitment fee of .5% of the unused balance of the
Facilities.
On December 15, 1998, the Facilities were repaid in full together with
accrued interest thereon from the proceeds of the new credit agreements (see
below).
In connection with the early retirement of the aforementioned bank debt,
HPIAC wrote off related unamortized deferred financing costs totaling
$1,657,320. Such amount has been classified as an extraordinary item in the
accompanying 1998 combined statement of operations.
In connection with the aforementioned Facilities, HPIAC entered into an
interest rate cap agreement to reduce its exposure to interest rate risk.
Interest rate cap transactions generally involve the exchange of fixed and
floating rate interest payment obligations and provide for a ceiling on interest
to be paid, respectively, without the exchange of the underlying notional
principal amount. These types of transactions involve risk of counterpart
nonperformance under the terms of the contract. At December 31, 1997, HPIAC had
cap agreements with aggregate notional amounts of $42,500,000 expiring through
March 29, 2000. On December 15, 1998, in connection with the early retirement of
the related bank debt, the cap agreements were terminated and HPIAC wrote off
the unamortized costs of these cap agreements.
On December 15, 1998, HPIAC entered into credit agreements with a group of
banks and Paribas, as agent, providing maximum borrowings of $110,000,000 (the
1998 Credit Facilities). The agreements include (i) a senior secured Credit
Agreement consisting of a $35,000,000 A Term Loan, maturing on December 31,
2005, $45,000,000 B Term Loan, maturing on December 31, 2006 and a $10,000,000
Revolving Commitment, maturing on December 31, 2005 and (ii) a Loan Agreement
consisting of a $20,000,000 Hybrid Facility, maturing on December 31, 2007.
As of December 31, 1998, the A Term Loan, B Term Loan and Hybrid Facility
were fully drawn down and there was nothing outstanding under the Revolving
Commitment. The principal cash payments required under the Company's credit
agreements for the fiscal years ended December 31, 1999, 2000, 2001, 2002 and
2003 are estimated to aggregate $0, $812,500, $3,950,000, $5,700,000 and
$7,450,000, respectively.
Interest is payable at LIBOR plus an applicable margin, which is based on a
ratio of loans outstanding to annualized EBITDAM, as defined in the agreement
and can not exceed 3.00% for A Term Loan and Revolving Commitments, 3.25% for B
Term Loan and 4.50% for the Hybrid Facility. In addition, the Company pays a
commitment fee of .50% of the unused balance of the Revolving Commitment.
The 1998 Credit Facilities are secured by a first perfected security
interest in all of the assets of HPIAC and a pledge of all equity interests of
HPIAC. The credit agreement contains various restrictive covenants that include
the achievement of certain financial ratios relating to interest, fixed charges,
leverage, limitations on capital expenditures, incurrence or guarantee of
indebtedness, other transactions with affiliates and distributions to members.
In addition, management fees in the aggregate cannot exceed 5% of gross revenues
of HPIAC.
F-164
<PAGE> 376
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On June 26, 1997, THGLP entered into a $20,000,000 senior secured credit
facility with Banque Paribas, as Agent (the 1997 Credit Facility). On January 5,
1999, the 1997 Credit Facility was restated and amended. The facility is
non-amortizing and is due November 1, 2000. Borrowings under the facility
financed the acquisition of certain cable television assets in North Carolina
(see note 3). Interest on the $20,000,000 outstanding is payable at specified
margins over either LIBOR or the rate of interest publicly announced in New York
City by The Chase Manhattan Bank from time to time as its prime commercial
lending rate. The margins vary based on the THGLP's total leverage ratio, as
defined, at the time of an advance. Currently interest is payable at LIBOR plus
2.75%.
The 1997 Credit Facility is secured by a first perfected security interest
in all of the assets of the Partnership and a pledge of all equity interests of
the THGLP. The credit agreement contains various restrictive covenants that
include the achievement of certain financial ratios relating to interest, fixed
charges, leverage, limitations on capital expenditures, incurrence or guarantee
of indebtedness, transactions with affiliates, distributions to members and
management fees which accrue at 5% of gross revenues.
Also included in loans payable to banks is a mortgage note of $266,922
payable to a bank that is secured by THGLP's office building in Vermont. The
interest is payable at Prime plus 1% and the mortgage note is due March 1, 2012.
Principal payments on the mortgage note are summarized as follows at
December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- ----------------------- --------
<S> <C>
1999................................................. $ 10,581
2000................................................. 11,631
2001................................................. 12,786
2002................................................. 14,055
2003 and thereafter.................................. 217,869
--------
$266,922
========
</TABLE>
10. SUBORDINATED NOTES AND REDEEMABLE PARTNERSHIP INTERESTS
In April 1996 the Partnership sold to unrelated investors, $34,000,000
aggregate principal amount of its 12% Subordinated Notes (the "Subordinated
Notes") and warrants to purchase 2,419.1 units (the "Units") of Class B Common
Limited Partnership Interests representing in the aggregate 24.191% of the
outstanding limited partner interests of the Partnership on a fully diluted
basis (the "Warrants"). Of the $34,000,000 of gross proceeds, $3,687,142 was
determined to be the value of the Warrants, and $30,312,858 was allocated to the
Subordinated Notes. The discount on the Subordinated Notes is being amortized
over the term of these Notes.
The Subordinated Notes are subordinated to the senior indebtedness of the
Partnership and are due April 1, 2004. Interest is payable semi-annually on each
October 1 and April 1 in cash or through the issuance of additional Subordinated
Notes, at the option of the Partnership. In October 1996, April 1997, October
1997, April 1998 and
F-165
<PAGE> 377
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
October 1998, the Partnership elected to satisfy interest due through the
issuance of $1,945,667, $2,156,740, $2,037,079, $2,408,370 and $2,552,871,
respectively, additional Subordinated Notes. After September 2001, a holder or
holders of no less than 33 1/3% of the aggregate principal amount of the
Subordinated Notes can require the Partnership to repurchase their Subordinated
Notes at a price equal to the principal amount thereof plus accrued interest.
The Partnership has an option to redeem the Subordinated Notes at 102% of the
aggregate principal amount after the fifth anniversary of their issuance, at
101% of the aggregate principal amount after the sixth anniversary of issuance
and at 100% of the aggregate principal amount after the seventh anniversary of
issuance.
Holders of the Warrants have the right to acquire the Units at any time for
a price of $1,500 per Unit. After September 2001, a holder or holders of at
least 33 1/3% of the Warrants can require the Partnership to either purchase
their Warrants at their interest in the Net Equity Value of the Partnership or
seek a purchaser for all of the assets or equity interests of the Partnership.
Net Equity Value pursuant to the terms of the underlying agreements is the
estimated amount of cash that would be available for distribution to the
Partnership interests upon a sale of all of the assets of the Partnership and
its subsequent dissolution and liquidation. The Net Equity Value is the amount
agreed to by the Partnership and 66 2/3% of the holders of the Subordinated
Notes and Warrants or, absent such agreement, determined through a specified
appraisal process.
The Partnership estimated the Net Equity Value of the Warrants to be
approximately $43,250,000 at December 31, 1998 and $16,750,000 at December 31,
1997. Such estimate as of December 31, 1998 reflects the amount that the holders
of the warrants have agreed to accept for their interests assuming the proposed
sale of all of the interests of the partnership is consummated (see note 14).
The increase in the estimated Net Equity Value over the original carrying value
of the Warrants is being accreted evenly over the period beginning with the date
of the increase and September 2001. Such accretion is being reflected in the
accompanying financial statements as an increase in the carrying value of the
Warrants and a corresponding reduction in the carrying value of the capital
accounts of the General and Class A Limited Partners.
The agreements underlying the Subordinated Notes and the Warrants contain
various restrictive covenants that include limitations on incurrence or
guarantee of indebtedness, transactions with affiliates, and distributions to
partners. In addition, management fees in the aggregate cannot exceed 5% of
gross revenues of the Partnership.
F-166
<PAGE> 378
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. OTHER NOTES PAYABLE
Other Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Promissory note in consideration for acquisition of a
cable television system, accruing interest at 10%
per annum on principal and accrued interest which is
added to principal on certain specified dates;
interest becomes payable on January 1, 1998 and the
principal is payable in full on August 20, 2000 $2,036,765 $2,036,765
Non-interest bearing promissory notes issued in
connection with the acquisition of a cable
television system. Principal payments begin on July
16, 1997, in the amount of $70,000 and four
installments in the amount of $170,000 on each July
16 thereafter. Such notes are reported net of
imputed interest of $141,116 and $101,732 in 1997
and 1998, respectively, computed at 9% per annum 538,884 408,268
Non-interest bearing promissory notes issued in
connection with the acquisitions of the internet
businesses. Principal payments are due in January,
February, and March of each year and continue
quarterly thereafter through June, 2001. Such notes
are reported net of imputed interest of $180,727 and
$146,441 in the 1997 and 1998, respectively,
computed at 9% per annum 1,398,478 1,021,474
Installment notes, collateralized by vehicles and
other equipment and payable in monthly installments,
at interest rates between 5.5% to 14.25% per annum,
through January, 2003 1,772,949 1,982,297
---------- ----------
$5,747,076 $5,448,804
========== ==========
</TABLE>
Principal payments due on the above notes payable are summarized as follows
at December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- ----------------------- ----------
<S> <C>
1999............................................. $1,337,476
2000............................................. 3,276,529
2001............................................. 678,349
2002............................................. 140,944
2003............................................. 15,506
----------
$5,448,804
==========
</TABLE>
F-167
<PAGE> 379
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. PARTNERS' DEFICIT
During 1993, the Principal Owner contributed a $6,500,000 unsecured,
non-interest bearing personal promissory note due on demand to the general
partner of THGLP. Additionally, the Principal Owner contributed to THGLP an
unsecured, non-interest bearing personal promissory note in the aggregate
principal amount of $24,000,000 (together with the $6,500,000 note, the "Baum
Notes"). The Baum Notes have been issued for the purpose of THGLP's credit
enhancement. Although the Baum Notes are unconditional, they do not become
payable except (i) in increasing amounts presently up to $19,500,000 and in
installments thereafter to a maximum of $30,500,000 on December 16, 1996 and
(ii) at such time after such dates as THGLP's creditors shall have exhausted all
claims against THGLP's assets.
13. COMMITMENTS
The Partnership and affiliates leases telephone and utility poles on an
annual basis. The leases are self renewing. Pole rental expense for the years
ended December 31, 1996, 1997 and 1998 was $609,075, $873,264 and $982,306,
respectively.
In connection with certain lease and franchise agreements, the Partnership,
from time to time, issues security bonds.
The Partnership and affiliates utilizes certain office space under
operating lease agreements which expire at various dates through August 2013 and
contain renewal options. At December 31, 1998 the future minimum rental
commitments under such leases were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- -----------------------
<S> <C>
1999............................................. $ 166,825
2000............................................. 142,136
2001............................................. 141,727
2002............................................. 147,912
2003............................................. 151,412
Thereafter....................................... 1,418,017
----------
$2,168,029
==========
</TABLE>
Office rent expense was $102,801 in 1996, $203,506 in 1997 and $254,955 in
1998.
14. SUBSEQUENT EVENTS
On March 22, 1999, Helicon Partners I, L. P. (HPI), Baum Investments, Inc.
and all the holders of partnership interests in HPI entered into a purchase
agreement by and among Charter Communications, Inc, Charter Communications, LLC
and Charter Helicon, LLC (collectively the "Charter Entities") providing for the
sale of all such partnership interests and Helicon Corp.'s interest in the
management agreements with THGLP and HPIAC to the Charter Entities. The sale
price is $550 million which amount will be reduced by any outstanding
indebtedness assumed by the Charter Entities.
F-168
<PAGE> 380
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of InterMedia Partners
and InterMedia Capital Partners IV, L.P.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of changes in equity and of cash flows
present fairly, in all material respects, the financial position of InterMedia
Cable Systems (comprised of components of InterMedia Partners and InterMedia
Capital Partners IV, L.P.), at December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the management of InterMedia Partners and InterMedia
Capital Partners IV, L.P.; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
April 20, 1999
F-169
<PAGE> 381
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Accounts receivable, net of allowance for doubtful accounts
of $899 and $680, respectively........................... $ 14,425 $ 13,017
Receivables from affiliates................................ 5,623 1,719
Prepaid expenses........................................... 423 626
Other current assets....................................... 350 245
-------- --------
Total current assets............................. 20,821 15,607
Intangible assets, net..................................... 255,356 283,562
Property and equipment, net................................ 218,465 179,681
Deferred income taxes...................................... 12,598 14,221
Other non-current assets................................... 2,804 1,140
-------- --------
Total assets..................................... $510,044 $494,211
======== ========
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities................... $ 19,230 $ 20,934
Deferred revenue........................................... 11,104 8,938
Payables to affiliates..................................... 3,158 2,785
Income taxes payable....................................... 285
-------- --------
Total current liabilities........................ 33,492 32,942
Note payable to InterMedia Partners IV, L.P................ 396,579 387,213
Deferred channel launch revenue............................ 4,045 2,104
-------- --------
Total liabilities................................ 434,116 422,259
-------- --------
Commitments and contingencies..............................
Mandatorily redeemable preferred shares.................... 14,184 13,239
Equity..................................................... 61,744 58,713
-------- --------
Total liabilities and equity..................... $510,044 $494,211
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-170
<PAGE> 382
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
REVENUES
Basic and cable services................................... $125,920 $112,592
Pay services............................................... 23,975 24,467
Other services............................................. 26,167 25,519
-------- --------
176,062 162,578
COSTS AND EXPENSES
Program fees............................................... 39,386 33,936
Other direct expenses...................................... 16,580 16,500
Selling, general and administrative expenses............... 30,787 29,181
Management and consulting fees............................. 3,147 2,870
Depreciation and amortization.............................. 85,982 81,303
-------- --------
175,882 163,790
-------- --------
Profit/(loss) from operations.............................. 180 (1,212)
-------- --------
OTHER INCOME (EXPENSE)
Interest expense........................................... (25,449) (28,458)
Gain on sale/exchange of cable systems..................... 26,218 10,006
Interest and other income.................................. 341 429
Other expense.............................................. (3,188) (1,431)
-------- --------
(2,078) (19,454)
Loss before income tax benefit (expense)................... (1,898) (20,666)
Income tax benefit (expense)............................... (1,623) 4,026
-------- --------
NET LOSS................................................... $ (3,521) $(16,640)
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-171
<PAGE> 383
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
COMBINED STATEMENT OF CHANGES IN EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1996................................ $ 69,746
Net loss.................................................... (16,640)
Accretion for mandatorily redeemable preferred shares....... (882)
Net contributions from parent............................... 6,489
--------
Balance at December 31, 1997................................ 58,713
Net loss.................................................... (3,521)
Accretion for mandatorily redeemable preferred shares....... (945)
Net cash contributions from parent.......................... 6,350
In-kind contribution from parent............................ 1,147
--------
Balance at December 31, 1998................................ $ 61,744
========
</TABLE>
See accompanying notes to combined financial statements.
F-172
<PAGE> 384
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................... $ (3,521) $(16,640)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization....................... 85,982 81,303
Loss and disposal of fixed assets................... 3,177 504
Gain on sale/exchange of cable systems.............. (26,218) (10,006)
Changes in assets and liabilities:
Accounts receivable............................... (1,395) (2,846)
Receivables from affiliates....................... (3,904) (639)
Prepaid expenses.................................. 203 (251)
Other current assets.............................. (106) (10)
Deferred income taxes............................. 1,623 (4,311)
Other non-current assets.......................... (517) (58)
Accounts payable and accrued liabilities.......... (2,073) 4,436
Deferred revenue.................................. 1,208 1,399
Payables to affiliates............................ 373 469
Accrued interest.................................. 25,449 28,458
Deferred channel launch revenue................... 2,895 2,817
-------- --------
Cash flows from operating activities........... 83,176 84,625
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................. (72,673) (87,253)
Sale/exchange of cable systems...................... (398) 11,157
Intangible assets................................... (372) (506)
-------- --------
Cash flows from investing activities........... (73,443) (76,602)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net contributions from parent....................... 6,350 6,489
Net repayment of borrowings......................... (16,083) (14,512)
-------- --------
Cash flows from financing activities........... (9,733) (8,023)
-------- --------
Net change in cash....................................... -- --
-------- --------
CASH AT BEGINNING OF PERIOD.............................. -- --
-------- --------
CASH AT END OF PERIOD.................................... $ -- $ --
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-173
<PAGE> 385
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
THE CHARTER TRANSACTIONS
InterMedia Partners, a California limited partnership ("IP-I"), and
InterMedia Capital Partners IV, L.P., a California limited partnership,
("ICP-IV", together with IP-I, "InterMedia") are affiliated through common
control and management. Robin Media Group, Inc., a Nevada corporation, ("RMG")
is a majority owned subsidiary of ICP-IV. On April 20, 1999, InterMedia and
certain of its affiliates entered into agreements (the "Agreements") with
affiliates of Charter Communications, Inc. ("Charter") to sell and exchange
certain of their cable television systems ("the Charter Transactions").
Specifically, ICP-IV and its affiliates have agreed to sell certain of
their cable television systems in Tennessee and Gainsville, Georgia through a
combination of asset sales and the sale of its equity interests in RMG, and to
exchange their systems in and around Greenville and Spartanburg, South Carolina
for Charter systems located in Indiana, Kentucky, Utah and Montana. Immediately
upon Charter's acquisition of RMG, IP-I will exchange its cable television
systems in Athens, Georgia, Asheville and Marion, North Carolina and Cleveland,
Tennessee for RMG's cable television systems located in middle Tennessee.
The Charter Transactions are expected to close during the third or fourth
quarter of 1999. The cable systems retained by Charter upon consummation of the
Charter Transactions, together with RMG, are referred to as the "InterMedia
Cable Systems," or the "Systems."
PRESENTATION
The accompanying combined financial statements represent the financial
position of the InterMedia Cable Systems as of December 31, 1998 and 1997 and
the results of their operations and their cash flows for the years then ended.
The Systems being sold or exchanged do not individually or collectively comprise
a separate legal entity. Accordingly, the combined financial statements have
been carved-out from the historical accounting records of InterMedia.
CARVE-OUT METHODOLOGY
Throughout the periods covered by the combined financial statements, the
individual cable systems were operated and accounted for separately. However,
the Charter Transactions exclude certain systems (the "Excluded Systems") which
were operated as part of the Marion, North Carolina and western Tennessee
systems throughout 1997 and 1998. For purposes of carving out and excluding the
results of operations and financial position of the Excluded Systems from the
combined financial statements, management has estimated the revenues, expenses,
assets and liabilities associated with each Excluded System based on the ratio
of each Excluded System's basic subscribers to the total basic subscribers
served by the Marion, North Carolina and western Tennessee systems,
respectively. Management believes the basis used for these allocations is
reasonable. The
F-174
<PAGE> 386
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Systems' results of operations are not necessarily indicative of future
operating results or the results that would have occurred if the Systems were a
separate legal entity.
Management and consulting fees represent an allocation of management fees
charged to IP-I and ICP-IV by InterMedia Capital Management, a California
limited partnership ("ICM") and InterMedia Management, Inc. ("IMI"),
respectively. Prior to January 1, 1998, InterMedia Capital Management IV, L.P.
("ICM-IV") provided such management and consulting services to ICP-IV. ICM and
ICM-IV are limited partners of IP-I and ICP-IV, respectively. IMI is the
managing member of each of the general partners of IP-I and ICP-IV. These fees
are charged at a fixed amount per annum and have been allocated to the Systems
based upon the allocated contributed capital of the individual systems as
compared to the total contributed capital of InterMedia's subsidiaries.
As more fully described in Note 9 -- "Related Party Transactions," certain
administrative services are also provided by IMI and are charged to all
affiliates based on relative basic subscriber percentages.
CASH AND INTERCOMPANY ACCOUNTS
Under InterMedia's centralized cash management system, cash requirements of
its individual operating units were generally provided directly by InterMedia
and the cash generated or used by the Systems was transferred to/from
InterMedia, as appropriate, through intercompany accounts. The intercompany
account balances between InterMedia and the individual operating units, except
RMG's intercompany note payable to InterMedia Partners IV, L.P. ("IP-IV") as
described in Note 7 -- "Note Payable to InterMedia Partners IV, L.P." are not
intended to be settled. Accordingly, the balances, other than RMG's note payable
to IP-IV, are included in equity and all net cash generated from operations,
investing activities and financing activities have been included in the Systems'
net contribution from parent in the combined statements of cash flows.
IP-I and ICP-IV or its subsidiaries maintain all external debt to fund and
manage InterMedia's operations on a centralized basis. The combined financial
statements present only the debt and related interest expense of RMG, which is
assumed and repaid by Charter pursuant to the Charter Transactions. See Note
7 -- "Note Payable to InterMedia Partners IV, L.P." Debt, unamortized debt issue
costs and interest expense related to the financing of the cable systems not
owned by RMG have not been allocated to the InterMedia Cable Systems. As such,
the level of debt, unamortized debt issue costs and related interest expense
presented in the combined financial statements are not representative of the
debt that would be required or interest expenses incurred if InterMedia Cable
Systems were a separate legal entity.
F-175
<PAGE> 387
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Cable television service revenue is recognized in the period in which
services are provided to customers. Deferred revenue generally represents
revenue billed in advance and deferred until cable service is provided.
PROPERTY AND EQUIPMENT
Additions to property and equipment, including new customer installations,
are recorded at cost. Self-constructed fixed assets include materials, labor and
overhead. Costs of disconnecting and reconnecting cable service are expensed.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and improvements are capitalized. Capitalized
fixed assets are written down to recoverable values whenever recoverability
through operations or sale of the systems becomes doubtful. Gains and losses on
disposal of property and equipment are included in the Systems' statements of
operations when the assets are sold or retired from service.
Depreciation is computed using the double-declining balance method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Cable television plant...................................... 5 - 10
Buildings and improvements.................................. 10
Furniture and fixtures...................................... 3 - 7
Equipment and other......................................... 3 - 10
</TABLE>
INTANGIBLE ASSETS
The Systems have franchise rights to operate cable television systems in
various towns and political subdivisions. Franchise rights are being amortized
over the lesser of the remaining franchise lives or the base ten and twelve-year
terms of IP-I and ICP-IV, respectively. The remaining lives of the franchises
range from one to eighteen years.
Goodwill represents the excess of acquisition costs over the fair value of
net tangible and franchise assets acquired and liabilities assumed and is being
amortized on a straight-line basis over the base ten or twelve-year term of IP-I
and ICP-IV, respectively.
Capitalized intangibles are written down to recoverable values whenever
recoverability through operations or sale of the systems becomes doubtful. Each
year, the Systems evaluate the recoverability of the carrying value of their
intangible assets by assessing whether the projected cash flows, including
projected cash flows from sale of the systems, is sufficient to recover the
unamortized costs of these assets.
F-176
<PAGE> 388
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
INCOME TAXES
Income taxes reported in InterMedia Cable Systems' combined financial
statements represent the tax effects of RMG's results of operations. RMG as a
corporation is the only entity within InterMedia Cable Systems which reports a
provision/benefit for income taxes. No provision or benefit for income taxes is
reported by any of the other cable systems within the InterMedia Cable Systems
structure because these systems are currently owned by various partnerships,
and, as such, the tax effects of these cable systems' results of operations
accrue to the partners.
RMG accounts for income taxes using the asset and liability approach which
requires the recognition of deferred tax assets and liabilities for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables, payables, deferred revenue and accrued
liabilities approximates fair value due to their short maturity.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (FAS
130), which establishes standards for reporting and disclosure of comprehensive
income and its components. FAS 130 is effective for fiscal years beginning after
December 15, 1997 and requires reclassification of financial statements for
earlier periods to be provided for comparative purposes. The Systems' total
comprehensive loss for all periods presented herein did not differ from those
amounts reported as net loss in the combined statement of operations.
F-177
<PAGE> 389
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3. SALE AND EXCHANGE OF CABLE PROPERTIES
SALE
On December 5, 1997, RMG sold its cable television assets serving
approximately 7,400 (unaudited) basic subscribers in and around Royston and
Toccoa, Georgia. The sale resulted in a gain, calculated as follows:
<TABLE>
<S> <C>
Proceeds from sale.......................................... $11,212
Net book value of assets sold............................... (1,206)
-------
Gain on sale................................................ $10,006
=======
</TABLE>
EXCHANGE
On December 31, 1998, certain of the Systems' cable television assets
located in and around western and eastern Tennessee ("Exchanged Assets"),
serving approximately 10,600 (unaudited) basic subscribers, plus cash of $398
were exchanged for other cable television assets located in and around western
and eastern Tennessee, serving approximately 10,000 (unaudited) basic
subscribers.
The cable television assets received have been recorded at fair market
value, allocated as follows:
<TABLE>
<S> <C>
Property and equipment...................................... $ 5,141
Franchise rights............................................ 24,004
-------
Total............................................. $29,145
=======
</TABLE>
The exchange resulted in a gain of $26,218 calculated as the difference
between the fair value of the assets received and the net book value of the
Exchanged Assets less cash paid of $398.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- --------
<S> <C> <C>
Franchise rights..................................... $ 332,157 $302,308
Goodwill............................................. 58,505 58,772
Other................................................ 345 6,392
--------- --------
391,007 367,472
Accumulated amortization............................. (135,651) (83,910)
--------- --------
$ 255,356 $283,562
========= ========
</TABLE>
F-178
<PAGE> 390
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Land.................................................. $ 1,068 $ 1,898
Cable television plant................................ 231,937 138,117
Building and improvements............................. 5,063 4,657
Furniture and fixtures................................ 3,170 2,009
Equipment and other................................... 25,396 21,808
Construction-in-progress.............................. 18,065 49,791
-------- --------
284,699 218,280
Accumulated depreciation.............................. (66,234) (38,599)
-------- --------
$218,465 $179,681
======== ========
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Accounts payable......................................... $ 1,780 $ 2,996
Accrued program costs.................................... 1,897 1,577
Accrued franchise fees................................... 4,676 4,167
Accrued copyright fees................................... 406 762
Accrued capital expenditures............................. 5,215 5,179
Accrued payroll costs.................................... 1,784 1,789
Accrued property and other taxes......................... 862 1,851
Other accrued liabilities................................ 2,610 2,613
------- -------
$19,230 $20,934
======= =======
</TABLE>
7. NOTE PAYABLE TO INTERMEDIA PARTNERS IV, L.P.
RMG's note payable to IP-IV consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Intercompany revolving credit facility, $1,200,000
commitment as of December 31, 1998, interest
currently at 6.86% payable on maturity, matures
December 31, 2006................................ $396,579 $387,213
======== ========
</TABLE>
F-179
<PAGE> 391
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
RMG's debt is outstanding under an intercompany revolving credit facility
executed with IP-IV. The revolving credit facility currently provides for
$1,200,000 of available credit.
RMG's intercompany revolving credit facility requires repayment of the
outstanding principal and accrued interest on the earlier of (i) December 31,
2006, or (ii) acceleration of any of IP-IV's obligations to repay under its bank
debt outstanding under its revolving credit facility ("IP-IV Revolving Credit
Facility") and term loan agreement ("IP-IV Term Loan", together with the IP-IV
Revolving Credit Facility, the "IP-IV Bank Facility") dated July 30, 1996.
Interest rates under RMG's intercompany revolving credit facility are
calculated monthly and are referenced to those made available under the IP-IV
Bank Facility. Interest rates ranged from 6.84% to 7.92% during 1998.
Charter has an obligation to assume and repay RMG's intercompany revolving
credit facility pursuant to the Charter Transactions.
Advances under the IP-IV Bank Facility are available under interest rate
options related to the base rate of the administrative agent for the IP-IV Bank
Facility ("ABR") or LIBOR. Effective October 20, 1997, pursuant to an amendment
to the IP-IV Bank Facility, interest rates on borrowings under the IP-IV Term
Loan vary from LIBOR plus 1.75% to LIBOR plus 2.00% or ABR plus 0.50% to ABR
plus 0.75% based on IP-IV's ratio of debt outstanding to annualized quarterly
operating cash flow ("Senior Debt Ratio"). Interest rates vary on borrowings
under the IP-IV Revolving Credit Facility from LIBOR plus 0.625% to LIBOR plus
1.50% or ABR to ABR plus 0.25% based on IP-IV's Senior Debt Ratio. Prior to the
amendment, interest rates on borrowings under the IP-IV Term Loan were at LIBOR
plus 2.375% or ABR plus 1.125%; and, interest rates on borrowings under the
IP-IV Revolving Credit Facility varied from LIBOR plus 0.75% to LIBOR plus 1.75%
or ABR to ABR plus 0.50% based on IP-IV's Senior Debt Ratio. The IP-IV Bank
Facility requires quarterly payment of fees on the unused portion of the IP-IV
Revolving Credit Facility of 0.375% per annum when the Senior Debt Ratio is
greater than 4.0:1.0 and at 0.25% when the Senior Debt Ratio is less than or
equal to 4.0:1.0.
The terms and conditions of RMG's intercompany debt agreement are not
necessarily indicative of the terms and conditions which would be available if
the Systems were a separate legal entity.
8. MANDATORILY REDEEMABLE PREFERRED SHARES
RMG has Redeemable Preferred Stock outstanding at December 31, 1998 and
1997, which has an annual dividend of 10.0% and participates in any dividends
paid on the common stock at 10.0% of the dividend per share paid on the common
stock. The Redeemable Preferred Stock bears a liquidation preference of $12,000
plus any accrued but unpaid dividends at the time of liquidation and is
mandatorily redeemable on September 30, 2006 at the liquidation preference
amount. Under the Agreements, upon
F-180
<PAGE> 392
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
consummation of the Charter Transactions, Charter has an obligation to redeem
RMG's Redeemable Preferred Stock at the liquidation preference amount.
9. RELATED PARTY TRANSACTIONS
ICM and IMI provide certain management services to IP-I and ICP-IV,
respectively, for per annum fixed fees, of which 20% per annum is deferred and
payable in each following year in order to support InterMedia's debt. Prior to
January 1, 1998, ICM-IV provided such management services to ICP-IV.
InterMedia's management fees for the years ended December 31, 1998 and 1997
amounted to $5,410, and $6,395, respectively, of which $3,147 and $2,870,
respectively, has been charged to the Systems.
IMI has entered into agreements with both IP-I and ICP-IV to provide
accounting and administrative services at cost. Under the terms of the
agreements, the expenses associated with rendering these services are charged to
the Systems and other affiliates based upon relative basic subscriber
percentages. Management believes this method to be reflective of the actual
cost. During 1998 and 1997, IMI administrative fees charged to the Systems
totaled $3,657 and $4,153, respectively. Receivable from affiliates at December
31, 1998 and 1997 includes $52 and $1,080, respectively, of advances to IMI, net
of administrative fees charged by IMI and operating expenses paid by IMI on
behalf of the Systems.
IP-I is majority-owned, and ICP-IV is owned in part, by
Tele-Communications, Inc. ("TCI"). As affiliates of TCI, IP-I and ICP-IV are
able to purchase programming services from a subsidiary of TCI. Management
believes that the overall programming rates made available through this
relationship are lower than the Systems could obtain separately. Such volume
rates may not continue to be available in the future should TCI's ownership
interest in InterMedia significantly decrease. Program fees charged by the TCI
subsidiary to the Systems for the years ended December 31, 1998 and 1997
amounted to $30,884 and $26,815, respectively. Payable to affiliates includes
programming fees payable to the TCI subsidiary of $2,918 and $2,335 at December
31, 1998 and 1997, respectively.
On January 1, 1998 an affiliate of TCI entered into agreements with
InterMedia to manage the Systems' advertising business and related services for
an annual fixed fee per advertising sales subscriber as defined by the
agreements. In addition to the annual fixed fee TCI is entitled to varying
percentage shares of the incremental growth in annual cash flows from
advertising sales above specified targets. Management fees charged by the TCI
subsidiary for the year ended December 31, 1998 amount to $292. Receivable from
affiliates at December 31, 1998 includes $3,437 of receivable from TCI for
advertising sales.
As part of its normal course of business the Systems are involved in
transactions with affiliates of InterMedia which own and operate cable
television systems. Such transactions include purchases and sales of inventories
used in construction of cable plant at cost. Receivable from affiliates at
December 31, 1998 and 1997 includes $2,134 and $639,
F-181
<PAGE> 393
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
respectively, of receivables from affiliated systems. Payable to affiliates at
December 31, 1998 and 1997 includes $208 and $181, respectively, of payables to
affiliated systems.
10. CABLE TELEVISION REGULATION
Cable television legislation and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the past, and
may in the future, materially affect the Systems and the cable television
industry.
The cable industry is currently regulated at the federal and local levels
under the Cable Act of 1984, the Cable Act of 1992 ("the 1992 Act"), the
Telecommunications Act of 1996 (the "1996 Act") and regulations issued by the
Federal Communications Commission ("FCC") in response to the 1992 Act. FCC
regulations govern the determination of rates charged for basic, expanded basic
and certain ancillary services, and cover a number of other areas including
customer services and technical performance standards, the required transmission
of certain local broadcast stations and the requirement to negotiate
retransmission consent from major network and certain local television stations.
Among other provisions, the 1996 Act eliminated rate regulation on the expanded
basic tier effective March 31, 1999.
Current regulations issued in conjunction with the 1992 Act empower the FCC
and/or local franchise authorities to order reductions of existing rates which
exceed the maximum permitted levels and to require refunds measured from the
date a complaint is filed in some circumstances or retroactively for up to one
year in other circumstances. Management believes it has made a fair
interpretation of the 1992 Act and related FCC regulations in determining
regulated cable television rates and other fees based on the information
currently available. However, complaints have been filed with the FCC on rates
for certain franchises and certain local franchise authorities have challenged
existing and prior rates. Further complaints and challenges could be
forthcoming, some of which could apply to revenue recorded in 1998, 1997 and
prior years. Management believes that the effect, if any, of these complaints
and challenges will not be material to the Systems' financial position or
results of operations.
Many aspects of regulation at the federal and local levels are currently
the subject of judicial review and administrative proceedings. In addition, the
FCC is required to conduct rulemaking proceedings to implement various
provisions of the 1996 Act. It is not possible at this time to predict the
ultimate outcome of these reviews or proceedings or their effect on the Systems.
11. COMMITMENTS AND CONTINGENCIES
The Systems are committed to provide cable television services under
franchise agreements with remaining terms of up to eighteen years. Franchise
fees of up to 5% of gross revenues are payable under these agreements.
F-182
<PAGE> 394
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Current FCC regulations require that cable television operators obtain
permission to retransmit major network and certain local television station
signals. The Systems have entered into long-term retransmission agreements with
all applicable stations in exchange for in-kind and/or other consideration.
InterMedia has been named in purported and certified class actions in
various jurisdictions concerning late fee charges and practices. Certain cable
systems owned by InterMedia charge late fees to customers who do not pay their
cable bills on time. These late fee cases challenge the amount of the late fees
and the practices under which they are imposed. The Plaintiffs raise claims
under state consumer protection statutes, other state statutes, and common law.
Plaintiffs generally allege that the late fees charged by InterMedia's cable
systems, including the Systems in the States of Tennessee, South Carolina and
Georgia are not reasonably related to the costs incurred by the cable systems as
a result of the late payment. Plaintiffs seek to require cable systems to reduce
their late fees on a prospective basis and to provide compensation for alleged
excessive late fee charges for past periods. These cases are either at the early
stages of the litigation process or are subject to a case management order that
sets forth a process leading to mediation. Based upon the facts available
management believes that, although no assurances can be given as to the outcome
of these actions, the ultimate disposition of these matters should not have a
material adverse effect upon the financial condition of the Systems.
Under existing Tennessee laws and regulations, the Systems pay an Amusement
Tax in the form of a sales tax on programming service revenues generated in
Tennessee in excess of charges for the basic and expanded basic levels of
service. Under the existing statute, only the service charges or fees in excess
of the charges for the "basic cable" television service package are exempt from
the Amusement Tax. Related regulations clarify the definition of basic cable to
include two tiers of service, which InterMedia's management and other operators
in Tennessee have interpreted to mean both the basic and expanded basic level of
services.
The Tennessee Department of Revenue ("TDOR") has proposed legislation which
would replace the Amusement Tax under the existing statute with a new sales tax
on all cable service revenues in excess of twelve dollars per month. The new tax
would be computed at a rate approximately equal to the existing effective tax
rate.
Unless InterMedia and other cable operators in Tennessee support the
proposed legislation, the TDOR has suggested that it would assess additional
taxes on prior years' expanded basic service revenues. The TDOR can issue an
assessment for prior periods up to three years. Management estimates that the
amount of such an assessment for the Systems, if made for all periods not
previously audited, would be approximately $5.4 million. InterMedia's management
believes that it is possible but not likely that the TDOR can make such an
assessment and prevail in defending it.
InterMedia's management believes it has made a valid interpretation of the
current Tennessee statute and regulations and that it has properly determined
and paid all sales taxes due. InterMedia further believes that the legislative
history of the current statute and
F-183
<PAGE> 395
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
related regulations, as well as the TDOR's history of not making assessments
based on audits of prior periods, support InterMedia's interpretation.
InterMedia and other cable operators in Tennessee are aggressively defending
their past practices on calculation and payment of the Amusement Tax and are
discussing with the TDOR modifications to their proposed legislation which would
clarify the statute and would minimize the impact of such legislation on the
Systems' results of operations.
The Systems are subject to other claims and litigation in the ordinary
course of business. In the opinion of management, the ultimate outcome of any
existing litigation or other claims will not have a material effect on the
Systems' financial position or results of operations.
The Systems have entered into pole rental agreements and lease certain of
its facilities and equipment under non-cancelable operating leases. Minimum
rental commitments at December 31, 1998 for the next five years and thereafter
under non-cancelable operating leases related to the Systems are as follows:
<TABLE>
<S> <C>
1999........................................................ $155
2000........................................................ 144
2001........................................................ 136
2002........................................................ 35
2003........................................................ 7
----
$477
====
</TABLE>
Rent expense, including pole rental agreements, for the years ended
December 31, 1998 and 1997 was $2,817 and $2,828, respectively.
12. INCOME TAXES
Income tax (expense) benefit consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------- ------
<S> <C> <C>
Current federal....................................... $ -- $ (285)
Deferred federal...................................... (1,454) 3,813
Deferred state........................................ (169) 498
------- ------
$(1,623) $4,026
======= ======
</TABLE>
F-184
<PAGE> 396
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
Deferred income taxes relate to temporary differences as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- ---------
<S> <C> <C>
Property and equipment............................ $ (7,258) $ (6,786)
Intangible assets................................. (12,930) (8,336)
-------- ---------
(20,188) (15,122)
Loss carryforward - federal....................... 31,547 29,058
Loss carryforward - state......................... 297 --
Other............................................. 942 285
-------- ---------
$ 12,598 $ 14,221
======== =========
</TABLE>
At December 31, 1998, RMG had net operating loss carryforwards for federal
income tax purposes aggregating $92,785, which expire through 2018. RMG is a
loss corporation as defined in Section 382 of the Internal Revenue Code.
Therefore, if certain substantial changes in RMG's ownership should occur, there
could be a significant annual limitation on the amount of loss carryforwards
which can be utilized.
InterMedia's management has not established a valuation allowance to reduce
the deferred tax assets related to RMG's unexpired net operating loss
carryforwards. Due to an excess of appreciated asset value over the tax basis of
RMG's net assets, management believes it is more likely than not that the
deferred tax assets related to unexpired net operating losses will be realized.
A reconciliation of the tax benefit computed at the statutory federal rate
and the tax (expense) benefit reported in the accompanying combined statements
of operations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- --------
<S> <C> <C>
Tax benefit at federal statutory rate............... $ 626 $ 4,454
State taxes, net of federal benefit................. 73 498
Goodwill amortization............................... (2,309) (2,056)
Realization of acquired tax benefit................. -- 346
Other............................................... (13) 784
------- --------
$(1,623) $ 4,026
======= ========
</TABLE>
13. CHANNEL LAUNCH REVENUE
During the years ended December 31, 1998 and 1997, the Systems were
credited $2,646 and $5,072, respectively, representing their share of payments
received by IP-I and ICP-IV from certain programmers to launch and promote their
new channels. Also, during 1998 the Systems recorded a receivable from a
programmer, of which $1,791 remains outstanding at December 31, 1998, for the
launch and promotion of its new channel. Of
F-185
<PAGE> 397
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
the total amount credited the Systems recognized advertising revenue of $586 and
$1,182 during the year ended December 31, 1998 and 1997, respectively, for
advertisements provided by the Systems to promote the new channels. The
remaining payments and receivable credited from the programmers are being
amortized over the respective terms of the program agreements which range
between five and ten years. For the years ended December 31, 1998 and 1997, the
Systems amortized and recorded as other service revenue $956 and $894
respectively.
14. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
In connection with RMG's sale of its cable television assets located in
Royston and Toccoa, Georgia in December 1997, as described in Note 3 -- "Sale
and Exchange of Cable Properties," net cash proceeds received were as follows:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from sale.......................................... $11,212
Receivable from buyer....................................... (55)
-------
Net proceeds received from buyer.................. $11,157
=======
</TABLE>
In connection with the exchange of certain cable assets in and around
western and eastern Tennessee on December 31, 1998, as described in Note 3, the
Systems paid cash of $398.
In December 1998, IP-IV contributed its 4.99% partner interest in a limited
partnership to RMG. The book value of the investment at the time of the
contribution was $1,147.
Total accretion on RMG's Redeemable Preferred Stock for the years ended
December 31, 1998 and 1997 amounted to $945 and $882, respectively.
15. EMPLOYEE BENEFIT PLANS
The Systems participate in the InterMedia Partners Tax Deferred Savings
Plan which covers all full-time employees who have completed at least six months
of employment. The plan provides for a base employee contribution of 1% and a
maximum of 15% of compensation. The Systems' matching contributions under the
plan are at the rate of 50% of the employee's contribution, up to a maximum of
5% of compensation.
F-186
<PAGE> 398
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Rifkin Cable Income Partners L.P.
In our opinion, the accompanying balance sheet and the related statements of
operations, of partners' equity (deficit) and of cash flows present fairly, in
all material respects, the financial position of Rifkin Cable Income Partners
L.P. (the "Partnership") at December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
March 19, 1999
F-187
<PAGE> 399
RIFKIN CABLE INCOME PARTNERS L. P.
BALANCE SHEET
<TABLE>
<CAPTION>
12/31/97 12/31/98
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 381,378 $ 65,699
Customer accounts receivable, net of allowance for
doubtful accounts of $12,455 in 1997 and $18,278
in 1998........................................... 49,585 51,523
Other receivables................................... 123,828 133,278
Prepaid expenses and deposits....................... 81,114 70,675
Property, plant and equipment, at cost:
Cable television transmission and distribution
systems and related equipment.................. 8,536,060 8,758,525
Land, buildings, vehicles and furniture and
fixtures....................................... 618,671 623,281
----------- -----------
9,154,731 9,381,806
Less accumulated depreciation..................... (3,847,679) (4,354,685)
----------- -----------
Net property, plant and equipment.............. 5,307,052 5,027,121
Franchise costs and other intangible assets, net of
accumulated amortization of $1,819,324 in 1997 and
$2,033,405 in 1998................................ 2,005,342 1,772,345
----------- -----------
Total assets.............................. $ 7,948,299 $ 7,120,641
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued liabilities............ $ 365,392 $ 396,605
Customer deposits and prepayments................... 177,307 126,212
Interest payable.................................... 58,093 --
Long-term debt...................................... 4,914,000 --
Interpartnership debt............................... -- 2,865,426
----------- -----------
Total liabilities......................... 5,514,792 3,388,243
Commitments and contingencies (Notes 4 and 8)
Partners' equity:
General partner................................... 263,171 822,837
Limited partners.................................. 2,170,336 2,909,561
----------- -----------
Total partner's equity.................... 2,433,507 3,732,398
----------- -----------
Total liabilities and partners' equity.... $ 7,948,299 $ 7,120,641
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-188
<PAGE> 400
RIFKIN CABLE INCOME PARTNERS L.P.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------
12/31/96 12/31/97 12/31/98
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE:
Service...................................... $4,104,841 $4,491,983 $4,790,052
Installation and other....................... 206,044 239,402 345,484
---------- ---------- ----------
Total revenue...................... 4,310,885 4,731,385 5,135,536
COSTS AND EXPENSES:
Operating expense............................ 643,950 691,700 671,968
Programming expense.......................... 787,124 879,939 1,077,540
Selling, general and administrative
expense.................................... 683,571 663,903 622,774
Depreciation................................. 535,559 602,863 628,515
Amortization................................. 377,749 332,770 199,854
Management fees.............................. 215,544 236,569 256,777
Loss (gain) on disposal of assets............ 1,530 2,980 (2,138)
---------- ---------- ----------
Total costs and expenses........... 3,245,027 3,410,724 3,455,290
---------- ---------- ----------
Operating income............................. 1,065,858 1,320,661 1,680,246
Interest expense............................. 533,294 448,530 362,439
---------- ---------- ----------
Net income before extraordinary item......... 532,564 872,131 1,317,807
Extraordinary item -- Loss on early
retirement of debt (Note 1)................ -- -- 18,916
---------- ---------- ----------
Net income................................... $ 532,564 $ 872,131 $1,298,891
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-189
<PAGE> 401
RIFKIN CABLE INCOME PARTNERS L.P.
STATEMENT OF PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
Partners' equity (deficit), December 31,
1995.................................... $(299,131) $1,427,630 $1,128,499
Net income................................ 229,471 303,093 532,564
Equity distribution....................... (42,953) (56,734) (99,687)
--------- ---------- ----------
Partners' equity (deficit), December 31,
1996.................................... (112,613) 1,673,989 1,561,376
Net income................................ 375,784 496,347 872,131
--------- ---------- ----------
Partners' equity, December 31, 1997....... 263,171 2,170,336 2,433,507
Net income................................ 559,666 739,225 1,298,891
--------- ---------- ----------
Partners' equity December 31, 1998........ $ 822,837 $2,909,561 $3,732,398
========= ========== ==========
</TABLE>
The partners' capital accounts for financial reporting purposes vary from
the tax capital accounts.
The accompanying notes are an integral part of the financial statements.
F-190
<PAGE> 402
RIFKIN CABLE INCOME PARTNERS L.P.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
12/31/96 12/31/97 12/31/98
----------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 532,564 $ 872,131 $ 1,298,891
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 913,308 935,633 828,369
Amortization of deferred loan
cost.............................. 18,970 18,970 14,228
Loss on early retirement of debt.... -- -- 18,916
Loss (gain) on disposal of fixed
assets............................ 1,530 2,980 (2,138)
Decrease (increase) in customer
accounts receivables.............. 521 (5,729) (1,938)
Increase in other receivables....... (45,274) (56,059) (9,450)
Decrease in prepaid expense and
other............................. 40,737 13,230 10,439
Increase (decrease) in accounts
payable and accrued liabilities... (207,035) 61,625 31,213
Increase (decrease) in customer
deposits and prepayment........... 673 (63,524) (51,095)
Increase (decrease) in interest
payable........................... 35,638 (3,145) (58,093)
----------- ---------- -----------
Net cash provided by operating
activities..................... 1,291,632 1,776,112 2,079,342
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment........................... (824,359) (679,394) (415,534)
Additions to other intangible assets,
net of refranchises................. -- (112) --
Net proceeds from the sale of assets... 18,255 57,113 69,087
Sales tax related to Florida assets
sold in 1994........................ (14,694) -- --
----------- ---------- -----------
Net cash used in investing
activities..................... (820,798) (622,393) (346,447)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from interpartnership debt.... -- -- 4,265,426
Payments of long-term debt............. (715,000) (871,000) (4,914,000)
Payments of interpartnership debt...... -- -- (1,400,000)
Partners' capital distributions........ (99,687) -- --
----------- ---------- -----------
Net cash used in financing
activities..................... (814,687) (871,000) (2,048,574)
----------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents............................ (343,853) 282,719 (315,679)
Cash and cash equivalents at beginning of
period................................. 442,512 98,659 381,378
----------- ---------- -----------
Cash and cash equivalents at end of
period................................. $ 98,659 $ 381,378 $ 65,699
=========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.......................... $ 455,124 $ 431,722 $ 406,304
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-191
<PAGE> 403
RIFKIN CABLE INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Rifkin Cable Income Partners L.P. (the "Partnership") was formed in 1986 as
a limited partnership under the laws of the State of Delaware. The Partnership
owns, operates and develops cable television systems in Missouri and New Mexico.
Rifkin Cable Management Partners L.P., an affiliate of Rifkin & Associates, Inc.
(Note 3), is the general partner of the Partnership.
The Partnership Agreement (the "Agreement") establishes the respective
rights, obligations and interests of the partners. The Agreement provides that
net income or loss, certain capital events, and cash distributions (all as
defined in the Agreement) are generally allocated 43% to the general partner and
57% to the limited partners.
ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP
During 1998, Interlink Communications Partners, LLLP ("ICP") agreed to
purchase all of the interests of the Partnership. ICP acquired the limited
partner interests, effective December 31, 1998, and is currently in the process
of obtaining the necessary consents to transfer all of the Partnership's
franchises to ICP. Once obtained, ICP will then purchase the general partner
interest in the Partnership, and the Partnership will, by operation of law, be
consolidated into ICP.
REVENUE RECOGNITION
Customer fees are recorded as revenue in the period the service is
provided. The cost to acquire the rights to the programming generally is
recorded when the product is initially available to be viewed by the customer.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion expenses are charged to income during the year in
which they are incurred and were not significant for the periods shown.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost, which in
the case of assets constructed includes amounts for material, labor, overhead
and capitalized interest, if applicable. Upon sale or retirement of an asset,
the related costs and accumulated depreciation are removed from the accounts and
any gain or loss is recognized.
Depreciation expense is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings.......................................... 21-30 years
Cable television transmission and distribution
systems and related equipment.................... 3-15 years
Vehicles and furniture and fixtures................ 3-5 years
</TABLE>
F-192
<PAGE> 404
RIFKIN CABLE INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FRANCHISE COSTS
Franchise costs are amortized using the straight-line method over the
remaining lives of the franchises as of the date they were acquired, ranging
from eight to twenty-five years. The carrying value of intangibles is assessed
for recoverability by management based on an analysis of undiscounted expected
future cash flows. The Partnership's management believes that there has been no
impairment thereof as of December 31, 1998.
OTHER INTANGIBLE ASSETS
Loan costs of the Partnership have been deferred and have been amortized to
interest expense utilizing the straight-line method over the term of the related
debt. Use of the straight-line method approximates the results of the
application of the interest method. The net amount remaining at December 31,
1997 was $37,886.
On December 30, 1998, the loan with a financial institution was paid in
full (Note 2). The related deferred loan costs and associated accumulated
amortization were written off and an extraordinary loss of $18,916 was recorded.
CASH AND CASH EQUIVALENTS
All highly liquid debt instruments purchased with an original maturity of
three months or less are considered to be cash equivalents.
INCOME TAXES
No provision for Federal or State income taxes is necessary in the
financial statements of the Partnership, because as a partnership, it is not
subject to Federal or State income tax as the tax effect of its activities
accrues to the partners.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up
Activities," which requires the Partnership to expense all start up costs
related to opening a new facility, introduction of anew product or service, or
conducting business with a new class of customer or in a new territory. This
standard is effective for the Partnership's 1999 fiscal year. Management
believes that SOP 98-5 will have no material effect on its financial position or
the results of operations.
F-193
<PAGE> 405
RIFKIN CABLE INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform with the 1998 financial statement presentation.
2. DEBT
The Partnership had a term loan with a financial institution which required
varying quarterly payments. At December 31, 1997, the term loan had a balance of
$4,914,000. At December 30, 1998, the term loan had a balance of $4,216,875; at
that date, the total balance and accrued interest were paid in full.
On that same date, the Partnership obtained a new interpartnership loan
with ICP (Note 1). Borrowing under the interpartnership loan, as well as
interest and principle payments are due at the discretion of the management of
ICP, resulting in no minimum required annual principle payments. The balance of
the interpartnership loan at December 31, 1998 was $2,865,426. The effective
interest rate at December 31, 1998 was 8.5%.
3. MANAGEMENT AGREEMENT
The Partnership has entered into a management agreement with Rifkin and
Associates, Inc. (Rifkin). The management agreement provides that Rifkin shall
act as manager of the Partnership's CATV systems, and shall be entitled to
annual compensation of 5% of the Partnership's CATV revenues, net of certain
CATV programming costs. Effective September 1, 1998, Rifkin conveyed its CATV
management business to R & A Management, LLC (RML). The result of this
transaction included the conveyance of the Rifkin management agreement (Rifkin
Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin
Agreement and the RML Agreement are disclosed in total on the Statement of
Operations.
4. COMMITMENTS AND RENTAL EXPENSE
The Partnership leases certain real and personal property under
noncancelable operating leases expiring through the year 2001. Future minimum
lease payments under such noncancelable leases as of December 31, 1998 are:
$30,000 for each year 1999, 2000 and 2001, totaling $90,000.
Total rental expense for the years ended December 31, 1996, 1997 and 1998
was $60,323, $68,593 and $68,776, respectively, including $27,442, $36,822 and
$36,716, respectively, relating to cancelable pole rental agreements.
5. RETIREMENT BENEFITS
The Partnership has a 401(k) plan for its employees that have been employed
by the Partnership for at least one year. Employees of the Partnership can
contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998
contribution of $10,000 (as set by the Internal Revenue Service). The
Partnership matches participant contributions up to a maximum of 50% of the
first 3% of a participant's salary contributed. All participant contributions
and earnings are fully vested upon contribution and Partnership contributions
F-194
<PAGE> 406
RIFKIN CABLE INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and earnings vest 20% per year of employment with the Partnership, becoming
fully vested after five years. The Partnership's matching contributions for the
years ended December 31, 1996, 1997 and 1998 were $2,693, $3,653 and $2,680,
respectively.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership has a number of financial instruments, none of which are
held for trading purposes. The following method and assumptions were used by the
Partnership to estimate the fair values of financial instruments as disclosed
herein:
Cash and Cash Equivalents, Customer Accounts Receivable, Other Receivables,
Accounts Payable and Accrued Liabilities and Customer Deposits and Prepayments:
The carrying value amount approximates fair value because of the short period to
maturity.
Debt: The carrying value amount approximates the fair value because the
Partnership's interpartnership debt was obtained on December 30, 1998.
7. CABLE REREGULATION
Congress enacted the Cable Television Consumer Protection and Competition
Act of 1992 (the Cable Act) and has amended it at various times since.
The total effects of the present law are, at this time, still unknown.
However, one provision of the present law further redefines a small cable
system, and exempts these systems from rate regulation on the upper tiers of
cable service. The Partnership is awaiting an FCC rulemaking implementing the
present law to determine whether its systems qualify as small cable systems.
8. LITIGATION
The Partnership could possibly be named as defendant in various actions and
proceedings arising from the normal course of business. In all such cases, the
Partnership will vigorously defend itself against the litigation and, where
appropriate, will file counterclaims. Although the eventual outcome of potential
lawsuits cannot be predicted, it is management's opinion that any such lawsuit
will not result in liabilities that would have a material affect on the
Partnership's financial position or results of operations.
F-195
<PAGE> 407
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Rifkin Acquisition Partners, L.L.L.P.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, partners' capital (deficit) and cash
flows present fairly, in all material respects, the financial position of Rifkin
Acquisition Partners, L.L.L.P. and its subsidiaries (the "Company") at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
March 19, 1999
F-196
<PAGE> 408
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
12/31/98 12/31/97
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents......................... $ 2,324,892 $ 1,902,555
Customer accounts receivable, net of allowance for
doubtful accounts of $444,839 in 1998 and
$425,843 in 1997................................ 1,932,140 1,371,050
Other receivables................................. 5,637,771 4,615,089
Prepaid expenses and other........................ 2,398,528 1,753,257
Property, plant and equipment at cost:
Cable television transmission and distribution
systems and related equipment................ 149,376,914 131,806,310
Land, buildings, vehicles and furniture and
fixtures..................................... 7,421,960 7,123,429
------------ ------------
156,798,874 138,929,739
Less accumulated depreciation................... (35,226,773) (26,591,458)
------------ ------------
Net property, plant and equipment....... 121,572,101 112,338,281
Franchise costs and other intangible assets, net
of accumulated amortization of $67,857,545 in
1998 and $53,449,637 in 1997.................... 183,438,197 180,059,655
------------ ------------
Total assets............................ $317,303,629 $302,039,887
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities.......... $ 11,684,594 $ 11,690,894
Customer deposits and prepayments................. 1,676,900 1,503,449
Interest payable.................................. 7,242,954 7,384,509
Deferred tax liability, net....................... 7,942,000 12,138,000
Notes payable..................................... 224,575,000 229,500,000
------------ ------------
Total liabilities....................... 253,121,448 262,216,852
Commitments and contingencies (Notes 8 and 14)
Redeemable partners' interests.................... 10,180,400 7,387,360
Partners' capital (deficit):
General partner................................. (1,991,018) (1,885,480)
Limited partners................................ 55,570,041 34,044,912
Preferred equity interest....................... 422,758 276,243
------------ ------------
Total partners' capital........................... 54,001,781 32,435,675
------------ ------------
Total liabilities and partners'
capital.............................. $317,303,629 $302,039,887
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-197
<PAGE> 409
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
12/31/98 12/31/97 12/31/96
----------- ------------ ------------
<S> <C> <C> <C>
REVENUE:
Service................................. $82,498,638 $ 78,588,503 $ 66,433,321
Installation and other.................. 7,422,675 5,736,412 4,852,124
----------- ------------ ------------
Total revenue................. 89,921,313 84,324,915 71,285,445
COSTS AND EXPENSES:
Operating expense....................... 13,305,376 14,147,031 10,362,671
Programming expense..................... 18,020,812 15,678,977 14,109,527
Selling, general and administrative
expense............................... 13,757,090 12,695,176 11,352,870
Depreciation............................ 15,109,327 14,422,631 11,725,246
Amortization............................ 22,104,249 24,208,169 23,572,457
Management fees......................... 3,147,246 2,951,372 2,475,381
Loss on disposal of assets.............. 3,436,739 7,834,968 1,357,180
----------- ------------ ------------
Total costs and expenses...... 88,880,839 91,938,324 74,955,332
----------- ------------ ------------
Operating income (loss)................. 1,040,474 (7,613,409) (3,669,887)
Gain from the sale of assets (Note 4)... (42,863,060) -- --
Interest expense........................ 23,662,248 23,765,239 21,607,174
----------- ------------ ------------
Income (loss) before income taxes....... 20,241,286 (31,378,648) (25,277,061)
Income tax benefit...................... (4,177,925) (5,335,000) (3,645,719)
----------- ------------ ------------
Net income (loss)....................... $24,419,211 $(26,043,648) $(21,631,342)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-198
<PAGE> 410
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
12/31/98 12/31/97 12/31/96
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ 24,419,211 $(26,043,648) $(21,631,342)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................... 37,213,576 38,630,800 35,297,703
Amortization of deferred loan costs............. 989,760 989,760 970,753
Gain on sale of assets (Note 4)................. (42,863,060) -- --
Loss on disposal of fixed assets................ 3,436,739 7,834,968 1,357,180
Deferred tax benefit............................ (4,196,000) (5,335,000) (3,654,000)
Increase in customer accounts receivables....... (300,823) (186,976) (117,278)
Increase in other receivables................... (474,599) (1,992,714) (994,681)
(Increase) decrease in prepaid expenses and
other......................................... (684,643) 23,015 (494,252)
Increase in accounts payable and accrued
liabilities................................... 34,073 1,753,656 3,245,736
Increase (decrease) in customer deposits and
prepayments................................... (86,648) 231,170 164,824
Increase (decrease) in interest payable......... (141,555) 600,248 6,692,988
------------ ------------ ------------
Net cash provided by operating
activities.............................. 17,346,031 16,505,279 20,837,631
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems, net (Note 3)......... (2,212,958) (19,359,755) (71,797,038)
Additions to property, plant and equipment......... (26,354,756) (28,009,253) (16,896,582)
Additions to cable television franchises, net of
retirements..................................... (151,695) 72,162 (1,182,311)
Net proceeds from the sale of cable systems (Note
4).............................................. 16,533,564 -- --
Net proceeds from the other sales of assets........ 247,216 306,890 197,523
------------ ------------ ------------
Net cash used in investing activities...... (11,938,629) (46,989,956) (89,678,408)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from isssuance of senior subordinated
notes........................................... -- -- 125,000,000
Proceeds from long-term bank debt.................. 22,500,000 38,000,000 18,000,000
Deferred loan costs................................ -- -- (6,090,011)
Payments of long-term bank debt.................... (27,425,000) (7,000,000) (82,000,000)
Partners' capital contributions.................... -- -- 15,000,000
Equity distributions to partners................... (60,065) -- --
------------ ------------ ------------
Net cash provided by (used in) financing
activities.............................. (4,985,065) 31,000,000 69,909,989
------------ ------------ ------------
Net increase in cash................................. 422,337 515,323 1,069,212
Cash and cash equivalents at beginning of period..... 1,902,555 1,387,232 318,020
------------ ------------ ------------
Cash and cash equivalents at end of period........... $ 2,324,892 $ 1,902,555 $ 1,387,232
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid...................................... $ 22,737,443 $ 22,098,732 $ 13,866,995
============ ============ ============
Noncash investing activities:
Proceeds from the sale of Michigan assets held
in escrow..................................... $ 500,000 $ -- $ --
============ ============ ============
Trade value related to the trade sale of
Tennessee assets.............................. $ 46,668,000 $ -- $ --
============ ============ ============
Trade value related to trade acquisition of
Tennessee assets.............................. $(46,668,000) $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-199
<PAGE> 411
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED GENERAL LIMITED
EQUITY INTEREST PARTNER PARTNERS TOTAL
--------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Partners' capital (deficit)
at December 31, 1995..... $ 562,293 $(1,085,311) $ 69,421,043 $ 68,898,025
Partners' capital
contributions............ -- 150,000 14,850,000 15,000,000
Accretion of redeemable
partners' interest....... -- (157,730) (1,104,110) (1,261,840)
Net loss................... (129,788) (216,313) (21,285,241) (21,631,342)
--------- ----------- ------------ ------------
Partners' capital (deficit)
at December 31, 1996..... 432,505 (1,309,354) 61,881,692 61,004,843
Accretion of redeemable
partners' interest....... -- (315,690) (2,209,830) (2,525,520)
Net loss................... (156,262) (260,436) (25,626,950) (26,043,648)
--------- ----------- ------------ ------------
Partners' capital (deficit)
at December 31, 1997..... 276,243 (1,885,480) 34,044,912 32,435,675
Accretion of redeemable
partners' interest....... -- (349,130) (2,443,910) (2,793,040)
Net income................. 146,515 244,192 24,028,504 24,419,211
Partners' equity
distribution............. -- (600) (59,465) (60,065)
--------- ----------- ------------ ------------
Partners' capital (deficit)
at December 31, 1998..... $ 422,758 $(1,991,018) $ 55,570,041 $ 54,001,781
========= =========== ============ ============
</TABLE>
The Partners' capital accounts for financial reporting purposes vary from
the tax capital accounts.
The accompanying notes are an integral part of the consolidated financial
statements.
F-200
<PAGE> 412
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL INFORMATION
Rifkin Acquisition Partners, L.L.L.P. ("the Partnership") was formed
pursuant to the laws of the State of Colorado. The Partnership and its
subsidiaries are hereinafter referred to on a consolidated basis as the
"Company." The Company owns, operates, and develops cable television systems in
Georgia, Tennessee, and Illinois. Rifkin Acquisition Management, L.P., an
affiliate of Rifkin & Associates, Inc. (Note 7), is the general partner of the
Partnership ("General Partner").
The Partnership operates under a limited liability limited partnership
agreement (the "Partnership Agreement") which establishes contribution
requirements, enumerates the rights and responsibilities of the partners and
advisory committee, provides for allocations of income, losses and
distributions, and defines certain items relating thereto. The Partnership
Agreement provides that net income or loss, certain defined capital events, and
cash distributions, all as defined in the Partnership Agreement, are generally
allocated 99% to the limited partners and 1% to the general partner.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the following
entities:
<TABLE>
<S> <C>
- - Rifkin Acquisition Partners, - Cable Equities of Colorado, Ltd.
L.L.L.P. (CEC)
- - Cable Equities of Colorado - Cable Equities, Inc. (CEI)
Management Corp. (CEM) - Rifkin Acquisition Capital Corp.
(RACC)
</TABLE>
The financial statements for 1997 and 1996 also included the following
entities:
<TABLE>
<S> <C>
- - Rifkin/Tennessee, Ltd. (RTL) - FNI Management Corp. (FNI)
</TABLE>
Effective January 1, 1998, both the RTL and FNI entities were dissolved and
the assets were transferred to the Partnership.
All significant intercompany accounts and transactions have been
eliminated.
REVENUE AND PROGRAMMING
Customer fees are recorded as revenue in the period the service is
provided. The cost to acquire the rights to the programming generally is
recorded when the product is initially available to be viewed by the customer.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion expenses are charged to income during the year in
which they are incurred and were not significant for the periods shown.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost, which in
the case of assets constructed, includes amounts for material, labor, overhead
and interest, if applicable. Upon sale or retirement of an asset, the related
costs and accumulated
F-201
<PAGE> 413
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
depreciation are removed from the accounts and any gain or loss is recognized.
Capitalized interest was not significant for the periods shown.
Depreciation expense is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings.......................................... 27-30 years
Cable television transmission and distribution
systems and related equipment.................... 3-15 years
Vehicles and furniture and fixtures................ 3-5 years
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
FRANCHISE COSTS
Franchise costs are amortized using the straight-line method over the
remaining lives of the franchises as of the date they were acquired, ranging
from one to twenty years. The carrying value of franchise costs is assessed for
recoverability by management based on an analysis of undiscounted future
expected cash flows from the underlying operations of the Company. Management
believes that there has been no impairment thereof as of December 31, 1998.
OTHER INTANGIBLE ASSETS
Certain loan costs have been deferred and are amortized to interest expense
utilizing the straight-line method over the remaining term of the related debt.
Use of the straight-line method approximates the results of the application of
the interest method. The net amounts remaining at December 31, 1998 and 1997
were $6,176,690 and $7,166,450, respectively.
CASH AND CASH EQUIVALENTS
All highly liquid debt instruments purchased with an original maturity of
three months or less are considered to be cash equivalents.
REDEEMABLE PARTNERS' INTERESTS
The Partnership Agreement provides that if a certain partner dies or
becomes disabled, that partner (or his personal representative) shall have the
option, exercisable by notice given to the partners at any time within 270 days
after his death or disability (except that if that partner dies or becomes
disabled prior to August 31, 2000, the option may not be exercised until August
31, 2000 and then by notice by that partner or his personal representative given
to the partners within 270 days after August 31, 2000) to sell, and require the
General Partner and certain trusts controlled by that partner to sell, and the
Partnership to purchase, up to 50% of the partnership interests owned by any of
such partners and certain current and former members of management of Rifkin &
Associates, Inc. that requests to sell their interest, for a purchase price
equal to the fair market value of those interests determined by appraisal in
accordance with the Partnership Agreement. Accordingly, the current fair value
of such partnership interests have been reclassified outside of partners'
capital.
F-202
<PAGE> 414
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up
Activities," which requires the Partnership to expense all start up costs
related to organizing a new business. This new standard also includes one-time
activities related to opening a new facility, introduction of a new product or
service, or conducting business with a new class of customer or in a new
territory. This standard is effective for the Partnership's 1999 fiscal year.
Management believes that SOP 98-5 will have no material effect on its financial
position or the results of operations.
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 financial statement presentation. Such
reclassification had no effect on the net loss as previously stated.
2. SUBSEQUENT EVENT
On February 12, 1999, the Company signed a letter of intent for the
partners to sell all of their partnership interests to Charter Communications
("Charter"). The Company and Charter are expected to sign a purchase agreement
and complete the sale during the third quarter of 1999.
3. ACQUISITION OF CABLE PROPERTIES
1998 ACQUISITIONS
At various times during the second half of 1998, the Company completed
three separate acquisitions of cable operating assets. Two of the acquisitions
serve communities in Gwinnett County, Georgia (the "Georgia Systems"). These
acquisitions were accounted for using the purchase method of accounting.
The third acquisition resulted from a trade of the Company's systems
serving the communities of Paris and Piney Flats, Tennessee for the operating
assets of another cable operator serving primarily the communities of Lewisburg
and Crossville, Tennessee (the "Tennessee Trade"). The trade was for cable
systems that are similar in size and was accounted for based on fair market
value. Fair market value was established at $3,000 per customer relinquished,
which was based on recent sales transactions of similar cable systems. The
transaction included the payment of approximately $719,000, net, of additional
cash (Note 4).
F-203
<PAGE> 415
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The combined purchase price was allocated based on estimated fair values
from an independent appraisal to property, plant and equipment and franchise
cost as follows (dollars in thousands):
<TABLE>
<CAPTION>
GEORGIA TENNESSEE
SYSTEMS TRADE TOTAL
------- --------- -------
<S> <C> <C> <C>
Fair value of assets relinquished (Note 4)...... $ -- $46,668 $46,668
Cash paid....................................... 1,392 719 2,111
Acquisition Costs (appraisal, transfer fees and
direct costs)................................. 26 76 102
------ ------- -------
Total acquisition cost.......................... $1,418 $47,463 $48,881
====== ======= =======
Allocation:
Current assets.................................. $ (2) $ 447 $ 445
Current liabilities............................. (1) (397) (398)
Property, plant and equipment................... 333 11,811 12,144
Franchise Cost.................................. 1,088 35,602 36,690
------ ------- -------
Total cost allocated............................ $1,418 $47,463 $48,881
====== ======= =======
</TABLE>
The fair value of assets relinquished from the Tennessee Trade was treated
as a noncash transaction on the Consolidated Statement of Cash Flows. The cash
acquisition costs were funded by proceeds from the Company's reducing revolving
loan with a financial institution.
The following combined pro forma information presents a summary of
consolidated results of operations for the Company as if the Tennessee Trade
acquisitions had occurred at the beginning of 1997, with pro forma adjustments
to show the effect on depreciation and amortization for the acquired assets,
management fees on additional revenues and interest expense on additional debt
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------
12/31/98 12/31/97
-------- -----------
(UNAUDITED)
<S> <C> <C>
Total revenues.......................... $89,921 $ 84,325
Net income (loss)....................... 19,447 (29,631)
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the Tennessee Trade actually been
acquired on January 1, 1997.
1997 ACQUISITIONS
On April 1, 1997, the Company acquired the cable operating assets of two
cable systems serving the Tennessee communities of Shelbyville and Manchester
(the "Manchester Systems"), for an aggregate purchase price of approximately
$19.7 million of which $495,000 was paid as escrow in 1996. The acquisition was
accounted for using the
F-204
<PAGE> 416
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase method of accounting, and was funded by proceeds from the Company's
reducing revolving loan with a financial institution. No pro forma information
giving the effect of the acquisitions is shown due to the results being
immaterial.
1996 ACQUISITIONS
On March 1, 1996, the Company acquired certain cable operating assets
("Mid-Tennessee Systems") from Mid-Tennessee CATV, L.P., and on April 1, 1996
acquired the cable operating assets ("RCT Systems") from Rifkin Cablevision of
Tennessee, Ltd. Both Mid-Tennessee CATV, L.P. and Rifkin Cablevision of
Tennessee, Ltd. were affiliates of the General Partner. The acquisition costs
were funded by $15 million of additional partner contributions and the remainder
from a portion of the proceeds received from the issuance of $125 million of
11 1/8% Senior Subordinated Notes due 2006 (see Note 6).
The acquisitions were recorded using the purchase method of accounting. The
results of operations of the Mid-Tennessee Systems have been included in the
consolidated financial statements since March 1, 1996, and the results of the
RCT Systems have been included in the consolidated financial statements since
April 1, 1996. The combined purchase price was allocated based on estimated fair
values from an independent appraisal to property, plant and equipment and
franchise cost as follows (dollars in thousands):
<TABLE>
<S> <C>
Cash paid, net of acquired cash....................... $71,582
Acquisition costs (appraisal, transfer fees, and
direct costs)....................................... 215
-------
Total acquisition cost................................ $71,797
=======
Allocation:
Current assets........................................ $ 624
Current liabilities................................... (969)
Property, plant and equipment......................... 24,033
Franchise cost and other intangible assets............ 48,109
-------
Total cost allocated.................................. $71,797
=======
</TABLE>
The following combined pro forma information presents a summary of
consolidated results of operations for the Company as if the Mid-Tennessee
Systems and the RCT Systems acquisitions had occurred at the beginning of 1996,
with pro forma adjustments to show the effect on depreciation and amortization
for the acquired assets, management fees on additional revenues and interest
expense on additional debt (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-----------
12/31/96
-----------
(UNAUDITED)
<S> <C>
Total revenues..................................... $ 74,346
Net loss........................................... (22,558)
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the Mid-Tennessee Systems and the
RCT Systems actually been acquired on January 1, 1996.
F-205
<PAGE> 417
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SALE OF ASSETS
On February 4, 1998, the Company sold all of its operating assets in the
state of Michigan (the "Michigan Sale") to another cable operator for cash. In
addition, on December 31, 1998, the Company traded certain cable systems in
Tennessee (the "Tennessee Trade") for similar-sized cable systems (Note 3). Both
sales resulted in a gain recognized by the Company as follows (dollars in
thousands):
<TABLE>
<CAPTION>
MICHIGAN TENNESSEE
SALE TRADE TOTAL
-------- --------- -------
<S> <C> <C> <C>
Fair value of assets relinquished...... $ -- $46,668 $46,668
Original cash proceeds................. 16,931 -- 16,931
Adjustments for value of assets and
liabilities assumed.................. 120 (17) 103
------- ------- -------
Net proceeds........................... 17,051 46,651 63,702
Net book value of assets sold.......... 11,061 9,778 20,839
------- ------- -------
Net gain from sale..................... $ 5,990 $36,873 $42,863
======= ======= =======
</TABLE>
The Michigan Sale proceeds amount includes $500,000 that is currently being
held in escrow. This amount and the fair value of assets relinquished, related
to the Tennessee Trade, were both treated as noncash transactions on the
Consolidated Statement of Cash Flows.
The cash proceeds from the Michigan Sale were used by the Company to reduce
its revolving and term loans with a financial institution.
5. INCOME TAXES
Although the Partnership is not a taxable entity, two corporations (the
"subsidiaries") are included in the consolidated financial statements. These
subsidiaries are required to pay taxes on their taxable income, if any.
F-206
<PAGE> 418
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents a reconciliation of pre-tax losses as reported in
accordance with generally accepted accounting principles and the losses
attributable to the partners and included in their individual income tax
returns:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
12/31/98 12/31/97 12/31/96
------------ ------------ ------------
<S> <C> <C> <C>
Pre-tax income (loss) as
reported......................... $ 20,241,286 $(31,378,648) $(25,277,061)
(Increase) decrease due to:
Separately taxed book results of
corporate subsidiaries........ 9,397,000 15,512,000 9,716,000
Effect of different depreciation
and amortization methods for
tax and book purposes......... (1,360,000) (2,973,000) (3,833,000)
Additional tax gain from the sale
of Michigan(Note 4).............. 2,068,000 -- --
Book gain from trade sale of
Tennessee assets(Note 4)......... (36,873,000) -- --
Additional tax loss from
dissolution of FNI stock......... (7,235,000) -- --
Other.............................. 81,714 (45,052) (22,539)
------------ ------------ ------------
Tax loss attributed to the
partners......................... $(13,680,000) $(18,884,700) $(19,416,600)
============ ============ ============
</TABLE>
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
As a result of a change in control in 1995, the book value of the Company's
net assets was increased to reflect their fair market value. In connection with
this revaluation, a deferred income tax liability in the amount of $22,801,000
was established to provide for future taxes payable on the revised valuation of
the net assets. A deferred tax benefit of $4,196,000, $5,335,000 and $3,654,000
was recognized for the years ended December 31, 1998, 1997 and 1996,
respectively, reducing the liability to $7,942,000.
Deferred tax assets (liabilities) were comprised of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
12/31/98 12/31/97
------------ ------------
<S> <C> <C>
Deferred tax assets resulting from
loss carryforwards.............. $ 11,458,000 $ 9,499,000
Deferred tax liabilities resulting
from depreciation and
amortization.................... (19,400,000) (21,637,000)
------------ ------------
Net deferred tax liability........ $ (7,942,000) $(12,138,000)
============ ============
</TABLE>
F-207
<PAGE> 419
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998 and 1997, the subsidiaries have net operating loss
carryforwards ("NOLs") for income tax purposes of $30,317,000 and $25,264,000,
respectively, substantially all of which are limited. The NOLs will expire at
various times between the years 2000 and 2013.
In 1998, one of the corporate entities was dissolved. The existing NOL's
were used to offset taxable income down to $87,751, resulting in a current tax
for 1998 of $18,075.
Under the Internal Revenue Code of 1986, as amended (the "Code"), the
subsidiaries generally would be entitled to reduce their future federal income
tax liabilities by carrying the unused NOLs forward for a period of 15 years to
offset their future income taxes. The subsidiaries' ability to utilize any NOLs
in future years may be restricted, however, in the event the subsidiaries
undergo an "ownership change" as defined in Section 382 of the Code. In the
event of an ownership change, the amount of NOLs attributable to the period
prior to the ownership change that may be used to offset taxable income in any
year thereafter generally may not exceed the fair market value of the subsidiary
immediately before the ownership change (subject to certain adjustments)
multiplied by the applicable long-term, tax exempt rate published by the
Internal Revenue Service for the date of the ownership change. Two of the
subsidiaries underwent an ownership change on September 1, 1995 pursuant to
Section 382 of the Code. As such, the NOLs of the subsidiaries are subject to
limitation from that date forward. It is the opinion of management that the NOLs
will be released from this limitation prior to their expiration dates and, as
such, have not been limited in their calculation of deferred taxes.
The provision for income tax expense (benefit) differs from the amount
which would be computed by applying the statutory federal income tax rate of 35%
to pre-tax income before extraordinary loss as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
12/31/98 12/31/97 12/31/96
------------ ------------ -----------
<S> <C> <C> <C>
Tax expense (benefit) computed at
statutory rate...................... $ 7,084,450 $(10,982,527) $(8,846,971)
Increase (decrease) due to:
Tax benefit (expense) for
non-corporate loss............... (10,373,252) 5,900,546 5,446,721
Permanent differences between
financial statement income and
taxable income................... (36,200) 84,500 48,270
State income tax.................... (247,000) (377,500) (252,590)
Tax benefit from dissolved
corporation...................... (148,925) -- --
Other............................... (456,998) 39,981 (41,149)
------------ ------------ -----------
Income Tax Benefit.................. $ (4,177,925) $ (5,335,000) $(3,645,719)
============ ============ ===========
</TABLE>
F-208
<PAGE> 420
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE
Debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Senior Subordinated Notes......... $125,000,000 $125,000,000
Tranche A Term Loan............... 21,575,000 25,000,000
Tranche B Term Loan............... 40,000,000 40,000,000
Reducing Revolving Loan........... 35,000,000 36,500,000
Senior Subordinated Debt.......... 3,000,000 3,000,000
------------ ------------
$224,575,000 $229,500,000
============ ============
</TABLE>
The Notes and loans are collateralized by substantially all of the assets
of the Company.
On January 26, 1996, the Company and its wholly-owned subsidiary, RACC (the
"Issuers"), co-issued $125,000,000 of 11 1/8% Senior Subordinated Notes (the
"Notes") to institutional investors. These notes were subsequently exchanged on
June 18, 1996 for publicly registered notes with identical terms. Interest on
the Notes is payable semi-annually on January 15 and July 15 of each year. The
Notes, which mature on January 15, 2006, can be redeemed in whole or in part, at
the Issuers' option, at any time on or after January 15, 2001, at redeemable
prices contained in the Notes plus accrued interest. In addition, at any time on
or prior to January 15, 1999, the Issuers, at their option, may redeem up to 25%
of the principle amount of the Notes issued to institutional investors of not
less than $25,000,000. At December 31, 1998 and 1997, all of the Notes were
outstanding (see also Note 10).
The Company has a $25,000,000 Tranche A term loan with a financial
institution. This loan requires quarterly payments of $1,875,000 plus interest
commencing on March 31, 2000. Any unpaid balance is due March 31, 2003. The
agreement requires that what it defines as excess proceeds from the sale of a
cable system be used to retire Tranche A term debt. As a result of the Michigan
sale (Note 4), there was $3,425,000 of excess proceeds used to pay principal in
1998. The interest rate on the Tranche A term loan is either the bank's prime
rate plus .25% to 1.75% or LIBOR plus 1.5% to 2.75%.
The specific rate is dependent upon the senior funded debt ratio which is
recalculated quarterly. The weighted average effective interest rate at December
31, 1998 and 1997 was 7.59% and 8.24%, respectively.
In addition, the Company has a $40,000,000 Tranche B term loan, which
requires principal payments of $2,000,000 on March 31, 2002, $18,000,000 on
March 31, 2003, and $20,000,000 on March 31, 2004. The Tranche B term loan bears
an interest rate of 9.75% and is payable quarterly.
The Company also has a reducing revolving loan providing for borrowing up
to $20,000,000 at the Company's discretion, subject to certain restrictions, and
an additional $60,000,000 available to finance acquisitions subject to certain
restrictions. On March 4,
F-209
<PAGE> 421
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998, the reducing revolving loan agreement was amended to revise the scheduled
reduction in revolving commitments. The additional financing amounts available
at December 31, 1998 and 1997 were $45,000,000 and $52,500,000, respectively. At
December 31, 1998, the full $20,000,000 available had been borrowed, and
$15,000,000 had been drawn against the $45,000,000 commitment. At December 31,
1997, the full $20,000,000 available had been borrowed, and $16,500,000 had been
drawn against the $52,500,000 commitment. The amount available for borrowing
will decrease annually during its term with changes over the four years
following December 31, 1998 as follows: 1999 -- $2,500,000 reduction per
quarter, and 2000 through 2002 -- $3,625,000 per quarter. Any unpaid balance is
due on March 31, 2003. The revolving loan bears an interest rate of either the
bank's prime rate plus .25% to 1.75% or LIBOR plus 1.5% to 2.75%. The specific
rate is dependent upon the senior funded debt ratio which is recalculated
quarterly. The weighted average effective interest rates at December 31, 1998
and 1997 was 8.08% and 8.29%, respectively. The reducing revolving loan includes
a commitment fee of 1/2% per annum on the unborrowed balance.
Certain mandatory prepayments may also be required, commencing in fiscal
1997, on the Tranche A term loan, the Tranche B term loan, and the reducing
revolving credit based on the Company's cash flow calculations, proceeds from
the sale of a cable system or equity contributions. Based on the 1998
calculation and the Michigan sale, $3,425,000 of prepayments were required.
Optional prepayments are allowed, subject to certain restrictions. The related
loan agreement contains covenants limiting additional indebtedness, dispositions
of assets, investments in securities, distribution to partners, management fees
and capital expenditures. In addition, the Company must maintain certain
financial levels and ratios. At December 31, 1998, the Company was in compliance
with these covenants.
The Company also has $3,000,000 of senior subordinated debt payable to a
Rifkin Partner. The debt has a scheduled maturity, interest rate and interest
payment schedule identical to that of the Notes, as discussed above.
Based on the outstanding debt as of December 31, 1998, the minimum
aggregate maturities for the five years following 1998 are none in 1999,
$7,500,000 in 2000, $16,500,000 in 2001, $23,075,000 in 2002 and $29,500,000 in
2003.
7. RELATED PARTY TRANSACTIONS
The Company entered into a management agreement with Rifkin & Associates,
Inc. (Rifkin). The management agreement provides that Rifkin will act as manager
of the Company's CATV systems and be entitled to annual compensation of 3.5% of
the Company's revenue. Effective September 1, 1998, Rifkin conveyed its CATV
management business to R & A Management, LLC (RML). The result of this
transaction included the conveyance of the Rifkin management agreement (Rifkin
Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin
Agreement and the RML Agreement are disclosed in total on the Consolidated
Statement of Operations.
The Company is associated with a company to purchase certain cable
television programming at a discount. Rifkin acted as the agent and held the
deposit funds required for the Company to participate.
F-210
<PAGE> 422
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective September 1, 1998, Rifkin conveyed this contract and deposit
amount to RML. The deposit amount recorded at December 31, 1998 and 1997 was
$2,139,274 and $1,225,274, respectively. The Company subsequently received
$1,225,274 of the December 31, 1998 balance.
The Company paid approximately $550,000 to a law firm in connection with
the public offering in 1996. A partner of this law firm is a relative of one of
the Company's partners.
8. COMMITMENTS AND RENTAL EXPENSE
The Company leases certain real and personal property under noncancelable
operating leases expiring through the year 2007. Future minimum lease payments
under such noncancelable leases as of December 31, 1998 are: $316,091 in 1999;
$249,179 in 2000; $225,768 in 2001; $222,669 in 2002; and $139,910 in 2003; and
$344,153 thereafter, totaling $1,497,770.
Total rental expense and the amount included therein which pertains to
cancelable pole rental agreements were as follows for the periods indicated:
<TABLE>
<CAPTION>
TOTAL CANCELABLE
RENTAL POLE RENTAL
PERIOD EXPENSE EXPENSE
- ------ ---------- -----------
<S> <C> <C>
Year Ended December 31, 1998.......... $1,592,080 $1,109,544
Year Ended December 31, 1997.......... $1,577,743 $1,061,722
Year Ended December 31, 1996.......... $1,294,084 $ 874,778
</TABLE>
9. COMPENSATION PLANS AND RETIREMENT PLANS
EQUITY INCENTIVE PLAN
In 1996, the Company implemented an Equity Incentive Plan (the "Plan") in
which certain Rifkin & Associates' executive officers and key employees, and
certain key employees of the Company are eligible to participate. Plan
participants in the aggregate, have the right to receive (i) cash payments of up
to 2.0% of the aggregate value of all partnership interests of the Company (the
"Maximum Incentive Percentage"), based upon the achievement of certain annual
Operating Cash Flow (as defined in the Plan) targets for the Company for each of
the calendar years 1996 through 2000, and (ii) an additional cash payment equal
to up to 0.5% of the aggregate value of all partnership interests of the Company
(the "Additional Incentive Percentage"), based upon the achievement of certain
cumulative Operating Cash Flow targets for the Company for the five-year period
ended December 31, 2000. Subject to the achievement of such annual targets and
the satisfaction of certain other criteria based on the Company's operating
performance, up to 20% of the Maximum Incentive Percentage will vest in each
such year; provided, that in certain events vesting may accelerate. Payments
under the Plan are subject to certain restrictive covenants contained in the
Notes.
No amounts are payable under the Plan except upon (i) the sale of
substantially all of the assets or partnership interests of the Company or (ii)
termination of a Plan participant's employment with Rifkin & Associates or the
Company, as applicable, due to
F-211
<PAGE> 423
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(a) the decision of the Advisory Committee to terminate such participant's
employment due to disability, (b) the retirement of such participant with the
Advisory Committee's approval or (c) the death of such Participant. The value of
amounts payable pursuant to clause (i) above will be based upon the aggregate
net proceeds received by the holders of all of the partnership interests in the
Company, as determined by the Advisory Committee, and the amounts payable
pursuant to clause (ii) above will be based upon the Enterprise Value determined
at the time of such payment. For purposes of the Plan, Enterprise Value
generally is defined as Operating Cash Flow for the immediately preceding
calendar year times a specified multiple and adjusted based on the Company's
working capital.
The amount expensed for the years ended December 31, 1998, 1997 and 1996
relating to this plan were $1,119,996, $859,992 and $660,000, respectively.
RETIREMENT BENEFITS
The Company has a 401(k) plan for employees that have been employed by the
Company for at least one year. Employees of the Company can contribute up to 15%
of their salary, on a before-tax basis, with a maximum 1998 contribution of
$10,000 (as set by the Internal Revenue Service). The Company matches
participant contributions up to a maximum of 50% of the first 3% of a
participant's salary contributed. All participant contributions and earnings are
fully vested upon contribution and Company contributions and earnings vest 20%
per year of employment with the Company, becoming fully vested after five years.
The Company's matching contributions for the years ended December 31, 1998, 1997
and 1996 were $50,335, $72,707 and $42,636, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held
for trading purposes. The following method and assumptions were used by the
Company to estimate the fair values of financial instruments as disclosed
herein:
Cash and Cash Equivalents, Customer Accounts Receivable, Other Receivables,
Accounts Payable and Accrued Liabilities and Customer Deposits and Prepayments:
The carrying value amount approximates fair value because of the short period to
maturity.
Debt: The fair value of bank debt is estimated based on interest rates for
the same or similar debt offered to the Company having the same or similar
remaining maturities and collateral requirements. The fair value of public
Senior Subordinated Notes is based on the market quoted trading value. The fair
value of the Company's debt is estimated at $236,137,500 and is carried on the
balance sheet at $224,575,000.
11. CABLE REREGULATION
Congress enacted the Cable Television Consumer Protection and Competition
Act of 1992 (the Cable Act) and has amended it at various times since.
The total effects of the present law are, at this time, still unknown.
However, one provision of the present law further redefines a small cable
system, and exempts these systems from rate regulation on the upper tiers of
cable service. The Partnership is
F-212
<PAGE> 424
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
awaiting an FCC rulemaking implementing the present law to determine whether its
systems qualify as small cable systems.
12. SUMMARIZED FINANCIAL INFORMATION
CEM, CEI and CEC (collective, the "Guarantors") are all wholly-owned
subsidiaries of the Company and, together with RACC, constitute all of the
Partnership's direct and indirect subsidiaries. As discussed in Note 1, RTL and
FNI were dissolved on January 1, 1998 and the assets were transferred to the
Company, however, prior thereto, RTL and FNI, as wholly-owned subsidiaries of
the Company, were Guarantors. Each of the Guarantors provides a full,
unconditional, joint and several guaranty of the obligations under the Notes
discussed in Note 6. Separate financial statements of the Guarantors are not
presented because management has determined that they would not be material to
investors.
The following tables present summarized financial information of the
Guarantors on a combined basis as of December 31, 1998 and 1997 and for the
years ended December 31, 1998, and 1997 and 1996.
<TABLE>
<CAPTION>
12/31/98 12/31/97
BALANCE SHEET ------------ ------------
<S> <C> <C> <C>
Cash....................... $ 373,543 $ 780,368
Accounts and other
receivables, net......... 3,125,830 3,012,571
Prepaid expenses........... 791,492 970,154
Property, plant and
equipment net............ 48,614,536 66,509,120
Franchise costs and other
intangible assets, net... 56,965,148 103,293,631
Accounts payable and
accrued liabilities...... 22,843,354 18,040,588
Other liabilities.......... 980,536 1,122,404
Deferred taxes payable..... 7,942,000 12,138,000
Notes payable.............. 140,050,373 167,200,500
Equity (deficit)........... (61,945,714) (23,935,648)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
12/31/98 12/31/97 12/31/96
STATEMENTS OF OPERATIONS ------------ ------------ ------------
<S> <C> <C> <C>
Total revenue.............. $ 29,845,826 $ 47,523,592 $ 42,845,044
Total costs and
expenses...... (31,190,388) (53,049,962) (43,578,178)
Interest expense........... (14,398,939) (17,868,497) (16,238,221)
Income tax benefit......... 4,177,925 5,335,000 3,645,719
------------ ------------ ------------
Net loss................... $(11,565,576) $(18,059,867) $(13,325,636)
============ ============ ============
</TABLE>
F-213
<PAGE> 425
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. QUARTERLY INFORMATION (UNAUDITED)
The following interim financial information of the Company presents the
1998 and 1997 consolidated results of operations on a quarterly basis (in
thousands):
<TABLE>
<CAPTION>
QUARTERS ENDED 1998
------------------------------------------------
MARCH 31(a) JUNE 30 SEPT. 30 DEC. 31(b)
----------- ------- -------- ----------
<S> <C> <C> <C> <C>
Revenue.................. $22,006 $22,296 $22,335 $23,284
Operating income
(loss)................. 295 511 (1,522) 1,756
Net income (loss)........ 1,437 (4,458) (5,907) 33,347
</TABLE>
- -------------------------
(a) First quarter includes a $5,900 gain from the sale of Michigan assets
(Note 4).
(b) Fourth quarter includes a $36,873 gain from the trade sale of certain
Tennessee assets (Note 4).
<TABLE>
<CAPTION>
QUARTERS ENDED 1997
------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue....................... $19,337 $21,331 $21,458 $22,199
Operating loss................ (1,220) (2,818) (2,777) (798)
Net loss...................... (5,998) (6,890) (8,127) (5,029)
</TABLE>
14. LITIGATION
The Company could possibly be named as defendant in various actions and
proceedings arising from the normal course of business. In all such cases, the
Company will vigorously defend itself against the litigation and, where
appropriate, will file counterclaims. Although the eventual outcome of potential
lawsuits cannot be predicted, it is management's opinion that any such lawsuit
will not result in liabilities that would have a material affect on the
Company's financial position or results of operations.
F-214
<PAGE> 426
REPORT OF INDEPENDENT AUDITORS
The Partners
Indiana Cable Associates, Ltd.
We have audited the accompanying balance sheet of Indiana Cable Associates, Ltd.
as of December 31, 1997 and 1998, and the related statements of operations,
partners' deficit and cash flows for the years ended December 31, 1996, 1997 and
1998. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Indiana Cable Associates, Ltd.
at December 31, 1997 and 1998, and the results of its operations and its cash
flows for the years ended December 31, 1996, 1997 and 1998 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Denver, Colorado
February 19, 1999
F-215
<PAGE> 427
INDIANA CABLE ASSOCIATES, LTD.
BALANCE SHEET
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
ASSETS (PLEDGED)
Cash and cash equivalents........................... $ 82,684 $ 108,619
Customer accounts receivable, less allowance for
doubtful accounts of $18,311 in 1997 and $24,729
in 1998........................................... 87,154 85,795
Other receivables................................... 257,236 295,023
Prepaid expenses and deposits....................... 172,614 152,575
Property, plant and equipment, at cost:
Buildings......................................... 78,740 91,682
Transmission and distribution systems and related
equipment...................................... 10,174,650 11,336,892
Office furniture and equipment.................... 144,137 161,327
Spare parts and construction inventory............ 435,554 742,022
----------- -----------
10,833,081 12,331,923
Less accumulated depreciation..................... 7,624,570 8,008,158
----------- -----------
Net property, plant and equipment.............. 3,208,511 4,323,765
Other assets, at cost less accumulated amortization
(Note 3).......................................... 5,817,422 5,083,029
----------- -----------
Total assets.............................. $ 9,625,621 $10,048,806
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accounts payable and accrued liabilities.......... $ 718,716 $ 897,773
Customer prepayments.............................. 50,693 47,458
Interest payable.................................. 32,475 --
Long-term debt (Note 4)........................... 10,650,000 --
Interpartnership debt (Note 4).................... -- 9,606,630
----------- -----------
Total liabilities......................... 11,451,884 10,551,861
Commitments (Notes 5 and 6)
Partners' deficit:
General partner................................... (66,418) (20,106)
Limited partner................................... (1,759,845) (482,949)
----------- -----------
Total partners' deficit............................. (1,826,263) (503,055)
----------- -----------
Total liabilities and partners' deficit... $ 9,625,621 $10,048,806
=========== ===========
</TABLE>
See accompanying notes.
F-216
<PAGE> 428
INDIANA CABLE ASSOCIATES, LTD.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------
12/31/96 12/31/97 12/31/98
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE:
Service...................................... $6,272,049 $6,827,504 $7,165,843
Installation and other....................... 538,158 622,699 773,283
---------- ---------- ----------
Total revenue...................... 6,810,207 7,450,203 7,939,126
COSTS AND EXPENSES:
Operating expense............................ 989,456 1,142,932 974,617
Programming expense.......................... 1,474,067 1,485,943 1,727,089
Selling, general and administrative
expense.................................... 1,112,441 1,142,247 1,128,957
Depreciation................................. 889,854 602,554 537,884
Amortization................................. 718,334 718,335 707,539
Management fees.............................. 340,510 372,510 396,956
Loss on disposal of assets................... 6,266 639 74,714
---------- ---------- ----------
Total costs and expenses........... 5,530,928 5,465,160 5,547,756
---------- ---------- ----------
Operating income............................. 1,279,279 1,985,043 2,391,370
Interest expense............................. 1,361,415 1,292,469 970,160
---------- ---------- ----------
Net income (loss) before extraordinary
item....................................... (82,136) 692,574 1,421,210
Extraordinary item--loss on early retirement
of debt (Note 3 and 4)..................... -- -- 98,002
---------- ---------- ----------
Net income (loss)............................ $ (82,136) $ 692,574 $1,323,208
========== ========== ==========
</TABLE>
See accompanying notes.
F-217
<PAGE> 429
INDIANA CABLE ASSOCIATES, LTD.
STATEMENT OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
-------- ----------- -----------
<S> <C> <C> <C>
Partners' deficit at December 31, 1995... $(87,783) $(2,348,918) $(2,436,701)
Net loss for the year ended December
31, 1996............................ (2,875) (79,261) (82,136)
-------- ----------- -----------
Partners' deficit at December 31, 1996... (90,658) (2,428,179) (2,518,837)
Net income for the year ended December
31, 1997............................ 24,240 668,334 692,574
-------- ----------- -----------
Partners' deficit at December 31, 1997... (66,418) (1,759,845) (1,826,263)
Net income for the year ended December
31, 1998............................ 46,312 1,276,896 1,323,208
-------- ----------- -----------
Partners' deficit at December 31, 1998... $(20,106) $ (482,949) $ (503,055)
======== =========== ===========
</TABLE>
The partners' capital accounts for financial reporting purposes vary from
the tax capital accounts.
See accompanying notes.
F-218
<PAGE> 430
INDIANA CABLE ASSOCIATES, LTD.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
12/31/96 12/31/97 12/31/98
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $ (82,136) $ 692,574 $ 1,323,208
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................... 1,608,188 1,320,889 1,245,423
Amortization of deferred loan costs............... 48,764 72,922 23,149
Loss on disposal of assets........................ 6,266 639 74,714
Loss on write-off of deferred loan cost associated
with early retirement of debt................... -- -- 95,832
Decrease (increase) in customer accounts
receivable...................................... (13,110) 1,536 1,359
Increase in other receivables..................... (80,843) (108,256) (37,787)
Decrease (increase) in prepaid expenses and
deposits........................................ (53,259) (5,928) 20,039
Increase (decrease) in accounts payable and
accrued liabilities............................. (190,357) (147,971) 179,057
Increase (decrease) in customer prepayments....... 16,355 (13,190) (3,235)
Decrease in interest payable...................... (12,314) (39,471) (32,475)
----------- ----------- ------------
Net cash provided by operating activities.... 1,247,554 1,773,744 2,889,284
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........... (675,244) (592,685) (1,732,831)
Proceeds from sale of assets......................... 227,025 23,662 4,979
----------- ----------- ------------
Net cash used in investing activities........ (448,219) (569,023) (1,727,852)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt......................... 2,000,000 1,450,000 10,636,421
Proceeds from interpartnership debt.................. -- -- 9,606,630
Deferred loan cost................................... (70,000) (29,776) (92,127)
Payments of long-term debt........................... (2,200,000) (3,100,000) (21,286,421)
----------- ----------- ------------
Net cash used in financing activities........ (270,000) (1,679,776) (1,135,497)
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents... 529,335 (475,055) 25,935
Cash and cash equivalents at beginning of year......... 28,404 557,739 82,684
----------- ----------- ------------
Cash and cash equivalents at end of year............... $ 557,739 $ 82,684 $ 108,619
=========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid........................................ $ 1,324,965 $ 1,258,078 $ 947,606
=========== =========== ============
</TABLE>
See accompanying notes.
F-219
<PAGE> 431
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION
GENERAL INFORMATION:
Indiana Cable Associates, Ltd. (the "Partnership"), a Colorado limited
partnership, was organized in March 1987 for the purpose of acquiring and
operating cable television systems and related operations in Indiana and
Illinois.
For financial reporting purposes, Partnership profits or losses are
allocated 3.5% to the general partners and 96.5% to the limited partners.
Limited partners are not required to fund any losses in excess of their capital
contributions.
ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP:
Interlink Communications Partners, LLLP ("ICP") agreed to purchase all of
the interests of the Partnership. ICP acquired all of the limited partner
interests, effective December 31, 1998, and is currently in the process of
obtaining the necessary consents to transfer all of the Partnership's franchises
to ICP. Once these are obtained, ICP will then purchase the general partner
interest in the Partnership, and the Partnership will, by operation of law, be
consolidated into ICP.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY, PLANT AND EQUIPMENT:
The Partnership records additions to property, plant and equipment at cost,
which in the case of assets constructed includes amounts for material, labor,
overhead and capitalized interest, if applicable.
For financial reporting purposes, the Partnership uses the straight-line
method of depreciation over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements......................... 5-30 years
Transmission and distribution systems and related
equipment........................................ 3-15 years
Office furniture and equipment..................... 5 years
</TABLE>
OTHER ASSETS:
Other assets are carried at cost and are amortized on a straight-line basis
over the following lives:
<TABLE>
<S> <C> <C>
Franchises -- the terms of the franchises
(10-19 1/2 years)
Goodwill -- the term of the Partnership
agreement (12 3/4 years)
Deferred loan costs -- the term of the debt (1-6 years)
Organization costs -- 5 years
</TABLE>
F-220
<PAGE> 432
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES:
No provision for the payment or refund of income taxes has been provided
for the Partnership since the partners are responsible for reporting their
distributive share of Partnership net income or loss in their personal
capacities.
CASH AND CASH EQUIVALENTS:
The Partnership considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION:
Customer fees are recorded as revenue in the period the service is
provided.
FAIR VALUE OF FINANCIAL INVESTMENTS:
The carrying values of cash and cash equivalents, customer accounts
receivable, accounts payable and interpartnership debt approximate fair value.
USE OF ESTIMATES:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
IMPACT OF YEAR 2000 (UNAUDITED):
The Partnership recognizes that certain of its time-sensitive computer
programs and product distribution equipment may be affected by conversion to the
year 2000. During 1998, management began their evaluation of the information
systems, product distribution facilities, and vendor and supplier readiness. To
date, considerable progress has been made to complete the evaluation process, to
integrate and test compliance installations, and to prepare contingency plans.
In addition, third party suppliers are either fully compliant or are expected to
be compliant by December 31, 1999. Management expects to have all systems
compliant, or have a contingency plan in effect that will result in minimal
impact on the operations.
NEW ACCOUNTING PRONOUNCEMENT:
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up
Activities," which requires the Partnerships to expense all start-up costs
related to organizing a new business. This new standard also includes one-time
activities related to opening a new facility, introduction of a new product or
service, or conducting business with a new class of customer or in a new
territory. This standard is effective for the Partnerships' 1999 fiscal year.
Organization costs are all fully amortized resulting in SOP 98-5 having no
material effect on its financial position or the results of operations.
F-221
<PAGE> 433
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION:
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform with the 1998 financial statement presentation. Such
reclassifications had no effect on the net income or loss as previously stated.
3. OTHER ASSETS
At December 31, 1997 and 1998, other assets consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Franchises.................................. $13,144,332 $12,996,580
Goodwill.................................... 378,336 378,336
Deferred loan costs......................... 26,854 --
Organization costs.......................... 63,393 63,393
----------- -----------
13,612,915 13,438,309
Less accumulated amortization............... 7,795,493 8,355,280
----------- -----------
$ 5,817,422 $ 5,083,029
=========== ===========
</TABLE>
On December 31, 1997, the loan agreement with a financial institution was
amended (Note 4). At that time, the original loan's costs, which were fully
amortized, and the accumulated amortization were written off. The bank loan
amendment required the payment of additional loan costs which will be amortized
over the remaining term of the bank loan.
On August 31, 1998, the loan with a financial institution and the
subordinated debt loan with two investor groups were paid in full (Note 4). The
related deferred loan costs and associated accumulated amortization were written
off and $9,263 was recorded as an extraordinary loss. On December 30, 1998, the
new loan agreement with a financial institution was paid in full (Note 4). The
related deferred loan costs and associated accumulated amortization were written
off and $86,569 was recorded as an extraordinary loss.
4. DEBT
The Partnership had a revolving credit agreement with a financial
institution which provided for borrowing up to $7,000,000 with a maturity date
of December 31, 1997, at which time the balance of the loan was $4,650,000. On
December 31, 1997, the credit agreement was amended to reduce the amount
available to borrow to $5,200,000 and extend the maturity date to December 31,
1998. The Partnership also had subordinated term notes with two investors
totalling $6,000,000 at December 31, 1997. Total outstanding loans at December
31, 1997 were $10,650,000. On August 31, 1998, the revolving credit loan and
subordinated term notes had a balance of $3,450,000 and $6,000,000,
respectively; at that date, the total balance of $10,650,000 and accrued
interest were paid in full. On that same date, the Partnership obtained a new
credit agreement with a financial institution. The new credit agreement provided
for a senior term note payable in the amount of $7,500,000 and a revolving
credit loan which provided for borrowing up to
F-222
<PAGE> 434
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$7,500,000. At December 30, 1998, the term note and revolving credit had a
balance of $7,500,000 and $1,950,000, respectively; at that date, the total
balance of $9,450,000 and accrued interest were paid in full. The Partnership
also incurred a LIBOR break fee of $2,170 in conjunction with the retirement of
debt which was recorded as an extraordinary item.
Also on December 30, 1998, the Partnership obtained a new interpartnership
loan agreement with ICP (Note 1). Borrowing under the interpartnership loan, as
well as interest and principal payments are due at the discretion of the
management of ICP, resulting in no minimum required annual principal payments.
The balance of the interpartnership loan at December 31, 1998 was $9,606,630.
The effective interest rate at December 31, 1998 was 8.5%.
5. MANAGEMENT AGREEMENT
The Partnership has entered into a management agreement with Rifkin and
Associates, Inc., (Rifkin) whose sole stockholder is affiliated with a general
partner of the Partnership. The agreement provides that Rifkin shall manage the
Partnership and shall receive annual compensation equal to 2 1/2% of gross
revenues and an additional 2 1/2% if a defined cash flow level is met. Effective
September 1, 1998, Rifkin conveyed its CATV management business to R & A
Management, LLC (RML). The result of this transaction was the conveyance of the
Rifkin management agreement (Rifkin Agreement) to RML (RML Agreement). Expenses
incurred pursuant to the Rifkin Agreement and the RML Agreement are disclosed on
the Statement of Operations.
6. LEASE COMMITMENTS
At December 31, 1998, the Partnership had lease commitments under long-term
operating leases as follows:
<TABLE>
<S> <C>
1999.................................................. $27,408
2000.................................................. 6,300
2001.................................................. 2,700
2002.................................................. 1,500
2003.................................................. 1,500
Thereafter............................................ 10,500
-------
Total....................................... $49,908
=======
</TABLE>
Rent expense, including pole rent, was as follows for the periods
indicated:
<TABLE>
<CAPTION>
TOTAL
RENTAL
PERIOD EXPENSE
- ------ --------
<S> <C>
Year Ended December 31, 1996......................... $105,590
Year Ended December 31, 1997......................... 98,693
Year Ended December 31, 1998......................... 104,155
</TABLE>
F-223
<PAGE> 435
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RETIREMENT BENEFITS
The Partnership has a 401(k) plan for its employees that have been employed
by the Partnership for at least one year. Employees of the Partnership can
contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998
contribution of $10,000 (as set by the Internal Revenue Service). The
Partnership matches participant contributions up to a maximum of 50% of the
first 3% of a participant's salary contributed. All participant contributions
and earnings are fully vested upon contribution and Partnership contributions
and earnings vest 20% per year of employment with the Partnership, becoming
fully vested after five years. The Partnership's matching contributions for the
years ended December 31, 1996, 1997 and 1998 were $4,723, $8,769 and $8,639,
respectively.
F-224
<PAGE> 436
REPORT OF INDEPENDENT AUDITORS
The Partners
R/N South Florida Cable Management
Limited Partnership
We have audited the accompanying consolidated balance sheet of R/N South Florida
Cable Management Limited Partnership as of December 31, 1997 and 1998, and the
related consolidated statements of operations, partners' equity (deficit) and
cash flows for the years ended December 31, 1996, 1997 and 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of R/N
South Florida Cable Management Limited Partnership at December 31, 1997 and
1998, and the consolidated results of its operations and its cash flows for the
years ended December 31, 1996, 1997 and 1998 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 19, 1999
F-225
<PAGE> 437
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
ASSETS (PLEDGED) ----------- -----------
<S> <C> <C>
Cash and cash equivalents........................... $ 362,619 $ 678,739
Customer accounts receivable, less allowance for
doubtful accounts of $85,867 in 1997 and $84,474
in 1998........................................... 569,296 455,339
Other receivables................................... 1,180,507 1,691,593
Prepaid expenses and deposits....................... 416,455 393,022
Property, plant and equipment, at cost:
Transmission and distribution system and related
equipment......................................... 22,836,588 27,981,959
Office furniture and equipment...................... 704,135 755,398
Leasehold improvements.............................. 546,909 549,969
Construction in process and spare parts inventory... 718,165 744,806
----------- -----------
24,805,797 30,032,132
Less accumulated depreciation....................... 9,530,513 11,368,764
----------- -----------
Net property, plant and equipment......... 15,275,284 18,663,368
Other assets, at cost less accumulated amortization
(Note 2).......................................... 6,806,578 5,181,012
----------- -----------
Total assets.............................. $24,610,739 $27,063,073
=========== ===========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued liabilities............ $ 2,994,797 $ 2,356,540
Interest payable.................................... 287,343 --
Customer prepayments................................ 699,332 690,365
Long-term debt (Note 3)............................. 29,437,500 --
Interpartnership debt (Note 3)...................... -- 31,222,436
----------- -----------
Total liabilities......................... 33,418,972 34,269,341
Commitments (Notes 4 and 5)
Partners' equity (deficit):
General partner................................... (96,602) (81,688)
Limited partner................................... (9,582,050) (8,104,718)
Special limited partner........................... 870,419 980,138
----------- -----------
Total partners' equity (deficit).................... (8,808,233) (7,206,268)
----------- -----------
Total liabilities and partners' deficit... $24,610,739 $27,063,073
=========== ===========
</TABLE>
See accompanying notes.
F-226
<PAGE> 438
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
12/31/96 12/31/97 12/31/98
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Service................................... $16,615,767 $17,520,883 $18,890,202
Installation and other.................... 1,732,681 2,425,742 3,158,742
----------- ----------- -----------
18,348,448 19,946,625 22,048,944
COSTS AND EXPENSES:
Operating expense......................... 2,758,704 3,489,285 3,707,802
Programming expense....................... 4,075,555 4,014,850 4,573,296
Selling, general and administrative
expense................................. 3,979,002 4,087,845 4,537,535
Depreciation.............................. 1,787,003 1,912,905 2,256,765
Amortization.............................. 1,350,195 1,287,588 1,293,674
Management fees........................... 733,938 797,863 881,958
Loss on disposal of assets................ 373,860 513,177 178,142
----------- ----------- -----------
Total costs and expenses........ 15,058,257 16,103,513 17,429,172
----------- ----------- -----------
Operating income.......................... 3,290,191 3,843,112 4,619,772
Interest expense.......................... 2,528,617 2,571,976 2,583,338
----------- ----------- -----------
Net income before extraordinary item...... 761,574 1,271,136 2,036,434
Extraordinary item -- loss on early
retirement of debt (Note 2)............. -- -- 434,469
----------- ----------- -----------
Net income................................ $ 761,574 $ 1,271,136 $ 1,601,965
=========== =========== ===========
</TABLE>
See accompanying notes.
F-227
<PAGE> 439
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SPECIAL
GENERAL LIMITED LIMITED
PARTNERS PARTNERS PARTNERS TOTAL
--------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Partners' equity (deficit) at
December 31, 1995.............. $(115,526) $(11,456,616) $731,199 $(10,840,943)
Net income for the year ended
December 31, 1996........... 7,090 702,324 52,160 761,574
--------- ------------ -------- ------------
Partners' equity (deficit) at
December 31, 1996.............. (108,436) (10,754,292) 783,359 (10,079,369)
Net income for the year ended
December 31, 1997........... 11,834 1,172,242 87,060 1,271,136
--------- ------------ -------- ------------
Partners' equity (deficit) at
December 31, 1997.............. (96,602) (9,582,050) 870,419 (8,808,233)
Net income for the year ended
December 31, 1998........... 14,914 1,477,332 109,719 1,601,965
--------- ------------ -------- ------------
Partners' equity (deficit) at
December 31, 1998.............. $ (81,688) $ (8,104,718) $980,138 $ (7,206,268)
========= ============ ======== ============
</TABLE>
The partners' capital accounts for financial reporting purposes vary from
the tax capital accounts.
See accompanying notes.
F-228
<PAGE> 440
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
12/31/96 12/31/97 12/31/98
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 761,574 $ 1,271,136 $ 1,601,965
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 3,137,198 3,200,493 3,550,439
Amortization of deferred loan cost....... 68,898 79,108 89,788
Loss on early retirement of debt......... -- -- 434,469
Loss on disposal of assets............... 373,860 513,177 178,142
Decrease (increase) in customer accounts
receivable............................. 1,420 (152,229) 113,957
Increase in other receivables............ (377,553) (506,325) (511,086)
Decrease (increase) in prepaid expenses
and deposits........................... (114,720) 115,734 23,433
Increase (decrease) in accounts payable
and accrued liabilities................ 122,512 513,839 (638,257)
Increase (decrease) in customer
prepayments............................ 362 208,021 (8,967)
Increase (decrease) in interest
payable................................ 180 16,207 (287,343)
----------- ----------- ------------
Net cash provided by operating
activities....................... 3,973,731 5,259,161 4,546,540
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment................................ (4,000,631) (4,288,776) (5,915,434)
Additions to other assets, net of
refranchises............................. (10,600) (164,560) (186,790)
Proceeds from the sale of assets............ 16,674 70,865 92,443
----------- ----------- ------------
Net cash used in investing
activities....................... (3,994,557) (4,382,471) (6,009,781)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................ 2,750,000 3,850,000 5,550,000
Proceeds from interpartnership debt......... -- -- 31,222,436
Payments of long-term debt.................. (2,604,913) (4,562,500) (34,987,500)
Deferred loan costs......................... -- (132,727) (5,575)
----------- ----------- ------------
Net cash provided by (used in)
financing activities............. 145,087 (845,227) 1,779,361
----------- ----------- ------------
Net increase in cash and cash equivalents..... 124,261 31,463 316,120
Cash and cash equivalents at beginning of the
year........................................ 206,895 331,156 362,619
----------- ----------- ------------
Cash and cash equivalents at end of year...... $ 331,156 $ 362,619 $ 678,739
=========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................... $ 2,412,038 $ 2,441,662 $ 2,780,893
=========== =========== ============
</TABLE>
See accompanying notes
F-229
<PAGE> 441
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND ORGANIZATION:
The accompanying consolidated financial statements include the accounts of
R/N South Florida Cable Management Limited Partnership (the "Partnership") and
its substantially wholly-owned subsidiary Rifkin/Narragansett South Florida CATV
Limited Partnership (the "Operating Partnership"). Each partnership is a Florida
Limited Partnership. The Partnership was organized in 1988 for the purpose of
being the general partner to the Operating Partnership which is engaged in the
installation, ownership, operation and management of cable television systems in
Florida.
In 1992, the Partnership adopted an amendment to the Partnership agreement
(the "Amendment") and entered into a Partnership Interest Purchase Agreement
whereby certain Special Limited Partnership interests were issued in the
aggregate amount of $1,250,000. These new Special Limited Partners are
affiliated with the current General and Limited Partners of the Partnership. The
Amendment provides for the methods under which the gains, losses, adjustments
and distributions are allocated to the accounts of the Special Limited Partners.
For financial reporting purposes, partnership profits or losses are
allocated to the limited partners, special limited partners and general partners
in the following ratios: 92.22%, 6.849% and .931%, respectively. Limited
partners and special limited partners are not required to fund any losses in
excess of their capital contributions.
ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP:
InterLink Communications Partners, LLLP ("ICP") agreed to purchase all of
the interests of the Partnerships. ICP acquired all of the limited partner
interests of the Operating Partnership, effective December 31, 1998, and is
currently in the process of obtaining the necessary consents to transfer all of
the Operating Partnership's franchises to ICP. Once obtained, ICP will then
purchase the general partner interest, and the Partnership, by operation of law,
will consolidate into ICP.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment additions are recorded at cost, which in the
case of assets constructed includes amounts for material, labor, overhead and
capitalized interest, if applicable.
For financial reporting purposes, the Operating Partnership uses the
straight-line method of depreciation over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Transmission and distribution systems and related
equipment....................................... 15 years
Office furniture and equipment.................... 3-15 years
Leasehold improvements............................ 5-8 years
</TABLE>
F-230
<PAGE> 442
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OTHER ASSETS:
Other assets are carried at cost and are amortized on a straight-line basis
over the following lives:
<TABLE>
<S> <C>
Franchises.............. -- the terms of the franchises (3-13
years)
Goodwill................ -- 40 years
Organization costs...... -- 5 years
Deferred loan costs..... -- the term of the debt (8 years)
</TABLE>
INCOME TAXES:
No provision for the payment or refund of income taxes has been provided
since the partners are responsible for reporting their distributive share of
partnerships net income or loss in their personal capacities.
CASH AND CASH EQUIVALENTS:
The Partnerships consider all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION:
Customer fees are recorded as revenue in the period the service is
provided.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying values of cash and cash equivalents, customer accounts
receivable, accounts payable and interpartnership debt approximate fair value.
USE OF ESTIMATES:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
IMPACT OF YEAR 2000 (UNAUDITED):
The Partnerships recognize that certain of its time-sensitive computer
programs and product distribution equipment may be affected by conversion to the
year 2000. During 1998, management began their evaluation of the information
systems, product distribution facilities, and vendor and supplier readiness. To
date, considerable progress has been made to complete the evaluation process, to
integrate and test compliance installations, and to prepare contingency plans.
In addition, third party suppliers are either fully compliant or are expected to
be compliant by December 31, 1999. Management expects to have all systems
compliant, or have a contingency plan in effect that will result in minimal
impact on the operations.
NEW ACCOUNTING PRONOUNCEMENT:
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5 "Reporting on the costs of Start-Up
Activities," which requires the Partnerships to expense all start-up costs
related to organizing a new business. This new standard also includes one-time
activities related to opening a new facility, introduction of
F-231
<PAGE> 443
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a new product or service, or conducting business with a new class of customer or
in a new territory. This standard is effective for the Partnerships' 1999 fiscal
year. The organization costs are fully amortized, resulting in SOP 98-5 having
no material effect on its financial position or the results of operations.
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION:
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform with the 1998 financial statement presentation. Such
reclassifications had no effect on the net income as previously stated.
2. OTHER ASSETS
At December 31, 1997 and 1998, other assets consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Franchises and other................ $14,348,984 $14,535,774
Goodwill............................ 3,429,845 3,429,845
Deferred loan costs................. 694,819 --
Organization costs.................. 23,218 23,218
----------- -----------
18,496,866 17,988,837
Less accumulated amortization....... 11,690,288 12,807,825
----------- -----------
$ 6,806,578 $ 5,181,012
=========== ===========
</TABLE>
On December 30, 1998, the Partnerships' loan with a financial institution
was paid in full (Note 3). The related deferred loan costs and associated
accumulated amortization were written off and an extraordinary loss of $434,469
was recorded.
3. DEBT
The Partnerships had senior term note payable and a revolving credit loan
agreement with a financial institution. The senior term note payable was a
$29,500,000 loan which required varying quarterly payments which commenced on
September 30, 1996. On June 30, 1997, the loan agreement was amended to defer
the June 30, 1997 and September 30, 1997 principal payments and restructured the
required principal payment amounts due through December 31, 2003. The revolving
credit loan provided for borrowing up to $3,000,000 at the discretion of the
Partnerships. On June 30, 1997, the loan agreement was amended to increase the
amount provided for borrowing under the revolving credit loan to $3,750,000. At
December 31, 1997, the term notes and the revolving credit loan had a balance of
$28,387,500 and $1,050,000, respectively, with a total balance of $29,437,500.
At December 30, 1998, the term notes and the revolving credit loan had a balance
of $27,637,500 and $3,300,000, respectively; at that date, the total balance of
$30,937,500 and accrued interest were paid in full.
Also on December 30, 1998, the Partnerships obtained a new interpartnership
loan agreement with ICP (Note 1). Borrowing under the interpartnership loan, as
well as interest and principal payments are due at the discretion of the
management of ICP, resulting in no minimum required annual principal payments.
The balance of the
F-232
<PAGE> 444
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interpartnership loan at December 31, 1998 was $31,222,436. The effective
interest rate at December 31, 1998 was 8.5%.
4. MANAGEMENT AGREEMENT
The Partnerships have entered into a management agreement with Rifkin &
Associates, Inc. (Rifkin). The management agreement provides that Rifkin shall
manage the Operating Partnership and shall be entitled to annual compensation of
4% of gross revenues. Effective September 1, 1998, Rifkin conveyed its CATV
management business to R & A Management, LLC (RML). The result of this
transaction was the conveyance of the Rifkin management agreement (Rifkin
Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin
Agreement and the RML Agreement are disclosed on the Consolidated Statement of
Operations.
5. LEASE COMMITMENTS
At December 31, 1998, the Operating Partnership had lease commitments under
long-term operating leases as follows:
<TABLE>
<S> <C>
1999................................................. $195,437
2000................................................. 189,643
2001................................................. 116,837
--------
Total...................................... $501,917
========
</TABLE>
Rent expense, including pole rent, was as follows for the periods
indicated:
<TABLE>
<CAPTION>
TOTAL
RENTAL
PERIOD EXPENSE
- ------ --------
<S> <C>
Year Ended December 31, 1996....................... $262,231
Year Ended December 31, 1997....................... 279,655
Year Ended December 31, 1998....................... 295,107
</TABLE>
6. RETIREMENT BENEFITS
The Operating Partnership has a 401(k) plan for its employees that have
been employed by the Operating Partnership for at least one year. Employees of
the Operating Partnership can contribute up to 15% of their salary, on a
before-tax basis, with a maximum 1998 contribution of $10,000 (as set by the
Internal Revenue Service). The Operating Partnership matches participant
contributions up to a maximum of 50% of the first 3% of a participant's salary
contributed. All participant contributions and earnings are fully vested upon
contribution and Operating Partnership contributions and earnings vest 20% per
year of employment with the Operating Partnership, becoming fully vested after
five years. The Operating Partnership's matching contributions for the years
ended December 31, 1996, 1997 and 1998 were $15,549, $23,292 and $20,652,
respectively.
F-233
<PAGE> 445
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying statements of operations and changes in
net assets and cash flows of Sonic Communications Cable Television Systems for
the period from April 1, 1998, through May 20, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Sonic
Communications Cable Television Systems for the period from April 1, 1998,
through May 20, 1998, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
F-234
<PAGE> 446
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE PERIOD FROM APRIL 1, 1998, THROUGH MAY 20, 1998
<TABLE>
<S> <C>
REVENUES.................................................... $ 6,343,226
-----------
OPERATING EXPENSES:
Operating costs........................................... 1,768,393
General and administrative................................ 1,731,471
Depreciation and amortization............................. 1,112,057
-----------
4,611,921
-----------
Income from operations................................. 1,731,305
INTEREST EXPENSE............................................ 289,687
-----------
Income before provision for income taxes............... 1,441,618
PROVISION IN LIEU OF INCOME TAXES........................... 602,090
-----------
Net income............................................. 839,528
NET ASSETS, April 1, 1998................................... 55,089,511
-----------
NET ASSETS, May 20, 1998.................................... $55,929,039
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-235
<PAGE> 447
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 1, 1998, THROUGH MAY 20, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 839,528
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 1,112,057
Changes in assets and liabilities --
Accounts receivable, net............................. 49,980
Prepaid expenses and other........................... 171,474
Accounts payable and accrued expenses................ (1,479,682)
-----------
Net cash provided by operating activities......... 693,357
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (470,530)
Payments of franchise costs............................... (166,183)
-----------
Net cash used in investing activities............. (636,713)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................ (41,144)
-----------
Net cash used in financing activities............. (41,144)
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 15,500
-----------
CASH AND CASH EQUIVALENTS, beginning of period.............. 532,238
-----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 547,738
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-236
<PAGE> 448
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Sonic Communications Cable Television Systems (the Company) operates cable
television systems in California and Utah.
Effective May 21, 1998, the Company's net assets were acquired by Charter
Communications Holdings, LLC.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
The Company depreciates its cable distribution systems using the
straight-line method over estimated useful lives of 5 to 15 years for systems
acquired on or after April 1, 1981. Systems acquired before April 1, 1981, are
depreciated using the declining balance method over estimated useful lives of 8
to 20 years.
Vehicles, machinery, office, and data processing equipment and buildings
are depreciated using the straight-line or declining balance method over
estimated useful lives of 3 to 25 years. Capital leases and leasehold
improvements are amortized using the straight-line or declining balance method
over the shorter of the lease term or the estimated useful life of the asset.
INTANGIBLES
The excess of amounts paid over the fair values of tangible and
identifiable intangible assets acquired in business combinations are amortized
using the straight-line method over the life of the franchise. Identifiable
intangible assets such as franchise rights, noncompete agreements and subscriber
lists are amortized using the straight-line method over their useful lives,
generally 3 to 15 years.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of May 20, 1998, no installation revenue has been
deferred, as direct selling costs exceeded installation revenue.
INTEREST EXPENSE
Interest expense relates to a note payable to a stockholder of the Company,
which accrues interest at 7.8% per annum.
F-237
<PAGE> 449
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. COMMITMENTS AND CONTINGENCIES:
FRANCHISES
The Company has committed to provide cable television services under
franchise agreements with various governmental bodies for remaining terms up to
13 years. Franchise fees of up to 5% of gross revenues are payable under these
agreements.
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense for the period from
April 1, 1998, through May 20, 1998, were $59,199.
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
period from April 1, 1998, through May 20, 1998, was $64,159.
3. INCOME TAXES:
The results of the Company are included in the consolidated federal income
tax return of its parent, Sonic Enterprises, Inc., which is responsible for tax
payments applicable to the Company. The financial statements reflect a provision
in lieu of income taxes as if the Company was filing on a separate company
basis. Accordingly, the Company has included the provision in lieu of income
taxes in the accompanying statement of operations.
The provision in lieu of income taxes approximates the amount of tax
computed using U.S. statutory rates, after reflecting state income tax expense
of $132,510 for the period from April 1, 1998, through May 20, 1998.
4. REGULATION IN THE CABLE TELEVISION INDUSTRY:
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject to
judicial proceeding and administrative or legislative proposals. Legislation and
regulations
F-238
<PAGE> 450
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
continue to change, and the Company cannot predict the impact of future
developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. For the period from
April 1, 1998, through May 20, 1998, the amount refunded by the Company has been
insignificant. The Company may be required to refund additional amounts in the
future.
The Company believes that it has complied in all material respects with the
ownership of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company are unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Systems.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
F-239
<PAGE> 451
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Long Beach Acquisition Corp.:
We have audited the accompanying statements of operations, stockholder's
equity and cash flows of Long Beach Acquisition Corp. (a Delaware corporation)
for the period from April 1, 1997, through May 23, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Long Beach
Acquisition Corp. for the period from April 1, 1997, through May 23, 1997, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
July 31, 1998
F-240
<PAGE> 452
LONG BEACH ACQUISITION CORP.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997
<TABLE>
<S> <C>
SERVICE REVENUES............................................ $ 5,313,282
-----------
EXPENSES:
Operating costs........................................... 1,743,493
General and administrative................................ 1,064,841
Depreciation and amortization............................. 3,576,166
Management fees -- related parties........................ 230,271
-----------
6,614,771
-----------
Loss from operations................................... (1,301,489)
INTEREST EXPENSE............................................ 753,491
-----------
Net loss............................................... $(2,054,980)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-241
<PAGE> 453
LONG BEACH ACQUISITION CORP.
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997
<TABLE>
<CAPTION>
CLASS A, SENIOR
VOTING REDEEMABLE ADDITIONAL TOTAL
COMMON PREFERRED PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK STOCK CAPITAL DEFICIT EQUITY
-------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE,
April 1, 1997....... $100 $11,000,000 $33,258,723 $(51,789,655) $(7,530,832)
Net loss............ -- -- -- (2,054,980) (2,054,980)
---- ----------- ----------- ------------ -----------
BALANCE,
May 23, 1997........ $100 $11,000,000 $33,258,723 $(53,844,635) $(9,585,812)
==== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-242
<PAGE> 454
LONG BEACH ACQUISITION CORP.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,054,980)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization.......................... 3,576,166
Changes in assets and liabilities, net of effects from
acquisition-
Accounts receivable, net............................. (830,725)
Prepaid expenses and other........................... (19,583)
Accounts payable and accrued expenses................ (528,534)
Other current liabilities............................ 203,282
-----------
Net cash provided by operating activities......... 345,626
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (596,603)
-----------
Net cash used in investing activities............. (596,603)
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (250,977)
CASH AND CASH EQUIVALENTS, beginning of period.............. 3,544,462
-----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 3,293,485
===========
CASH PAID FOR INTEREST...................................... $ 1,316,462
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-243
<PAGE> 455
LONG BEACH ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS
MAY 23, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Long Beach Acquisition Corp. (LBAC or the "Company") was a wholly owned
corporation of KC Cable Associates, L.P., a partnership formed through a joint
venture agreement between Kohlberg, Kravis, Roberts & Co. (KKR) and Cablevision
Industries Corporation (CVI). The Company was formed to acquire cable television
systems serving Long Beach, California, and surrounding areas.
On May 23, 1997, the Company executed a stock purchase agreement with
Charter Communications Long Beach, Inc. (CC-LB) whereby CC-LB purchased all of
the outstanding stock of the Company for an aggregate purchase price, net of
cash acquired, of $150.9 million. Concurrent with this stock purchase, CC-LB was
acquired by Charter Communications, Inc. (Charter) and Kelso Investment
Associates V, L.P., an investment fund (Kelso).
As of May 23, 1997, LBAC provided cable television service to subscribers
in southern California.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installation. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred, and
equipment replacement costs and betterments are capitalized.
Depreciation is provided on a straight-line basis over the estimated useful
life of the related asset as follows:
<TABLE>
<S> <C>
Leasehold improvements........................... Life of respective lease
Cable systems and equipment...................... 5-10 years
Subscriber devices............................... 5 years
Vehicles......................................... 5 years
Furniture, fixtures and office equipment......... 5-10 years
</TABLE>
FRANCHISES
Franchises include the assigned fair value of the franchise from purchased
cable television systems. These franchises are amortized on a straight-line
basis over six years, the remaining life of the franchise at acquisition.
F-244
<PAGE> 456
LONG BEACH ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Intangible assets include goodwill, which is amortized over fifteen years;
subscriber lists, which are amortized over seven years; a covenant not to
compete which is amortized over five years; organization costs which are
amortized over five years and debt issuance costs which are amortized over ten
years, the life of the loan.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
average estimated period that customers are expected to remain connected to the
cable television system. As of May 23, 1997, no installation revenue has been
deferred, as direct selling costs have exceeded installation service revenues.
INCOME TAXES
LBAC's income taxes are recorded in accordance with SFAS No. 109,
"Accounting for Income Taxes."
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-245
<PAGE> 457
LONG BEACH ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. STOCKHOLDER'S EQUITY:
For the period from April 1, 1997, through May 23, 1997, stockholder's
equity consisted of the following:
<TABLE>
<S> <C>
Stockholder's (deficit) equity:
Common stock -- Class A, voting $1 par value, 100 shares
authorized, issued and outstanding..................... $ 100
Common stock -- Class B, nonvoting, $1 par value, 1,000
shares authorized, no shares issued.................... --
Senior redeemable preferred stock, no par value, 110,000
shares authorized, issued and outstanding, stated at
redemption value....................................... 11,000,000
Additional paid-in capital................................ 33,258,723
Accumulated deficit....................................... (53,844,635)
------------
Total stockholder's (deficit) equity................... $ (9,585,812)
============
</TABLE>
3. INTEREST EXPENSE:
The Company has the option of paying interest at either the Base Rate of
the Eurodollar rate, as defined, plus a margin which is based on the attainment
of certain financial ratios. The weighted average interest rate for the period
from April 1, 1997, through May 23, 1997, was 7.3%.
4. REGULATION IN THE CABLE TELEVISION INDUSTRY:
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject to
judicial proceeding and administrative or legislative proposals. Legislation and
regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of May 23, 1997,
the amount refunded by the Company has been insignificant. The Company may be
required to refund additional amounts in the future.
F-246
<PAGE> 458
LONG BEACH ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company believes that it has complied in all material respects with the
ownership of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company are unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
5. RELATED-PARTY TRANSACTIONS:
The Company has entered into a management agreement (the "Management
Agreement") with CVI under which CVI manages the operations of the Company for
an annual management fee equal to 4% of gross operating revenues, as defined.
Management fees under this agreement amounted to $210,100 for the period from
April 1, 1997, through May 23, 1997. In addition, the Company has agreed to pay
a monitoring fee of two dollars per basic subscriber, as defined, per year for
services provided by KKR. Monitoring fees amounted to $20,171 for the period
from April 1, 1997, through May 23, 1997.
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Rent expense incurred under these leases for the period from
April 1, 1997, through May 23, 1997, was $67,600.
The Company rents utility poles in its operations. Generally, pole rental
agreements are short term, but LBAC anticipates that such rentals will recur.
Rent expense for pole attachments for the period from April 1, 1997, through May
23, 1997, was $12,700.
F-247
<PAGE> 459
LONG BEACH ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
The Company is a party to lawsuits which are generally incidental to its
business. In the opinion of management, after consulting with legal counsel, the
outcome of these lawsuits will not have a material adverse effect on the
Company's financial position or results of operations.
7. INCOME TAXES:
The Company has not recognized the tax benefit associated with its taxable
loss for the period from April 1, 1997, through May 23, 1997, as the Company
believes the benefit will likely not be realized.
8. EMPLOYEE BENEFIT PLANS:
Substantially all employees of the Company are eligible to participate in a
defined contribution plan containing a qualified cash or deferred arrangement
pursuant to IRC Section 401(k). The plan provides that eligible employees may
contribute up to 10% of their compensation to the plan. The Company made no
contributions to the plan for the period from April 1, 1997, through May 23,
1997.
F-248
<PAGE> 460
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
---------------------------
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $1,038,360 $ 10,386
Accounts receivable, net of allowance for doubtful
accounts of $3,171 and $3,528, respectively..... 30,314 31,163
Prepaid expenses and other......................... 15,882 8,613
---------- ----------
Total current assets....................... 1,084,556 50,162
---------- ----------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment...................... 1,533,197 1,473,727
Franchises......................................... 5,607,539 5,705,420
---------- ----------
7,140,736 7,179,147
---------- ----------
OTHER ASSETS......................................... 131,990 6,347
---------- ----------
$8,357,282 $7,235,656
========== ==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............... $ -- $ 87,950
Accounts payable and accrued expenses.............. 216,397 199,831
Payable to related party........................... -- 20,000
Payables to manager of cable television systems -
related party................................... 12,554 23,236
---------- ----------
Total current liabilities.................. 228,951 331,017
---------- ----------
LONG-TERM DEBT....................................... 4,754,018 3,435,251
---------- ----------
OTHER LONG-TERM LIABILITIES.......................... 48,171 40,097
---------- ----------
MEMBERS' EQUITY...................................... 3,326,142 3,429,291
---------- ----------
$8,357,282 $7,235,656
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-249
<PAGE> 461
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
1999 1998
SUCCESSOR PREDECESSOR
------------------------
<S> <C> <C>
REVENUES................................................ $286,135 $4,782
-------- ------
OPERATING EXPENSES:
Operating, general and administrative................. 152,075 2,638
Depreciation and amortization......................... 153,747 1,605
Corporate expense charges -- related party............ 5,323 143
-------- ------
311,145 4,386
(Loss) income from operations...................... (25,010) 396
-------- ------
OTHER INCOME (EXPENSE):
Interest income....................................... 1,733 8
Interest expense...................................... (71,591) (1,329)
Other, net............................................ 15 2
-------- ------
(69,843) (1,319)
Loss before extraordinary item..................... (94,853) (923)
EXTRAORDINARY ITEM- Loss from early extinguishment of
debt.................................................. 3,604 --
-------- ------
Net loss........................................... $(98,457) $ (923)
======== ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-250
<PAGE> 462
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
1999 1998
SUCCESSOR PREDECESSOR
------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $ (98,457) $ (923)
---------- ------
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization....................... 153,747 1,605
Amortization of non-cash interest expense........... 12,277 31
Gain (loss) on disposal of property, plant and
equipment......................................... (15) --
Loss from early extinguishment of debt.............. 3,604 --
Changes in assets and liabilities, net of effects from
acquisition --
Accounts receivable, net............................ 862 274
Prepaid expenses and other.......................... (3,369) 10
Accounts payable and accrued expenses............... (27,141) (550)
Payables to manager of cable television systems,
including deferred management fees................ 4,879 (41)
Other operating activities.......................... (563) --
---------- ------
Net cash provided by operating activities......... 45,824 406
---------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............. (109,629) (821)
Purchase of cable television system.................... (2,752) --
Other investing activities............................. (4,419) --
---------- ------
Net cash used in investing activities............. (116,800) (821)
---------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt........................... 4,854,188 900
Repayments of long-term debt........................... (3,641,666) (900)
Payments for debt issuance costs....................... (88,880) --
Distributions.......................................... (4,692) --
Payment to related party............................... (20,000) --
---------- ------
Net cash used in financing activities............. 1,098,950 --
---------- ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 1,027,974 (415)
CASH AND CASH EQUIVALENTS, beginning of period........... 10,386 626
---------- ------
CASH AND CASH EQUIVALENTS, end of period................. $1,038,360 $ 211
========== ======
CASH PAID FOR INTEREST................................... $ 91,672 $1,013
========== ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
F-251
<PAGE> 463
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited
liability company, was formed in February 1999 as a wholly owned subsidiary of
Charter Investment, Inc. (Charter), formerly Charter Communications, Inc.
Charter, through its wholly owned cable television operating subsidiary, Charter
Communications Properties, LLC (CCP), 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 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
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 from unrelated third parties for fair value. Charter 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
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 CCP, CharterComm Holdings and CCA
Group, Charter Holdings has applied push-down accounting in the preparation of
the consolidated financial statements. Accordingly, Charter Holdings increased
its members' equity by $2.2 billion to reflect the amounts paid by Paul G. Allen
and Charter. 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 third 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 7, 1999, the cable television operating subsidiaries of Marcus
Cable Company, L.L.C. (Marcus) were transferred to Charter Operating. As a
result of the Marcus transfer, Charter Holdings is owned 54% by Charter and 46%
by companies controlled by Paul G. Allen giving Paul G. Allen a 97% direct and
indirect ownership interest in Charter Holdings. The transfer was accounted for
as a reorganization of entities under common control similar to a pooling of
interests since Paul G. Allen and a company controlled by Paul G. Allen
purchased substantially all of the outstanding partnership
F-252
<PAGE> 464
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interests in Marcus in April 1998, and purchased the remaining interest in
Marcus on April 7, 1999.
The consolidated financial statements of Charter Holdings include the
accounts of Charter Operating and CCP, the accounts of CharterComm Holdings and
CCA Group and their subsidiaries since December 23, 1998 (date acquired by
Charter), and the accounts of Marcus since December 23, 1998 (date Paul G. Allen
controlled both Charter and Marcus), and are collectively referred to as the
"Company" herein. All subsidiaries are wholly owned. All material intercompany
transactions and balances have been eliminated.
As a result of the Paul Allen Transaction and 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 March 31,
1999, and for the Successor Period (January 1, 1999, through March 31, 1999) is
presented on a different cost basis than the financial information of the
Company for the Predecessor Period (January 1, 1998, through March 31, 1998) and
therefore, such information is not comparable.
The accompanying unaudited financial statements of Charter Holdings 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.
2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS:
The accompanying 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
financial statements should be read in conjunction with the financial statements
and notes thereto as of and for the period ended December 31, 1998. Interim
results are not necessarily indicative of results for a full year.
3. ACQUISITIONS:
In addition to the Paul Allen Transaction and the acquisitions by Charter
of CharterComm Holdings and CCA Group, 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. The
Company also refinanced substantially all of its long-term debt in March 1999
(see Note 4).
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.
Unaudited pro forma operating results as though the acquisitions and
dispositions discussed above, including the Paul Allen Transaction and the
combination with Marcus, and the refinancing discussed herein, had occurred on
January 1, 1998, with adjustments to
F-253
<PAGE> 465
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
give effect to amortization of franchises, interest expense and certain other
adjustments are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues....................................... $ 286,135 $ 264,971
Loss from operations........................... (25,010) (35,889)
Net loss....................................... (102,633) (149,988)
</TABLE>
The unaudited 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>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Charter:
Credit Agreements (including CCP, CCA
Group and CharterComm Holdings)......... $ -- $1,726,500
Senior Secured Discount Debentures......... -- 109,152
11 1/4% Senior Notes....................... 25 125,000
Marcus:
Senior Credit Facility..................... -- 808,000
13 1/2% Senior Subordinated Discount
Notes................................... 1,010 383,236
14 1/4% Senior Discount Notes.............. 50 241,183
Charter Holdings:
8.250% Senior Notes........................ 600,000 --
8.625% Senior Notes........................ 1,500,000 --
9.920% Senior Discount Notes............... 909,055 --
CCO Credit Agreement....................... 1,750,000 --
---------- ----------
4,760,140 3,393,071
Current maturities......................... -- (87,950)
Unamortized net premium (discount)......... (6,122) 130,130
---------- ----------
$4,754,018 $3,435,251
========== ==========
</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
F-254
<PAGE> 466
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement entered into by Charter Operating (the "CCO Credit Agreement"). The
excess of the amount paid over the carrying value of the Company's long-term
debt was recorded as Extraordinary item -- loss on early extinguishment of debt
in the accompanying statement of operations.
CCH 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 "CCH 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 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 semiannually 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
semiannually 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 $565.9 million at March 31, 1999.
The CCH 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 purchase all of the CCH 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 as defined.
CCO CREDIT AGREEMENT
The CCO Credit Agreement 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 on March 2009
(Term B). The CCO Credit Agreement also provides for a $1.25 billion revolving
credit facility with a maturity date of September 2008. Amounts under the CCO
Credit Agreement bear interest at the
F-255
<PAGE> 467
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Base Rate or the Eurodollar rate, as defined, 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 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 March 31, 1999, and the amortization
of term and fund loans, and scheduled reductions in available borrowings of the
revolving credit facility, aggregate future principal payments on the total
borrowings under all debt agreements at March 31, 1999, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- ----------
<S> <C>
2000....................................................... $ --
2001....................................................... --
2002....................................................... 17,500
2003....................................................... 17,500
2004....................................................... 18,510
Thereafter................................................. 4,706,630
----------
$4,760,140
==========
</TABLE>
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, the Company
records a distribution to (capital contributions from) parent. For the three
months ended March 31, 1999, the Company recorded a distribution of $4,692. As
of March 31, 1999, management fees currently payable of $10,015 are included in
payables to manager of cable television systems-related party.
6. STOCK OPTION PLAN
In accordance with an employment agreement between Charter and the
President and CEO of Charter options to purchase 3% of the net equity of Charter
Communications Holdings Company, LLC (CCHC), parent of Charter Holdings, were
issued to the President and CEO of Charter. The option exercise price is equal
to the fair market value at the date of grant. The options vest over a four year
period and expire ten years from the date of grant.
F-256
<PAGE> 468
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
CCHC. The option plan provides for grants of options to employees, officers and
directors of CCHC and its affiliates and consultants who provide services to
CCHC. The option exercise price is equal to the fair market value at the date of
grant. Options granted under the vest over five years. However, if there has not
been a public offering of the equity interests of CCHC or an affiliate, vesting
will occur only upon termination of employment for any reason, other than for
cause or disability. 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.
Options outstanding as of March 31, 1999, are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------
EXERCISE NUMBER OF REMAINING CONTRACT NUMBER OF
PRICE OPTIONS LIFE (IN YEARS) OPTIONS
- --------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
$20.00 16,095,008 9.8 1,761,032
</TABLE>
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" to account for the option plans. No compensation
expense is recognized because the option exercise price is equal to the fair
value of the underlying membership interests on the date of grant. Had
compensation expense for the option plans been determined based on the fair
value at the grant dates under the provisions of SFAS No. 123, the Company's net
loss would have been $113.8 million. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions: no dividend yield, expected volatility of 44.0%, risk
free rate of 5.00%, and expected option lives of 10 years.
7. SUBSEQUENT EVENT:
In the second quarter of 1999, the Company acquired cable television
systems in two separate transactions for an aggregate purchase price of $699.0
million. The Company has also entered into definitive agreements to purchase
additional cable television systems, including a exchange of cable television
systems, for approximately $3.9 billion. The exchange of cable television
systems will be recorded at the fair value of the systems exchanged. The
additional six acquisitions are expected to close no later than March 31, 2000.
F-257
<PAGE> 469
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................. $ 8,901 $ 8,482
Accounts receivable -- trade (less allowance for
doubtful accounts of $76 in 1999 and $94 in 1998)... 731 726
Accounts receivable -- other.......................... 552 584
Prepaid expenses and other assets..................... 381 340
Escrow deposit........................................ -- 150
Investment in cable television systems:
Property, plant and equipment....................... 74,435 71,246
Less: accumulated depreciation..................... (9,841) (7,294)
-------- --------
64,594 63,952
-------- --------
Cable television franchises......................... 238,407 236,489
Less: accumulated amortization..................... (15,436) (11,473)
-------- --------
222,971 225,016
-------- --------
Intangible assets................................... 17,540 17,559
Less: accumulated amortization..................... (1,411) (1,059)
-------- --------
16,129 16,500
-------- --------
Total investment in cable television systems.......... 303,694 305,468
-------- --------
TOTAL ASSETS.......................................... $314,259 $315,750
======== ========
LIABILITIES AND MEMBERS' EQUITY
Accounts payable...................................... $ 587 $ 2,042
Accrued expenses...................................... 7,062 6,670
Subscriber advance payments and deposits.............. 651 608
Deferred marketing support............................ 755 800
Advances from affiliates.............................. 135 135
Debt.................................................. 212,503 209,874
-------- --------
TOTAL LIABILITIES..................................... 221,693 220,129
-------- --------
MEMBERS' EQUITY:
Paid-in capital....................................... 108,600 108,600
Accumulated deficit................................... (16,034) (12,979)
-------- --------
Total members' equity................................. 92,566 95,621
-------- --------
TOTAL LIABILITIES AND MEMBERS' EQUITY................. $314,259 $315,750
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-258
<PAGE> 470
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1999
------------
(UNAUDITED)
<S> <C>
Revenues.................................................... $15,254
Cost and expenses:
Service costs............................................. 4,596
Selling, general and administrative....................... 2,293
Depreciation and amortization............................. 6,655
-------
Operating income............................................ 1,710
-------
Interest (income)......................................... (90)
Interest expense.......................................... 4,797
-------
Loss before provision for taxes............................. (2,997)
-------
Provision for taxes......................................... 58
-------
Net loss.................................................... $(3,055)
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-259
<PAGE> 471
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
PAID-IN ACCUMULATED MEMBERS'
CAPITAL DEFICIT EQUITY
-------- ----------- --------
<S> <C> <C> <C>
Balance December 31, 1998 (Audited)......... $108,600 $(12,979) $95,621
Net loss (Unaudited)........................ -- (3,055) (3,055)
-------- -------- -------
Balance March 31, 1999 (Unaudited).......... $108,600 $(16,034) $92,566
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-260
<PAGE> 472
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1999
---------------
(UNAUDITED)
<S> <C>
Operating Activities:
Net loss.................................................. $(3,055)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 6,655
Accretion on senior discount notes and non-cash
interest expense...................................... 2,630
Other non-cash expenses................................ 239
Deferred marketing support............................. (45)
Changes in operating assets and liabilities, net of
effects from acquisitions
Accounts receivable -- trade, net...................... (5)
Accounts receivable -- other........................... 32
Prepaid expenses and other assets...................... (41)
Accounts payable....................................... (1,455)
Accrued expenses....................................... 392
Subscriber advance payments and deposits............... 43
-------
Net cash provided by operating activities............ 5,390
-------
Investing Activities:
Purchases of cable television systems:
Property, plant and equipment.......................... (830)
Cable television franchises............................... (1,918)
Escrow deposit............................................ 150
Capital expenditures...................................... (2,393)
Other intangible assets................................... 20
-------
Net cash used in investing activities.................. (4,971)
-------
Financing Activities:
Net cash provided by financing activities.............. --
-------
Net increase in cash and cash equivalents................... 419
Cash and cash equivalents at beginning of period............ 8,482
=======
Cash and cash equivalents at end of period.................. $ 8,901
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-261
<PAGE> 473
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(DOLLARS IN THOUSANDS EXCEPT WHERE INDICATED)
(UNAUDITED)
1. ORGANIZATION
Renaissance Media Group LLC ("Group") was formed on March 13, 1998 by
Renaissance Media Holdings LLC ("Holdings"). Holdings formed Renaissance Media
Capital Corporation on March 12, 1998. On March 20, 1998, Holdings contributed
to Group its membership interests in two wholly owned subsidiaries; Renaissance
Media (Louisiana) LLC ("Louisiana") and Renaissance Media (Tennessee) LLC
("Tennessee"), both of which were formed on January 7, 1998. Louisiana and
Tennessee acquired a 76% interest and 24% interest, respectively, in Renaissance
Media LLC ("Media") from Morgan Stanley Capital Partners III, Inc. ("MSCP III")
on February 13, 1998 for a nominal amount. As a result, Media became a
subsidiary of Holdings. The transfer was accounted for as a reorganization of
entities under common control similar to a pooling of interests since an entity
affiliated with MSCP III had a controlling interest in Holdings. Group and its
aforementioned subsidiaries are collectively referred to as the "Company"
herein. On April 9, 1998, the Company acquired (the "Acquisition") six cable
television systems (the "TWI Systems") from TWI Cable, Inc. ("TWI Cable") a
subsidiary of Time Warner Inc. ("Time Warner"). Prior to this Acquisition, the
Company had no operations other than start-up related activities. For further
information, refer to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 for additional disclosures and information regarding the
formation of the Company.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles. The interim financial statements
are unaudited but include all adjustments, which are of normal recurring nature
that the Company considers necessary for a fair presentation of the financial
position and the results of operations and cash flows for such period. Operating
results of interim periods are not necessarily indicative of results for a full
year.
3. SALE OF THE COMPANY
On February 23, 1999, Holdings, Charter Communications, Inc. ("Charter")
and Charter Communications, LLC ("Buyer") executed a purchase agreement (the
"Charter Purchase Agreement"), providing for Holdings to sell and Buyer to
purchase, all the outstanding limited liability company membership interests in
Group held by Holdings (the "Charter Transaction") subject to certain covenants
and restrictions pending closing and satisfaction of certain conditions prior to
closing. On April 30, 1999, the Charter Transaction was consummated. In
connection therewith all amounts outstanding, including accrued interest and
fees, under the Credit Agreement, (as defined herein, see Note 5), were paid in
full and the Credit Agreement was terminated on April 30, 1999.
F-262
<PAGE> 474
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS EXCEPT WHERE INDICATED)
(UNAUDITED)
4. ACQUISITIONS
On April 9, 1998, the Company commenced operations with the acquisition of
the TWI Systems (the "TWI Acquisition"). Unaudited pro forma summarized results
of operations for the Company for the three months ended March 31, 1998,
assuming the TWI Acquisition had been consummated on January 1, 1998 are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1998
------------
<S> <C>
Revenues.................................................... $13,973
Costs and expenses.......................................... 13,531
-------
Operating income............................................ 442
Interest and other expenses................................. 4,954
=======
Net loss.................................................... $(4,512)
=======
</TABLE>
5. DEBT
Media maintained a credit agreement (the "Credit Agreement"). The aggregate
commitments under the Credit Agreement totaled $150,000, consisted of a $40,000
revolver, $60,000 Tranche A Term Loans and $50,000 Tranche B Term Loans. The
revolving credit facility and term loans were collateralized by a first lien
position on all present and future assets and members' interest of Media,
Louisiana and Tennessee. The Credit Agreement provided for interest at varying
rates based upon various borrowing options and the attainment of certain
financial ratios and for commitment fees of 1/2% on the unused portion of the
revolver. The effective interest rate for the quarter ended March 31, 1999 was
7.67%.
On April 9, 1998, $110,000 was borrowed under the Credit Agreement's
Tranche A and B Term Loans. On June 23, 1998, $7,500 was repaid resulting in
$102,500 of outstanding Tranche A and B Term Loans as of March 31, 1999.
On March 31, 1999, the Company had unrestricted use of the $40,000
revolver. No borrowings had been made by the Company through that date.
As required by the Credit Agreement, Media purchased an interest rate cap
agreement from Morgan Stanley Capital Services Inc., an affiliate of MSCP III.
The agreement effectively fixed or set a maximum LIBOR rate of 7.25% on bank
debt borrowings up to $100,000 through December 1999. As of March 31, 1999, the
fair value of the interest rate cap agreement was $0.
As a result of the Charter Transaction (i.e., change of control) and in
accordance with the terms and conditions of the indenture governing the 10%
senior discount notes
F-263
<PAGE> 475
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1999
(DOLLARS IN THOUSANDS EXCEPT WHERE INDICATED)
(UNAUDITED)
due 2008 (the "Notes"), the Company will offer to repurchase the Notes at a
redemption price of 101% of Accreted Value (as defined in the indenture) plus
accrued interest.
6. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, Media entered into an agreement with
Time Warner, pursuant to which Time Warner manages the Company's programming in
exchange for providing the Company access to certain Time Warner programming
arrangements. Management believes that these programming rates made available
through its relationship with Time Warner are lower than the Company could
obtain separately. Such volume rates will not continue to be available after the
Charter Transaction.
For the quarter ended March 31, 1999, the Company incurred approximately
$2,009 for programming services under this agreement. In addition, the Company
has incurred programming costs of approximately $713 for programming services
owned directly or indirectly by Time Warner entities for the quarter ended March
31, 1999.
The Company has utilized the law firm of one of its board members for
various ongoing legal matters. These fees totaled approximately $154 for the
quarter ended March 31, 1999.
7. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan that covers substantially
all employees (the "Plan"). The Plan provides for contributions from eligible
employees up to 15% of their compensation subject to a maximum limit as
determined by the Internal Revenue Service. The Company's contribution to the
Plan is limited to 50% of each eligible employee's contribution up to 10% of his
or her compensation. The Company has the right to change the amount of the
Company's matching contribution percentage. The Company matching contributions
approximated $38 for the quarter ended March 31, 1999.
F-264
<PAGE> 476
HELICON PARTNERS I, L.P. AND AFFILIATES
UNAUDITED CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1999
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 11,463,984
Receivables from subscribers................................ 1,619,055
Prepaid expenses and other assets........................... 2,866,831
Property, plant and equipment, net.......................... 88,723,374
Intangible assets and deferred costs, net................... 95,641,669
------------
Total assets........................................... $200,314,913
============
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accounts payable.......................................... $ 6,318,658
Accrued expenses.......................................... 839,902
Subscriptions received in advance......................... 954,732
Accrued interest.......................................... 8,381,948
Due to principal owner.................................... 5,000,000
Senior secured notes...................................... 115,000,000
Loans payable to banks.................................... 120,264,288
Senior subordinated loans payable to banks................ 12,000,000
12% subordinated notes, net of unamortized discount of
$2,313,425............................................. 42,787,309
Redeemable partnership interests.......................... 18,708,097
Other notes payable....................................... 5,293,908
Due to affiliates, net.................................... 136,952
------------
Total liabilities...................................... 335,685,794
------------
Commitments
Partners' deficit:
Preferred limited partners................................ 8,824,491
Accumulated partners' deficit............................. (144,194,372)
Less capital contribution receivable...................... (1,000)
------------
Total partners' deficit................................ (135,370,881)
------------
Total liabilities and partners' deficit................ $200,314,913
============
</TABLE>
See accompanying notes to unaudited condensed combined financial statements.
F-265
<PAGE> 477
HELICON PARTNERS I, L.P. AND AFFILIATES
UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS
THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Revenues............................................ $18,348,297 $21,251,906
----------- -----------
Operating expenses:
Operating expenses................................ 5,576,707 6,724,757
General and administrative expenses............... 3,138,482 3,365,652
Marketing expenses................................ 820,971 1,094,800
Depreciation and amortization..................... 5,774,012 6,828,410
Management fee charged by affiliate............... 635,485 1,063,597
Corporate and other expenses...................... 63,751 90,977
----------- -----------
Total operating expenses....................... 16,009,408 19,168,193
----------- -----------
Operating income.................................. 2,338,889 2,083,713
----------- -----------
Interest expense.................................... (6,844,969) (7,821,042)
Interest income..................................... 30,314 51,704
----------- -----------
(6,814,655) (7,769,338)
----------- -----------
Net loss.......................................... ($4,475,766) ($5,685,625)
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed combined financial statements.
F-266
<PAGE> 478
HELICON PARTNERS I, L.P. AND AFFILIATES
UNAUDITED CONDENSED COMBINED STATEMENTS OF
CHANGES IN PARTNERS' DEFICIT
THREE-MONTH PERIOD ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PARTNERS' DEFICIT
PREFERRED ----------------------------- CAPITAL
LIMITED GENERAL CLASS A LIMITED CONTRIBUTION
PARTNERS PARTNER PARTNERS RECEIVABLE TOTAL
---------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998...... $8,567,467 $ (989,962) $(134,807,570) $(1,000) $(127,231,065)
Distribution of additional
preferred partnership
interests....................... 257,024 (2,570) (254,454) -- 0
Accretion of redeemable
partnership interests........... -- (24,542) (2,429,649) -- (2,454,191)
Net loss.......................... -- (56,856) (5,628,769) -- (5,685,625)
---------- ----------- ------------- ------- -------------
Balance at March 31, 1999......... $8,824,491 $(1,073,930) $(143,120,442) $(1,000) $(135,370,881)
========== =========== ============= ======= =============
</TABLE>
See accompanying notes to unaudited condensed combined financial statements.
F-267
<PAGE> 479
HELICON PARTNERS I, L.P. AND AFFILIATES
UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS
THREE-MONTHS PERIOD ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. ($4,475,766) ($5,685,625)
----------- -----------
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 5,774,012 6,828,410
Amortization of debt discount and deferred financing
costs................................................. 230,005 241,605
Gain on sale of equipment.............................. (1,498) (6,000)
Change in operating assets and liabilities:
Decrease in receivables from subscribers............. 285,217 39,303
(Increase) decrease in prepaid expenses and other
assets.............................................. (756,438) 605,752
Increase in financing costs incurred................. (37,500) (240,000)
Decrease in accounts payable and accrued expenses.... (1,125,646) (2,501,877)
Increase in subscriptions received in advance........ 137,562 135,169
Increase in accrued interest......................... 4,356,122 4,639,494
----------- -----------
Total adjustments................................. 8,861,836 9,741,856
----------- -----------
Net cash provided by operating activities......... 4,386,070 4,056,231
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment................ (1,725,789) (3,229,629)
Proceeds from sale of equipment........................... 91,128 6,000
Cash paid for net assets of cable television systems
acquired............................................... -- (5,951,453)
Increase in intangible assets and deferred costs.......... (47,088) (172,593)
----------- -----------
Net cash used in investing activities............. (1,681,749) (9,347,675)
----------- -----------
Cash flows from financing activities:
Proceeds from bank loans.................................. 1,000,000 12,000,000
Repayment of bank loans................................... (2,511) (2,633)
Repayment of other notes payable.......................... (307,889) (262,410)
Advances to affiliates.................................... (895,633) (2,596,997)
Repayments of advances to affiliates...................... 364,141 2,486,907
----------- -----------
Net cash provided by financing activities......... 158,108 11,624,867
----------- -----------
Net increase in cash and cash equivalents......... 2,862,429 6,333,423
Cash and cash equivalents at beginning of period............ 4,372,281 5,130,561
----------- -----------
Cash and cash equivalents at end of period.................. $ 7,234,710 $11,463,984
=========== ===========
Supplemental cash flow information:
Interest paid............................................. $ 2,258,842 $ 2,939,944
=========== ===========
Other non-cash items:
Acquisition of property, plant and equipment through
issuance of other notes payable....................... $ 17,686 $ 97,666
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed combined financial statements.
F-268
<PAGE> 480
HELICON PARTNERS I, L.P AND AFFILIATES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
MARCH 31, 1999
1. ORGANIZATION AND NATURE OF BUSINESS
Helicon Partners I, L.P. ("the Partnership") was organized as a limited
partnership on November 30, 1994 under the laws of the State of Delaware. On
April 8, 1996, Baum Investments, Inc. acquired a 1% general partnership interest
in the Partnership through an initial capital contribution of $1,500 and the
existing limited partners of The Helicon Group, L.P. ("THGLP"), formed in 1993,
exchanged their limited partnership interests in THGLP for all Class A Common
Limited Partnership Interests and Preferred Limited Partnership Interests in the
Partnership. As a result of this exchange, THGLP became 99% owned by the
Partnership. The Partnership now owns all of the limited partnership interests
in THGLP and Baum Investments, Inc. continues to be the general partner of THGLP
and to own a 1% general partnership interest in THGLP. The Partnership also owns
a 99% interest and THGLP a 1% interest in HPI Acquisition Co., LLC ("HPIAC"), a
Delaware limited liability company formed on February 7, 1996. The Company also
owns a 89% limited partnership interest and Baum Investments, Inc. a 1% general
partnership interest in Helicon OnLine, L. P. ("HOL"), a Delaware limited
partnership formed May 31, 1997. The Partnership, THGLP, HPIAC and HOL are
referred to collectively herein as the Company.
The Partnership operates in one business segment offering cable television
services in the states of Pennsylvania, West Virginia, North Carolina, South
Carolina, Louisiana, Vermont and New Hampshire, Georgia and Tennessee. The
Company also offers to customers advanced services, such as paging, cable modems
and private data network systems under the name of "Helicon Network Solutions",
as well as, dial up internet service in Pennsylvania and Vermont under the name
of "Helicon OnLine".
On March 22, 1999, the Partnership, Baum Investments, Inc. and all the
holders of partnership interests in the Partnership entered into a purchase
agreement by and among Charter Communications, Inc, Charter Communications, LLC
and Charter Helicon, LLC (collectively the "Charter Entities") providing for the
sale of all such partnership interests and Helicon Corp.'s interest in the
management agreements with THGLP and HPIAC to the Charter Entities. The sale
price is $550 million which amount will be reduced by any outstanding
indebtedness assumed by the Charter Entities.
In the opinion of management, the accompanying unaudited condensed combined
financial statements of the Partnership reflect all adjustments, consisting of
normal recurring accruals, necessary to present fairly the Partnership's
combined financial position as of March 31, 1999, and their results of
operations and cash flows for the three-month periods ended March 31, 1998 and
1999. The results of operations for the three-month period ended March 31, 1999
are not necessarily indicative of the results for a full year.
2. ACQUISITIONS
On December 31, 1998, HPIAC acquired the net assets of cable television
systems serving approximately 11,225 (unaudited) subscribers primarily in the
North Carolina community of Roanoke Rapids. The aggregate purchase price was
$26,063,284 including acquisition costs of $535,875 and was allocated to the net
assets acquired, which included property, equipment and intangible assets, based
on their estimated fair value.
F-269
<PAGE> 481
HELICON PARTNERS I, L.P AND AFFILIATES
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On January 7, 1999, THGLP acquired the cable television systems, serving
approximately 4,350 (unaudited) subscribers in the North Carolina counties of
Carter, Johnson and Unicol. The aggregate purchase price was approximately
$5,228,097 and was allocated to the net assets acquired, which included property
and equipment and intangible assets.
On March 1, 1999, HPIAC acquired a cable television system serving
approximately 551 (unaudited) subscribers in the communities of Abbeville,
Donalds and Due West, South Carolina. The aggregate purchase price was
approximately $723,356 and was allocated to the net assets acquired, which
included property, equipment and intangible assets, based on their estimated
fair value.
The operating results relating to the above acquisitions, effective with
their acquisition dates, are included in the accompanying unaudited condensed
combined financial statements.
On April 6, 1999, the HPIAC acquired a cable television system serving
approximately 314 (unaudited) subscribers in the communities of Mentone and part
of DeKalb, Alabama. The aggregate purchase price was approximately $265,690 and
was allocated to the net assets acquired, which included property, equipment and
intangible assets, based on their estimated fair value.
3. LOANS PAYABLE TO BANKS
On January 5, 1999, THGLP entered into a $12,000,000 Senior Subordinated
Loan Agreement with Paribas Capital Funding, LLC ("the 1999 Credit Facility").
The Facility is non-amortizing and is due January 5, 2003. Initial borrowings of
$7,000,000 under this Facility financed the acquisition of certain cable
television assets in North Carolina. On February 19, 1999, the Company borrowed
the remainder $5,000,000 available under the 1999 Credit Facility. Interest on
the $12,000,000 is payable at 11.5% per annum.
F-270
<PAGE> 482
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Accounts receivable, net of allowance for doubtful
accounts of $948 and $899, respectively.............. $ 13,949 $ 14,425
Receivables from affiliates............................ 5,038 5,623
Prepaid expenses....................................... 847 423
Other current assets................................... 206 350
-------- --------
Total current assets......................... 20,040 20,821
Intangible assets, net................................. 240,567 255,356
Property and equipment, net............................ 225,682 218,465
Deferred income taxes.................................. 13,994 12,598
Investments and other non-current assets............... 3,697 2,804
-------- --------
Total assets................................. $503,980 $510,044
======== ========
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities............... $ 19,030 $ 19,230
Deferred revenue....................................... 11,944 11,104
Payables to affiliates................................. 3,057 3,158
-------- --------
Total current liabilities.................... 34,031 33,492
Note payable to InterMedia Partners IV, L.P. .......... 412,436 396,579
Deferred channel launch revenue........................ 3,900 4,045
-------- --------
Total liabilities............................ 450,367 434,116
-------- --------
Commitments and contingencies
Mandatorily redeemable preferred shares................ 14,430 14,184
Equity................................................. 39,183 61,744
-------- --------
Total liabilities and equity................. $503,980 $510,044
======== ========
</TABLE>
See accompanying notes to the condensed combined financial statements.
F-271
<PAGE> 483
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
-------- -------
(UNAUDITED)
<S> <C> <C>
REVENUES
Basic and cable services.................................... $ 34,215 $30,103
Pay services................................................ 6,436 6,070
Other services.............................................. 7,637 5,961
-------- -------
48,288 42,134
COSTS AND EXPENSES
Program fees................................................ 11,598 9,616
Other direct expenses....................................... 4,763 4,177
Selling, general and administrative expenses................ 9,719 8,183
Management and consulting fees.............................. 781 781
Depreciation and amortization............................... 26,100 20,353
-------- -------
52,961 43,110
-------- -------
Loss from operations........................................ (4,673) (976)
-------- -------
OTHER INCOME (EXPENSE)
Interest expense............................................ (5,778) (6,734)
Interest and other income................................... 77 49
Other expense............................................... -- (24)
-------- -------
(5,701) (6,709)
-------- -------
Loss before income tax benefit.............................. (10,374) (7,685)
Income tax benefit.......................................... 1,396 1,595
-------- -------
NET LOSS.................................................... $ (8,978) $(6,090)
======== =======
</TABLE>
See accompanying notes to the condensed combined financial statements.
F-272
<PAGE> 484
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
COMBINED STATEMENT OF CHANGES IN EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at January 1, 1998.................................. $ 58,713
Net loss.................................................... (3,521)
Accretion for mandatorily redeemable preferred shares....... (945)
Net cash contributions from parent.......................... 6,350
In-kind contribution from parent............................ 1,147
--------
Balance at December 31, 1998................................ 61,744
Net loss (unaudited)........................................ (8,978)
Accretion for mandatorily redeemable preferred shares
(unaudited)............................................... (246)
Net cash distributions to parent (unaudited)................ (13,337)
--------
Balance at March 31, 1999 (unaudited)....................... $ 39,183
========
</TABLE>
See accompanying notes to the condensed combined financial statements.
F-273
<PAGE> 485
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................... $ (8,978) $ (6,090)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization....................... 26,100 20,353
Loss on disposal of fixed assets.................... -- 4
Changes in assets and liabilities:
Accounts receivable............................... 476 242
Receivables from affiliates....................... 585 (1,092)
Prepaid expenses.................................. (424) (183)
Other current assets.............................. 144 52
Deferred income taxes............................. (1,396) (1,595)
Investments and other non-current assets.......... (893) 138
Accounts payable and accrued liabilities.......... (713) (5,272)
Deferred revenue.................................. (220) 522
Payables to affiliates............................ (101) (53)
Accrued interest.................................. 5,532 6,505
Deferred channel launch revenue................... 915 591
-------- --------
Cash flows from operating activities........... 21,027 14,122
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................. (17,895) (18,069)
Intangible assets................................... (120) (161)
-------- --------
Cash flows from investing activities........... (18,015) (18,230)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (distributions) contributions to/from parent.... (13,337) 5,431
Net (repayments) borrowings of intercompany debt.... 10,325 (1,323)
-------- --------
Cash flows from financing activities........... (3,012) 4,108
-------- --------
Net change in cash....................................... -- --
-------- --------
CASH AT BEGINNING OF PERIOD.............................. -- --
-------- --------
CASH AT END OF PERIOD.................................... $ -- $ --
======== ========
</TABLE>
See accompanying notes to the condensed combined financial statements.
F-274
<PAGE> 486
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
THE CHARTER TRANSACTIONS
InterMedia Partners, a California limited partnership ("IP-I"), and
InterMedia Capital Partners IV, L.P., a California limited partnership,
("ICP-IV", together with IP-I, "InterMedia") are affiliated through common
control and management. Robin Media Group, Inc. , a Nevada corporation, ("RMG")
is a majority owned subsidiary of ICP-IV. On April 20, 1999 InterMedia and
certain of its affiliates entered into agreements (the "Agreements") with
affiliates of Charter Communications, Inc. ("Charter") to sell and exchange
certain of their cable television systems ("the Charter Transactions").
Specifically, ICP-IV and its affiliates have agreed to sell certain of
their cable television systems in Tennessee and Gainesville, Georgia through a
combination of asset sales and the sale of their equity interests in RMG, and to
exchange their systems in and around Greenville and Spartanburg, South Carolina
for Charter systems located in Indiana, Kentucky, Utah and Montana. Immediately
upon Charter's acquisition of RMG, IP-I will exchange its cable television
systems in Athens, Georgia, Asheville and Marion, North Carolina and Cleveland,
Tennessee for RMG's cable television systems located in middle Tennessee.
The Charter Transactions are expected to close during the third or fourth
quarter of 1999. The cable systems retained by Charter upon consummation of the
Charter Transactions, together with RMG, are referred to as the "InterMedia
Cable Systems," or the "Systems."
PRESENTATION
The Systems being sold or exchanged do not individually or collectively
comprise a separate legal entity. Accordingly, the accompanying condensed
combined financial statements have been carved-out from the historical
accounting records of InterMedia.
The accompanying unaudited interim condensed combined financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, certain footnote disclosures
have been condensed or omitted. In the management's opinion, the interim
unaudited combined financial statements reflect all adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation of the
Systems' financial position as of March 31, 1999 and their results of operations
and cash flows for the three months ended March 31, 1999 and 1998. The results
of operations and cash flows for the three months ended March 31, 1999 are not
necessarily indicative of results that may be expected for the year ending
December 31, 1999. These condensed combined financial statements should be read
in conjunction with the Systems' audited combined financial statements and notes
thereto for the year ended December 31, 1998.
F-275
<PAGE> 487
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO CONDENSED COMBINED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
(DOLLARS IN THOUSANDS)
CARVE-OUT METHODOLOGY
Throughout the periods covered by the condensed combined financial
statements, the individual cable systems were operated and accounted for
separately. However, the Charter Transactions exclude certain systems (the
"Excluded Systems") which were operated as part of the Marion, North Carolina
and western Tennessee systems throughout 1998 and 1999. For purposes of carving
out and excluding the results of operations and financial position of the
Excluded Systems from the condensed combined financial statements, management
has estimated the revenues, expenses, assets and liabilities associated with
each Excluded System based on the ratio of each Excluded System's basic
subscribers to the total basic subscribers served by the Marion, North Carolina
and western Tennessee systems, respectively. Management believes the basis used
for these allocations is reasonable. The Systems' results of operations are not
necessarily indicative of future operating results or the results that would
have occurred if the Systems were a separate legal entity.
Management and consulting fees represent an allocation of management fees
charged to IP-I and ICP-IV by InterMedia Capital Management, a California
limited partnership ("ICM") and InterMedia Management, Inc. ("IMI"),
respectively. ICM is a limited partner of IP-I. IMI is the managing member of
each of the general partners of IP-I and ICP-IV. These fees are charged at a
fixed amount per annum and have been allocated to the Systems based upon the
allocated contributed capital of the individual systems as compared to the total
contributed capital of InterMedia's subsidiaries.
As more fully described in Note 4 -- "Related Party Transactions," certain
administrative services are also provided by IMI and are charged to all
affiliates based on relative basic subscriber percentages.
CASH AND INTERCOMPANY ACCOUNTS
Under InterMedia's centralized cash management system, cash requirements of
its individual operating units were generally provided directly by InterMedia
and the cash generated or used by the Systems was transferred to/from
InterMedia, as appropriate, through intercompany accounts. The intercompany
account balances between InterMedia and the individual operating units, except
RMG's intercompany note payable to InterMedia Partners IV, L.P. ("IP-IV"), as
described in Note 3 -- "Note Payable to InterMedia Partners IV, L.P.," are not
intended to be settled. Accordingly, the balances, other than RMG's note payable
to IP-IV, are included in equity and all net cash generated from operations,
investing activities and financing activities have been included in the Systems'
net (distributions) contributions to/from parent in the combined statements of
cash flows.
IP-I and ICP-IV or its subsidiaries maintain all external debt to fund and
manage InterMedia's operations on a centralized basis. The condensed combined
financial statements present only the debt and related interest expense of RMG,
which is assumed
F-276
<PAGE> 488
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO CONDENSED COMBINED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
(DOLLARS IN THOUSANDS)
and repaid by Charter pursuant to the Charter Transactions. See Note 3 -- "Note
Payable to InterMedia Partners IV, L.P." Debt, unamortized debt issue costs and
interest expense related to the financing of the cable systems not owned by RMG
have not been allocated to the InterMedia Cable Systems. As such, the level of
debt, unamortized debt issue costs and related interest expense presented in the
condensed combined financial statements are not representative of the debt that
would be required or interest expense incurred if InterMedia Cable Systems were
a separate legal entity.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
2. EXCHANGE OF CABLE PROPERTIES
EXCHANGE
On December 31, 1998, certain of the Systems' cable television assets
located in and around western and eastern Tennessee ("Exchanged Assets"),
serving approximately 10,600 (unaudited) basic subscribers, plus cash of $398
were exchanged for other cable television assets located in and around western
and eastern Tennessee, serving approximately 10,000 (unaudited) basic
subscribers.
The exchange resulted in a gain of $26,218 calculated as the difference
between the fair value of the assets received and the net book value of the
Exchanged Assets less cash paid of $398.
3. NOTE PAYABLE TO INTERMEDIA PARTNERS IV, L.P.
RMG's note payable to IP-IV consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Intercompany revolving credit facility, $1,200,000
commitment as of March 31, 1999, interest currently at
6.84% payable on maturity, matures December 31, 2006... $412,436 $396,579
======== ========
</TABLE>
RMG's debt is outstanding under an intercompany revolving credit facility
executed with IP-IV. The revolving credit facility currently provides for
$1,200,000 of available credit.
RMG's intercompany revolving credit facility requires repayment of the
outstanding principal and accrued interest on the earlier of (i) December 31,
2006, or (ii) acceleration of any of IP-IV's obligations to repay under its bank
debt outstanding under its revolving
F-277
<PAGE> 489
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO CONDENSED COMBINED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
(DOLLARS IN THOUSANDS)
credit facility ("IP-IV Revolving Credit Facility") and term loan agreement
("IP-IV Term Loan", together with the IP-IV Revolving Credit Facility, the
"IP-IV Bank Facility") dated July 30, 1996.
Interest rates under RMG's intercompany revolving credit facility are
calculated monthly and are referenced to those made available under the IP-IV
Bank Facility. Interest rates ranged from 6.21% to 6.84% during the three months
ended March 31, 1999.
Charter has an obligation to assume and repay RMG's intercompany revolving
credit facility pursuant to the Charter Transactions.
Advances under the IP-IV Bank Facility are available under interest rate
options related to the base rate of the administrative agent for the IP-IV Bank
Facility ("ABR") or LIBOR. Interest rates on borrowings under the IP-IV Term
Loan vary from LIBOR plus 1.75% to LIBOR plus 2.00% or ABR plus 0.50% to ABR
plus 0.75% based on IP-IV's ratio of debt outstanding to annualized quarterly
operating cash flow ("Senior Debt Ratio"). Interest rates on borrowings under
the IP-IV Revolving Credit Facility also vary from LIBOR plus 0.625% to LIBOR
plus 1.50% or ABR to ABR plus 0.25% based on IP-IV's Senior Debt Ratio. The
IP-IV Bank Facility requires quarterly payment of fees on the unused portion of
the IP-IV Revolving Credit Facility of 0.375% per annum when the Senior Debt
Ratio is greater than 4.0:1.0 and at 0.25% when the Senior Debt Ratio is less
than or equal to 4.0:1.0.
The terms and conditions of RMG's intercompany debt agreement are not
necessarily indicative of the terms and conditions which would be available if
the Systems were a separate legal entity.
4. RELATED PARTY TRANSACTIONS
ICM and IMI provide certain management services to IP-I and ICP-IV,
respectively, for per annum fixed fees, of which 20% per annum is deferred and
payable in each following year in order to support InterMedia's debt.
InterMedia's management fees for the three months ended March 31, 1999 and 1998
amounted to $1,353, of which $781 has been charged to the Systems.
IMI has entered into agreements with both IP-I and ICP-IV to provide
accounting and administrative services at cost. Under the terms of the
agreements, the expenses associated with rendering these services are charged to
the Systems and other affiliates based upon relative basic subscriber
percentages. Management believes this method to be reflective of the actual
cost. During the three months ended March 31, 1999 and 1998, IMI administrative
fees charged to the Systems totaled $859 and $1,206, respectively. Receivables
from affiliates at March 31, 1999 and December 31, 1998 include $405 and $52,
respectively, of advances to IMI, net of administrative fees charged by IMI and
operating expenses paid by IMI on behalf of the Systems.
F-278
<PAGE> 490
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO CONDENSED COMBINED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
(DOLLARS IN THOUSANDS)
IP-I is majority-owned, and ICP-IV is owned in part, by AT&T Broadband &
Internet Services ("AT&TBIS"), formerly Tele-Communications, Inc. As affiliates
of AT&TBIS, IP-I and ICP-IV are able to purchase programming services from a
subsidiary of AT&TBIS. Management believes that the overall programming rates
made available through this relationship are lower than the Systems could obtain
separately. Such volume rates may not continue to be available in the future
should AT&TBIS's ownership interest in InterMedia significantly decrease.
Program fees charged by the AT&TBIS subsidiary to the Systems for the three
months ended March 31, 1999 and 1998 amounted to $8,505 and $6,624,
respectively. Payables to affiliates include programming fees payable to the
AT&TBIS subsidiary of $2,846 and $2,918 at March 31, 1999 and December 31, 1998,
respectively.
On January 1, 1998 an affiliate of AT&TBIS entered into agreements with
InterMedia to manage the Systems' advertising business and related services for
an annual fixed fee per advertising sales subscriber as defined by the
agreements. In addition to the annual fixed fee AT&TBIS is entitled to varying
percentage shares of the incremental growth in annual cash flows from
advertising sales above specified targets. Management fees charged by the
AT&TBIS subsidiary for the three months ended March 31, 1999 amounted to $90.
Receivables from affiliates at March 31, 1999 and December 31, 1998 include
$4,119 and $3,437, respectively, of receivable from AT&TBIS for advertising
sales.
As part of its normal course of business the Systems are involved in
transactions with affiliates of InterMedia which own and operate cable
television systems. Such transactions include purchases and sales at cost of
inventories used in construction of cable plant. Receivables from affiliates at
March 31, 1999 and December 31, 1998 include $514 and $2,134, respectively, of
receivables from affiliated systems. Payables to affiliates at March 31, 1999
and December 31, 1998 include $172 and $208, respectively, of payables to
affiliated systems.
5. COMMITMENTS AND CONTINGENCIES
The Systems are committed to provide cable television services under
franchise agreements with remaining terms of up to eighteen years. Franchise
fees of up to 5% of gross revenues are payable under these agreements.
Current FCC regulations require that cable television operators obtain
permission to retransmit major network and certain local television station
signals. The Systems have entered into long-term retransmission agreements with
all applicable stations in exchange for in-kind and/or other consideration.
InterMedia has been named in purported and certified class actions in
various jurisdictions concerning late fee charges and practices. Certain cable
systems owned by InterMedia charge late fees to customers who do not pay their
cable bills on time. These late fee cases challenge the amount of the late fees
and the practices under which they are imposed. The plaintiffs raise claims
under state consumer protection statutes, other state
F-279
<PAGE> 491
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO CONDENSED COMBINED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
(DOLLARS IN THOUSANDS)
statutes and common law. The plaintiffs generally allege that the late fees
charged by InterMedia's cable systems, including the Systems in the States of
Tennessee, South Carolina and Georgia are not reasonably related to the costs
incurred by the cable systems as a result of the late payment. The plaintiffs
seek to require cable systems to reduce their late fees on a prospective basis
and to provide compensation for alleged excessive late fee charges for past
periods. These cases are either at the early stages of the litigation process or
are subject to a case management order that sets forth a process leading to
mediation. Based upon the facts available management believes that, although no
assurances can be given as to the outcome of these actions, the ultimate
disposition of these matters should not have a material adverse effect upon the
financial condition of the Systems.
Under existing Tennessee laws and regulations, the Systems pay an Amusement
Tax in the form of a sales tax on programming service revenues generated in
Tennessee in excess of charges for the basic and expanded basic levels of
service. Under the existing statute, only the service charges or fees in excess
of the charges for the "basic cable" television service package are subject to
the Amusement Tax. Related regulations clarify the definition of basic cable to
include two tiers of service, which InterMedia's management and other operators
in Tennessee have interpreted to mean both the basic and expanded basic level of
services.
The Tennessee Department of Revenue ("TDOR") has proposed legislation which
would replace the Amusement Tax under the existing statute with a new sales tax
on all cable service revenues in excess of twelve dollars per month. The new tax
would be computed at a rate approximately equal to the existing effective tax
rate.
Unless InterMedia and other cable operators in Tennessee support the
proposed legislation, the TDOR has suggested that it would assess additional
taxes on prior years' expanded basic service revenues. The TDOR can issue an
assessment for prior periods up to three years. Management estimates that the
amount of such an assessment for the Systems, if made for all periods not
previously audited, would be approximately $5.4 million. InterMedia's management
believes that it is possible but not likely that the TDOR can make such an
assessment and prevail in defending it.
InterMedia's management believes it has made a valid interpretation of the
current Tennessee statute and regulations and that it has properly determined
and paid all sales taxes due. InterMedia further believes that the legislative
history of the current statute and related regulations, as well as the TDOR's
history of not making assessments based on audits of prior periods, support
InterMedia's interpretation. InterMedia and other cable operators in Tennessee
are aggressively defending their past practices on calculation and payment of
the Amusement Tax and are discussing with the TDOR modifications to their
proposed legislation which would clarify the statute and would minimize the
impact of such legislation on the Systems' results of operations. See Note
8 -- Subsequent Events.
The Systems are subject to other claims and litigation in the ordinary
course of business. In the opinion of management, the ultimate outcome of any
existing litigation or
F-280
<PAGE> 492
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND
INTERMEDIA CAPITAL PARTNERS IV, L.P.)
NOTES TO CONDENSED COMBINED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
(DOLLARS IN THOUSANDS)
other claims will not have a material effect on the Systems' financial position
or results of operations.
6. CHANNEL LAUNCH REVENUE
During 1997 and 1998, the Systems were credited with amounts representing
their share of payments received or to be received by InterMedia from certain
programmers to launch and promote their new channels. Of the total amount
credited the Systems recognized advertising revenue of $333 during the three
months ended March 31, 1999 for advertisements provided by the Systems to
promoted the new channels. The remaining amounts credited to the Systems are
being amortized over the respective terms of the program agreements which range
between five to ten years. For the three months ended March 31, 1999 and 1998
the Systems amortized and recorded as other service revenues of $218 and $179,
respectively.
7. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Total accretion on RMG's Redeemable Preferred Stock for the three months
ended March 31, 1999 and 1998 amounted to $246 and $230, respectively.
8. SUBSEQUENT EVENT
In late May 1999, both Houses of the Tennessee legislature passed new
legislation which replaces the existing Amusement Tax with a new sales tax on
cable service revenues effective September 1, 1999. Under the new legislation,
all cable service revenues in excess of fifteen dollars are subject to tax at a
rate which approximates the existing tax rate. The new legislation reflects
certain amendments to the TDOR's proposed legislation described in Note
5 -- Commitments and Contingencies, including the change in the amount of cable
service revenues which are exempt from sales tax from twelve dollars per month
to fifteen dollars per month.
F-281
<PAGE> 493
RIFKIN CABLE INCOME PARTNERS, L. P.
BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
12/31/98 3/31/99
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 65,699 $ 76,892
Customer accounts receivable, net of allowance for
doubtful accounts of $18,278 in 1998 and $6,406 in
1999.............................................. 51,523 34,147
Other receivables................................... 133,278 100,057
Prepaid expenses and deposits....................... 70,675 18,731
Property, plant and equipment, at cost:
Cable television transmission and distribution
systems and related equipment.................. 8,758,525 11,010,643
Land, buildings, vehicles and furniture and
fixtures....................................... 623,281 449,299
----------- -----------
9,381,806 11,459,942
Less accumulated depreciation..................... (4,354,685) (293,664)
----------- -----------
Net property, plant and equipment.............. 5,027,121 11,166,278
Franchise costs and other intangible assets, net of
accumulated amortization of $2,033,405 in 1998 and
$281,821 in 1999.................................. 1,772,345 13,197,093
----------- -----------
Total assets.............................. $ 7,120,641 $24,593,198
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued liabilities............ $ 396,605 $ 299,110
Customer deposits and prepayments................... 126,212 102,492
Interest payable.................................... -- 3,231
Interpartnership debt............................... 2,865,426 2,312,776
----------- -----------
Total liabilities......................... 3,388,243 2,717,609
Partners' equity:
General partner................................... 822,837 8,784,068
Limited partners.................................. 2,909,561 13,091,521
----------- -----------
Total partner's equity.................... 3,732,398 21,875,589
----------- -----------
Total liabilities and partners' equity.... $ 7,120,641 $24,593,198
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-282
<PAGE> 494
RIFKIN CABLE INCOME PARTNERS L.P.
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------
3/31/98 3/31/99
---------- ----------
<S> <C> <C>
REVENUE:
Service............................................... $1,189,030 $1,249,886
Installation and other................................ 76,220 101,437
---------- ----------
Total revenue............................... 1,265,250 1,351,323
COSTS AND EXPENSES:
Operating expense..................................... 198,322 134,256
Programming expense................................... 275,393 305,007
Selling, general and administrative expense........... 119,236 166,467
Depreciation.......................................... 155,000 293,767
Amortization.......................................... 50,072 281,548
Management fees....................................... 63,262 67,497
Loss on disposal of assets -- 8,578
---------- ----------
Total costs and expenses.................... 861,285 1,257,120
---------- ----------
Operating income...................................... 403,965 94,203
Interest expense...................................... 98,537 55,708
---------- ----------
Net income............................................ $ 305,428 $ 38,495
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-283
<PAGE> 495
RIFKIN CABLE INCOME PARTNERS L.P.
STATEMENT OF PARTNERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Partners' equity, December 31, 1997.... $ 263,171 $ 2,170,336 $ 2,433,507
Net income............................. 131,603 173,825 305,428
---------- ----------- -----------
Partners' equity, March 31, 1998....... 394,774 2,344,161 2,738,935
========== =========== ===========
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Partners' equity, December 31, 1998.... 822,837 2,909,561 3,732,398
Partners' contribution................. 7,944,340 10,160,356 18,104,696
Net income............................. 16,891 21,604 38,495
---------- ----------- -----------
Partners' equity March 31, 1999........ $8,784,068 $13,091,521 $21,875,589
========== =========== ===========
</TABLE>
The partners' capital accounts for financial reporting purposes vary from
the tax capital accounts.
The accompanying notes are an integral part of the financial statements.
F-284
<PAGE> 496
RIFKIN CABLE INCOME PARTNERS L.P.
STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------
3/31/98 3/31/99
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 305,428 $ 38,495
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 205,072 575,315
Amortization of deferred loan cost................ 4,743 --
Loss on disposal of fixed assets.................. -- 8,578
Decrease in customer accounts receivables......... 9,781 17,376
Decrease in other receivables..................... 52,995 33,221
Decrease (increase) in prepaid expense and
other........................................... (22,190) 51,944
Decrease in accounts payable and accrued
liabilities..................................... (46,448) (97,495)
Decrease in customer deposits and prepayment...... (15,329) (23,720)
Increase (decrease) in interest payable........... (4,924) 3,231
--------- ---------
Net cash provided by operating activities....... 489,128 606,945
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment........... (99,234) (44,602)
Proceeds from the sale of assets..................... -- 1,500
--------- ---------
Net cash used in investing activities........... (99,234) (43,102)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from interpartnership debt.................. -- 55,000
Payments of long-term debt........................... (232,375) --
Payments of interpartnership debt.................... -- (607,650)
--------- ---------
Net cash used in financing activities........... (232,375) (552,650)
--------- ---------
Net increase in cash and cash equivalents.............. 157,519 11,193
Cash and cash equivalents at beginning of period....... 381,378 65,699
--------- ---------
Cash and cash equivalents at end of period............. $ 538,897 $ 76,892
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid........................................ $ 98,718 $ 52,350
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-285
<PAGE> 497
RIFKIN CABLE INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Rifkin Cable Income Partners L.P. (the "Partnership") was formed in 1986 as
a limited partnership under the laws of the State of Delaware. The Partnership
owns, operates and develops cable television systems in Missouri and New Mexico.
Rifkin Cable Management Partners L.P., an affiliate of Rifkin & Associates,
Inc., is the general partner of the Partnership.
The Partnership Agreement (the "Agreement") establishes the respective
rights, obligations and interests of the partners. The Agreement provides that
net income or loss, certain capital events, and cash distributions (all as
defined in the Agreement) are generally allocated 43% to the general partner and
57% to the limited partners.
ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP
Effective December 31, 1998, InterLink Communications Partners, LLLP
("ICP") acquired 100% of the Partnership. This transaction was accounted for as
a purchase, as such, assets and liabilities were written up to their fair market
value. The December 31, 1998 audited financial statements represent the
Partnership just prior to this transaction. The March 31, 1999 unaudited
financial statements represent the new basis of accounting as property, plant
and equipment and franchise cost which were written up by $6,398,400 and
$11,701,600, respectively.
Accordingly, the March 31, 1999 unaudited financial statements of the
Partnership are not comparable to the December 31, 1998 audited financial
statements of the Partnership, which are based upon historic costs.
BASIS OF PRESENTATION
The accompanying condensed financial statements are unaudited. However, in
the opinion of management, the financial statements reflect all adjustments,
consisting of normal recurring adjustments, necessary for fair presentation in
accordance with generally accepted accounting principles applicable to interim
periods. The results of operations for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be achieved for the full
fiscal year and cannot be used to indicate financial performance for the entire
year. The accompanying financial statements should be read in conjunction with
the December 31, 1998 audited financial statements of Rifkin Cable Income
Partners, L.P.
ACQUISITION BY CHARTER COMMUNICATIONS
On February 12, 1999, ICP signed a letter of intent to sell all of ICP's
partnership interests to Charter Communications, Inc. ("Charter"). On April 26,
1999, ICP signed a definitive Purchase and Sale Agreement with Charter for the
sale of the individual partners' interest. ICP and Charter are expected to
complete the sale during the third quarter of 1999.
F-286
<PAGE> 498
RIFKIN CABLE INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. LITIGATION
The Partnership could possibly be named as defendant in various actions and
proceedings arising from the normal course of business. In all such cases, the
Partnership will vigorously defend itself against the litigation and, where
appropriate, will file counterclaims. Although the eventual outcome of potential
lawsuits cannot be predicted, it is management's opinion that any such lawsuit
will not result in liabilities that would have a material affect on the
Partnership's financial position or results of operations.
F-287
<PAGE> 499
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash.............................................. $ 4,397,931 $ 2,324,892
Subscriber accounts receivable, net of allowance
for doubtful accounts of $286,228 in 1999 and
$444,839 in 1998............................. 1,438,418 1,932,140
Other receivables................................. 3,743,948 5,637,771
Prepaid expenses and other........................ 1,479,094 2,398,528
Property, plant and equipment at cost:
Cable television transmission and distribution
systems and related equipment................ 154,357,916 149,376,914
Land, building, vehicles and furniture and
fixtures..................................... 7,895,440 7,421,960
------------ ------------
162,253,356 156,798,874
Less accumulated depreciation................... (39,125,222) (35,226,773)
------------ ------------
Net property, plant and equipment....... 123,128,134 121,572,101
Franchise costs and other intangible assets, net
of accumulated amortization of $72,059,022 in
1999 and $67,857,545 in 1998.................... 176,785,191 183,438,197
------------ ------------
Total assets............................ $310,972,716 $317,303,629
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities.......... $ 13,513,817 $ 11,684,594
Subscriber deposits and prepayments............... 645,379 1,676,900
Interest payable.................................. 3,651,571 7,242,954
Deferred taxes payable............................ 7,405,000 7,942,000
Notes payable..................................... 226,575,000 224,575,000
------------ ------------
Total liabilities....................... 251,790,767 253,121,448
Commitments:
Redeemable partners' interests.................... 16,732,480 10,180,400
Partners' capital (deficit):
General partner................................. (2,860,031) (1,991,018)
Limited partners................................ 44,916,743 55,570,041
Preferred equity interest....................... 392,757 422,758
------------ ------------
Total partners' capital........................... 42,449,469 54,001,781
------------ ------------
Total liabilities and partners'
capital.............................. $310,972,716 $317,303,629
============ ============
</TABLE>
See accompanying notes to financial statements.
F-288
<PAGE> 500
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUE:
Service............................................. $21,827,094 $20,535,417
Installation and other.............................. 2,190,189 1,470,093
----------- -----------
Total revenue............................. 24,017,283 22,005,510
COSTS AND EXPENSES:
Operating expense................................... 3,461,852 3,546,468
Programming expense................................. 5,396,599 4,941,131
Selling, general and administrative expense......... 3,380,966 2,748,970
Depreciation........................................ 4,010,219 3,625,474
Amortization........................................ 6,383,145 5,817,358
Management fees..................................... 840,605 770,193
Loss on disposal of assets.......................... 76,798 260,912
----------- -----------
Total costs and expenses.................. 23,550,184 21,710,506
----------- -----------
Operating income.................................... 467,099 295,004
Gain on sale of Michigan assets..................... -- (5,989,846)
Interest expense.................................... 5,892,724 5,945,495
----------- -----------
Income (loss) before income taxes and cumulative
effect of accounting change....................... (5,425,625) 339,355
Income tax benefit.................................. (537,000) (1,098,000)
----------- -----------
Income (loss) before cumulative effect of accounting
change............................................ (4,888,625) 1,437,355
Cumulative effect of accounting change for
organizational costs.............................. 111,607 --
----------- -----------
Net income (loss)................................... $(5,000,232) $ 1,437,355
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-289
<PAGE> 501
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED STATEMENT OF CASH FLOW (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $(5,000,232) $ 1,437,355
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................. 10,393,364 9,442,832
Amortization of deferred loan cost............ 235,956 247,440
Gain on sale of Michigan assets............... -- (5,989,846)
Loss on disposal of fixed assets.............. 76,798 260,912
Cumulative effect of accounting change for
organizational costs........................ 111,607 --
Deferred taxes benefit........................ (537,000) (1,098,000)
Decrease in subscriber accounts receivable.... 493,722 309,085
Decrease in other receivables................. 1,893,823 593,691
Decrease (increase) in prepaid expenses and
other....................................... 919,434 (205,882)
Increase (decrease) in accounts payable and
accrued liabilities......................... 1,829,223 (900,090)
Increase (decrease) in subscriber deposits and
prepayment.................................. (1,031,521) 15,946
Decrease in interest payable.................. (3,591,383) (3,702,056)
----------- ------------
Net cash provided by operating
activities............................ 5,793,791 411,387
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of cable systems, net............... (13,812) --
Additions to property, plant and equipment....... (5,722,161) (6,727,584)
Additions to cable television franchises, net of
retirements and changes in other intangible
assets........................................ (63,890) (38,349)
Net proceeds from sale of Michigan assets........ -- 17,050,564
Net proceeds from the disposal of assets (other
than Michigan)................................ 79,111 92,664
----------- ------------
Net cash provided by (used in) investing
activities............................ (5,720,752) 10,377,295
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term bank debt................ 8,000,000 8,500,000
Payments of long term-bank debt.................. (6,000,000) (20,000,000)
----------- ------------
Net cash provided by (used in) financing
activities............................ 2,000,000 (11,500,000)
----------- ------------
NET INCREASE (DECREASE) IN CASH.................... 2,073,039 (711,318)
CASH AT BEGINNING OF QUARTER....................... 2,324,892 1,902,555
----------- ------------
CASH AT END OF QUARTER............................. $ 4,397,931 $ 1,191,237
=========== ============
</TABLE>
See accompanying notes to financial statements.
F-290
<PAGE> 502
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
PREFERRED GENERAL LIMITED
EQUITY INTEREST PARTNER PARTNERS TOTAL
--------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Partners' capital (deficit) at
12/31/98............................. $422,758 $(1,991,018) $55,570,041 $54,001,781
Net loss for the quarter ended
3/31/99.............................. (30,001) (50,003) (4,920,228) (5,000,232)
Accretion of redeemable partners'
interest............................. -- (819,010) (5,733,070) (6,552,080)
-------- ----------- ----------- -----------
Partners' capital (deficit) at
3/31/99.............................. $392,757 $(2,860,031) $44,916,743 $42,449,469
======== =========== =========== ===========
Partners' capital (deficit) at
12/31/97............................. $276,243 $(1,885,480) $34,044,912 $32,435,675
Net income for the quarter ended
3/31/98.............................. 8,624 14,374 1,414,357 1,437,355
Accretion of redeemable partners'
interest............................. -- (140,880) (986,160) (1,127,040)
-------- ----------- ----------- -----------
Partners' capital (deficit) at
3/31/98.............................. $284,867 $(2,011,986) $34,473,109 $32,745,990
======== =========== =========== ===========
</TABLE>
See accompanying notes to financial statement.
F-291
<PAGE> 503
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION
Rifkin Acquisition Partners, L.P. ("RAP L.P.") was formed on December 16,
1988, pursuant to the laws of the State of Colorado, for the purpose of
acquiring and operating cable television (CATV) systems. On September 1, 1995,
RAP L.P. registered as a limited liability limited partnership, Rifkin
Acquisition Partners, L.L.L.P. (the "Partnership"), pursuant to the laws of the
State of Colorado. Rifkin Acquisition Management, L.P., was the general partner
of RAP L.P. and is the general partner of the Partnership ("General Partner").
The Partnership and its subsidiaries are hereinafter referred to on a
consolidated basis as the "Company."
The Partnership operates under a limited liability limited partnership
agreement (the "Partnership Agreement") which establishes contribution
requirements, enumerates the rights and responsibilities of the partners and
advisory committee, provides for allocations of income, losses and
distributions, and defines certain items relating thereto.
These statements have been completed in conformity with the SEC
requirements for unaudited consolidated financial statements for the Company and
does not contain all of the necessary footnote disclosures required for a fair
presentation of the balance sheets, statements of operations, of partners'
capital(deficit), and of cash flows in conformity with generally accepted
accounting principles. However, in the opinion of management, this data includes
all adjustments, consisting of normal recurring accruals necessary to present
fairly the Company's consolidated financial position at March 31, 1999, December
31, 1998 and March 31,1998, and its consolidated results of operations and cash
flows for the three months ended March 31, 1999 and 1998. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be achieved for the full fiscal year and
cannot be used to indicate financial performance for the entire year. The
consolidated financial statements should be read in conjunction with the
Company's annual consolidated financial statements and notes thereto included on
Form 10-K, No. 333-3084, for the year ended December 31, 1998.
2. SUBSEQUENT EVENT
On February 12, 1999, the Company signed a letter of intent for the
partners to sell their partnership interests to Charter Communications, Inc.
("Charter"). On April 26, 1999, the Company signed a definitive Purchase and
Sale Agreement with Charter for the sale of the individual partners' interest.
Subsequently, Charter assigned this contract to Charter Communications Holdings,
LLC (CCH). The company and CCH are expected to complete the sale during the
third quarter of 1999.
3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1999, the Company adopted the Accounting Standards
Executive Committee's Statement of Position (SOP)98-5 "Reporting on the Costs of
Start-Up Activities," which requires the Company to expense all start-up costs
related to organizing a new business. During the first quarter of 1999, the
Company wrote off the organization costs capitalized in prior years along with
the accumulated amortization, resulting in the recognition of a cumulative
effect of accounting change loss of $111,607.
F-292
<PAGE> 504
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION
Certain reclassifications have been made to the 1998 Consolidated Statement
of Operations to conform with the Audited Consolidated Statement of Operations
for the year ended December 31, 1998.
5. SENIOR SUBORDINATED NOTES
On January 26, 1996, the Company and its wholly-owned subsidiary, Rifkin
Acquisition Capital Corp (RAC), co-issued a $125 million aggregate principal
amount of 11 1/8% Senior Subordinated Notes (the "Notes") to institutional
investors. These Notes were subsequently exchanged on June 18, 1996 for publicly
registered notes with identical terms. Interest on the Notes is payable in cash,
semi-annually on January 15 and July 15 of each year, commencing on July 15,
1996. The Notes, which mature on January 15, 2006, can be redeemed in whole or
in part, at the Issuers' option, at any time on or after January 15, 2001, at
redeemable prices contained in the Notes plus accrued interest. In addition, at
any time on or prior to January 15, 1999, the Issuers, at their option, were
allowed to redeem up to 25% of the principle amount of the notes issued to
institutional investors of not less than $25 million. Such redemption did not
take place. The Senior Subordinated Notes had a balance of $125 million at March
31, 1999 and 1998.
F-293
<PAGE> 505
INDIANA CABLE ASSOCIATES, LTD.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
3/31/99
-----------
<S> <C>
ASSETS (PLEDGED)
Cash and cash equivalents................................... $ 111,665
Customer accounts receivable, less allowance for doubtful
accounts of $2,017........................................ 64,223
Other receivables........................................... 163,272
Prepaid expenses and deposits............................... 39,535
Property, plant and equipment:
Buildings................................................. 19,155
Transmission and distribution systems and related
equipment.............................................. 11,238,219
Office furniture and equipment............................ 57,153
Spare parts and construction inventory.................... 742,022
-----------
12,056,549
Less accumulated depreciation............................. 351,158
-----------
Net property, plant and equipment...................... 11,705,391
Other assets, less accumulated amortization................. 20,799,833
-----------
Total assets...................................... $32,883,919
===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 687,332
Customer prepayments...................................... 23,157
Interest payable.......................................... 20,644
Interpartnership debt..................................... 9,513,888
-----------
Total liabilities................................. 10,245,021
Partners' equity:
General partner........................................... 789,862
Limited partner........................................... 21,849,036
-----------
Total partners' equity...................................... 22,638,898
-----------
Total liabilities and partners' equity............ $32,883,919
===========
</TABLE>
See accompanying notes.
F-294
<PAGE> 506
INDIANA CABLE ASSOCIATES, LTD.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
3/31/98 3/31/99
---------- ----------
<S> <C> <C>
REVENUE:
Service............................................... $1,828,568 $1,885,201
Installation and other................................ 171,518 216,944
---------- ----------
Total revenue............................... 2,000,086 2,102,145
COSTS AND EXPENSES:
Operating expense..................................... 322,881 212,173
Programming expense................................... 452,606 465,569
Selling, general and administrative expense........... 263,679 285,549
Depreciation.......................................... 128,089 351,257
Amortization.......................................... 178,279 1,034,849
Management fees....................................... 100,004 105,103
Loss on disposal of assets............................ 24,924 8,897
---------- ----------
Total costs and expenses.................... 1,470,462 2,463,397
---------- ----------
Operating income (loss)............................... 529,624 (361,252)
Interest expense...................................... 293,941 203,002
---------- ----------
Net income (loss)..................................... $ 235,683 $ (564,254)
========== ==========
</TABLE>
See accompanying notes.
F-295
<PAGE> 507
INDIANA CABLE ASSOCIATES, LTD.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
3/31/98 3/31/99
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 235,683 $(564,254)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation........................................... 128,089 351,257
Amortization........................................... 178,279 1,034,849
Amortization of deferred loan costs.................... 6,947 --
Loss on disposal of assets............................. 24,924 8,897
Decrease in customer accounts receivable............... 20,138 21,572
Decrease in other receivables.......................... 52,089 131,751
Decrease in prepaid expenses and deposits.............. 126 113,040
Increase (decrease) in accounts payable and accrued
liabilities........................................... 14,651 (210,441)
Increase (decrease) in customer prepayments............ 633 (24,301)
Increase (decrease) in interest payable................ (1,448) 20,644
--------- ---------
Net cash provided by operating activities......... 660,111 883,014
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (142,080) (787,226)
--------- ---------
Net cash used in investing activities............. (142,080) (787,226)
Cash flows from financing activities:
Proceeds from long-term debt.............................. 150,000 --
Payments of long-term debt................................ (400,000) --
Payments of interpartnership debt......................... -- (92,742)
Deferred loan cost........................................ (934) --
--------- ---------
Net cash used in financing activities............. (250,934) (92,742)
--------- ---------
Net increase in cash and cash equivalents................... 267,097 3,046
Cash and cash equivalents at beginning of period............ 82,684 108,619
--------- ---------
Cash and cash equivalents at end of period.................. $ 349,781 $ 111,665
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ 288,442 $ 182,358
========= =========
</TABLE>
See accompanying notes.
F-296
<PAGE> 508
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited.
However, in the opinion of management, the financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary for fair
presentation in accordance with generally accepted accounting principles
applicable to interim periods. Interim results of operations are not indicative
of results for the full year. The accompanying financial statements should be
read in conjunction with the audited consolidated financial statements of
Indiana Cable Associates, L.P. (the "Partnership").
2. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP
InterLink Communications Partners, LLLP ("ICP") agreed to purchase all of
the Partnership interests as of December 31, 1998, for a total purchase price of
approximately $32,693,781. The acquisition of the Partnership by ICP was
accounted for as a purchase and a new basis of accounting was established
effective January 1, 1999. The new basis resulted in assets and liabilities
being recorded at their fair market value resulting in an increase in property,
plant, and equipment and franchise costs of $6,952,385 and $16,751,653,
respectively. Accordingly, the 1999 interim unaudited financial statements are
not comparable to the 1998 interim unaudited financial statements of the
Partnership, which are based on historical costs.
3. DEBT
On December 30, 1998, the Partnership obtained an interpartnership loan
agreement with ICP. Borrowings under the interpartnership loan, as well as
interest and principal payments are due at the discretion of the management of
ICP. The balance of the interpartnership loan at March 31, 1999 was $9,513,888.
The interest rate was 8.5% on March 31, 1999.
4. ACQUISITION BY CHARTER COMMUNICATIONS HOLDINGS, LLC
On February 12, 1999, ICP signed a letter of intent to sell all of ICP's
partnership interests to Charter Communications Holdings, LLC ("Charter"). On
April 26, 1999, ICP signed a definitive Purchase and Sale Agreement with Charter
for the sale of the individual partners' interest. ICP and Charter are expected
to complete the sale during the third quarter of 1999.
F-297
<PAGE> 509
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
3/31/99
ASSETS (PLEDGED) ------------
<S> <C>
Cash and cash equivalents................................... $ 886,775
Customer accounts receivable, less allowance for doubtful
accounts of $15,315....................................... 225,562
Other receivables........................................... 1,108,404
Prepaid expenses and deposits............................... 198,634
Property, plant and equipment:
Transmission and distribution system and related
equipment................................................. 23,861,716
Office furniture and equipment.............................. 244,959
Construction in process and spare parts inventory........... 1,000,389
------------
25,107,064
Less accumulated depreciation............................... 689,851
------------
Net property, plant and equipment................. 24,417,213
Other assets, less accumulated amortization................. 76,223,185
------------
Total assets...................................... $103,059,773
============
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................... $ 2,464,391
Interest payable............................................ 42,298
Customer prepayments........................................ 493,169
Interpartnership debt....................................... 30,272,414
------------
Total liabilities................................. 33,272,272
Partners' equity:
General partner........................................... 635,124
Limited partner........................................... 62,898,936
Special limited partner................................... 6,253,441
------------
Total partners' equity...................................... 69,787,501
------------
Total liabilities and partners' equity............ $103,059,773
============
</TABLE>
See accompanying notes.
F-298
<PAGE> 510
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
3/31/98 3/31/99
---------- -----------
<S> <C> <C>
REVENUES:
Service.............................................. $4,621,902 $ 5,199,389
Installation and other............................... 759,252 946,223
---------- -----------
5,381,154 6,145,612
COSTS AND EXPENSES:
Operating expense.................................... 1,178,431 1,018,808
Programming expense.................................. 1,257,362 1,267,120
Selling, general and administrative expense.......... 912,931 1,074,086
Depreciation......................................... 543,852 692,889
Amortization......................................... 322,652 6,231,423
Management fees...................................... 215,246 245,824
Loss on disposal of assets........................... 17,917 138,643
---------- -----------
Total costs and expenses................... 4,448,391 10,668,793
---------- -----------
Operating income (loss).............................. 932,763 (4,523,181)
Interest expense..................................... 637,986 607,692
---------- -----------
Net income (loss).................................... $ 294,777 $(5,130,873)
========== ===========
</TABLE>
See accompanying notes.
F-299
<PAGE> 511
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
3/31/98 3/31/99
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ 294,777 $(5,130,873)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation................................... 543,852 692,889
Amortization................................... 322,652 6,231,423
Amortization of deferred loan cost............. 22,329 --
Loss on disposal of assets..................... 17,917 138,643
Decrease in customer accounts receivable....... 172,099 229,777
Decrease (increase) in other receivables....... (61,849) 583,189
Decrease (increase) in prepaid expenses and
deposits..................................... (11,708) 194,388
Increase in accounts payable and accrued
liabilities.................................. 454,505 107,851
Decrease in customer prepayments............... (200,756) (197,196)
Increase (decrease) in interest payable........ (10,308) 42,298
----------- -----------
Net cash provided by operating
activities............................. 1,543,510 2,892,389
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........ (2,326,765) (1,619,609)
Additions to other assets, net of refranchises.... (117,090) (135,252)
Proceeds from the sale of assets.................. 4,442 20,530
----------- -----------
Net cash used in investing activities..... (2,439,413) (1,734,331)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt...................... 2,900,000 --
Payments of long-term debt........................ (1,900,000) --
Payments of interpartnership debt................. -- (950,022)
Deferred loan costs............................... (132,727) --
----------- -----------
Net cash provided by (used in) financing
activities............................. 1,000,000 (950,022)
----------- -----------
Net increase in cash and cash equivalents........... 104,097 208,036
Cash and cash equivalents at beginning of period.... 362,619 678,739
----------- -----------
Cash and cash equivalents at end of period.......... $ 466,716 $ 886,775
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid..................................... $ 617,214 $ 565,395
=========== ===========
</TABLE>
See accompanying notes.
F-300
<PAGE> 512
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited. However,
in the opinion of management, the financial statements reflect all adjustments,
consisting of normal recurring adjustments, necessary for fair presentation in
accordance with generally accepted accounting principles applicable to interim
periods. Interim results of operations are not indicative of results for the
full year. The accompanying financial statements should be read in conjunction
with the audited consolidated financial statements of R/N South Florida Cable
Management Limited Partnership (the "Partnership").
2. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP
InterLink Communications Partners, LLLP ("ICP") agreed to purchase all of
the Partnership interests as of December 31, 1998, for a total purchase price of
approximately $105,447,622. The acquisition of the Partnership by ICP was
accounted for as a purchase and a new basis of accounting was established
effective January 1, 1999. The new basis resulted in assets and liabilities
being recorded at their fair market value resulting in a increase in property,
plant, and equipment and franchise costs of $4,986,298 and $77,273,596,
respectively. Accordingly, the 1999 interim unaudited financial statements are
not comparable to the 1998 interim unaudited financial statements of the
Partnership, which are based on historical costs.
3. DEBT
On December 30, 1998, the Partnership obtained an interpartnership loan
agreement with ICP. Borrowings under the interpartnership loan, as well as
interest and principal payments are due at the discretion of the management of
ICP. The balance of the interpartnership loan at March 31, 1999 was $30,272,414.
The interest rate at March 31, 1999 was 8.5%
4. ACQUISITION BY CHARTER COMMUNICATIONS HOLDINGS, LLC
On February 12, 1999, ICP signed a letter of intent to sell all of ICP's
partnership interests to Charter Communications Holdings, LLC ("Charter"). On
April 26, 1999, ICP signed a definitive Purchase and Sale Agreement with Charter
for the sale of the individual partners' interest. ICP and Charter are expected
to complete the sale during the third quarter of 1999.
F-301
<PAGE> 513
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$3,575,000,000
OFFER TO EXCHANGE
8.250% SENIOR NOTES DUE 2007,
8.625% SENIOR NOTES DUE 2009 AND
9.920% SENIOR DISCOUNT NOTES DUE 2011
FOR ANY AND ALL OUTSTANDING
8.250% SENIOR NOTES DUE 2007,
8.625% SENIOR NOTES DUE 2009 AND
9.920% SENIOR DISCOUNT NOTES DUE 2011,
RESPECTIVELY, OF
CHARTER COMMUNICATIONS
HOLDINGS, LLC
AND
CHARTER COMMUNICATIONS
HOLDINGS CAPITAL CORPORATION
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS
AN OFFER TO ISSUE ONLY THE NEW NOTES OFFERED HEREBY, BUT ONLY UNDER
CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION
CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 514
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION UNDER THE LIMITED LIABILITY COMPANY AGREEMENT OF CHARTER
HOLDINGS.
The limited liability company agreement of Charter Holdings, entered into
as of February 9, 1999, by Charter Investment, as the initial member, provides
that the members, the manager, the directors, their affiliates or any person who
at any time serves or has served as a director, officer, employee or other agent
of any member or any such affiliate, and who, in such capacity, engages or has
engaged in activities on behalf of Charter Holdings, shall be indemnified and
held harmless by Charter Holdings to the fullest extent permitted by law from
and against any losses, damages, expenses, including attorneys' fees, judgments
and amounts paid in settlement actually and reasonably incurred by or in
connection with any claim, action, suit or proceeding arising out of or
incidental to such indemnifiable person's conduct or activities on behalf of
Charter Holdings. Notwithstanding the foregoing, no indemnification is available
under the limited liability company agreement in respect of any such claim
adjudged to be primarily the result of bad faith, willful misconduct or fraud of
an indemnifiable person. Payment of these indemnification obligations shall be
made from the assets of Charter Holdings and the members shall not be personally
liable to an indemnifiable person for payment of indemnification.
INDEMNIFICATION UNDER THE DELAWARE LIMITED LIABILITY COMPANY ACT.
Section 18-108 of the Delaware Limited Liability Company Act authorizes a
limited liability company to indemnify and hold harmless any member or manager
or other person from and against any and all claims and demands whatsoever,
subject to such standards and restrictions, if any, as are set forth in its
limited liability company agreement.
INDEMNIFICATION UNDER THE BY-LAWS OF CHARTER CAPITAL.
The by-laws of Charter Capital provide that Charter Capital, to the
broadest and maximum extent permitted by applicable law, will indemnify each
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director or officer of Charter Capital, or is or was serving
at the request of Charter Capital as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding. To the extent that a director, officer,
employee or agent of Charter Capital has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in the
preceding paragraph, or in defense of any claim, issue or matter, such person
will be indemnified against expenses, including attorneys' fees, actually and
reasonably incurred by such person. Expenses, including attorneys' fees,
incurred by a director or officer in defending any civil or criminal action,
suit or proceeding may be paid by Charter Capital in advance of the final
disposition of such action, suit or proceeding, as authorized by the board of
directors of Charter Capital, upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it shall ultimately be
determined that such director or officer was not entitled to be indemnified by
Charter Capital as authorized in
II-1
<PAGE> 515
the by-laws of Charter Capital. The indemnification and advancement of expenses
provided by, or granted pursuant to, the by-laws of Charter Capital will not be
deemed exclusive and are declared expressly to be non-exclusive of any other
rights to which those seeking indemnification or advancements of expenses may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in such person's official capacity and
as to action in another capacity while holding an office, and, unless otherwise
provided when authorized or ratified, will continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such person.
INDEMNIFICATION UNDER THE DELAWARE GENERAL CORPORATION LAW.
Section 145 of the Delaware General Corporation Law, authorizes a
corporation to indemnify any person who was or is a party, or is threatened to
be made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that the person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the person in connection with such action, suit or proceeding, if the person
acted in good faith and in a manner the person reasonably believed to be in, or
not opposed to, the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful. In addition, the Delaware General Corporation Law does not
permit indemnification in any threatened, pending or completed action or suit by
or in the right of the corporation in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses, which such court
shall deem proper. To the extent that a present or former director or officer of
a corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above, or in defense of any claim, issue
or matter, such person shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by such person. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
The Delaware General Corporation Law also allows a corporation to provide for
the elimination or limit of the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director
(i) for any breach of the director's duty of loyalty to the corporation or
its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock purchases or
redemptions, or
(iv) for any transaction from which the director derived an improper
personal benefit. These provisions will not limit the liability of
directors or officers under the federal securities laws of the United
States.
II-2
<PAGE> 516
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS
<TABLE>
<S> <C>
1.1 Purchase Agreement, dated as of March 12, 1999, by and among
Charter Communications Holdings, LLC, Charter Communications
Holdings Capital Corporation, Goldman, Sachs & Co., Chase
Securities Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Bear, Stearns & Co. Inc., NationsBanc
Montgomery Securities LLC, Salomon Smith Barney Inc., Credit
Lyonnais Securities (USA), Inc., First Union Capital Markets
Corp., Prudential Securities Incorporated, TD Securities
(USA) Inc., CIBC Oppenheimer Corp. and Nesbitt Burns
Securities Inc.*
2.1 Merger Agreement, dated March 31, 1999, by and between
Charter Communications Holdings, LLC and Marcus Cable
Holdings, LLC*
2.2(a) Membership Purchase Agreement, dated as of January 1, 1999,
by and between ACEC Holding Company, LLC and Charter
Investment, Inc. (formerly known as Charter Communications,
Inc.)*
2.2(b) Assignment of Membership Purchase Agreement, dated as of
February 23, 1999, by and between Charter Investment, Inc.
(formerly known as Charter Communications, Inc.) and Charter
Communications Entertainment II, LLC*
2.3(a) Asset Purchase Agreement, dated as of February 17, 1999,
among Greater Media, Inc., Greater Media Cablevision, Inc.
and Charter Investment, Inc. (formerly known as Charter
Communications, Inc.)*
2.3(b) Assignment of Asset Purchase Agreement, dated as of February
23, 1999, by and between Charter Investment, Inc. (formerly
known as Charter Communications, Inc.) and Charter
Communications Entertainment I, LLC*
2.4 Purchase Agreement, dated as of February 23, 1999, by and
among Charter Investment, Inc. (formerly known as Charter
Communications, Inc.), Charter Communications, LLC,
Renaissance Media Holdings LLC and Renaissance Media Group
LLC*
2.5 Purchase Agreement, dated as of March 22, 1999, among
Charter Investment, Inc., (formerly known as Charter
Communications, Inc.) Charter Communications, LLC, Charter
Helicon, LLC, Helicon Partners I, L.P., Baum Investments,
Inc. and the limited partners of Helicon Partners I, L.P.*
2.6(a) Asset and Stock Purchase Agreement, dated April 20, 1999,
between Intermedia Partners of West Tennessee, L.P. and
Charter Communications, LLC*
2.6(b) Stock Purchase Agreement, dated April 20, 1999, between TCID
1P-V, Inc. and Charter Communications, LLC*
2.6(c) RMG Purchase Agreement, dated as of April 20, 1999, between
Robin Media Group, Inc., InterMedia Partners of West
Tennessee, L.P. and Charter RMG, LLC.*
2.6(d) Asset Exchange Agreement, dated April 20, 1999, among
InterMedia Partners Southeast Charter Communications, LLC,
Charter Communications Properties, LLC, and Marcus Cable
Associates, L.L.C.*
2.6(e) Asset Exchange Agreement, dated April 20, 1999, among
InterMedia Partners, a California Limited Partnership,
Brenmor Cable Partners, L.P. and Robin Media Group, Inc.*
2.6(f) Common Agreement, dated April 20, 1999, between InterMedia
Partners, InterMedia Partners Southeast, InterMedia Partners
of West Tennessee, L.P., InterMedia Capital Partners IV,
L.P., InterMedia Partners IV, L.P., Brenmor Cable Partners,
L.P., TCID IP-V, Inc., Charter Communications, LLC, Charter
Communications Properties, LLC, Marcus Cable Associates,
L.L.C. and Charter RMG, LLC*+
</TABLE>
II-3
<PAGE> 517
<TABLE>
<S> <C>
2.7(a) Purchase and Sale Agreement, dated as of April 26, 1999, by
and among Interlink Communications Partners, LLLP, the
sellers listed therein and Charter Investment, Inc.
(formerly known as Charter Communications, Inc.)*
2.7(b) Purchase and Sale Agreement, dated as of April 26, 1999, by
and among Rifkin Acquisition Partners, L.L.L.P., the sellers
listed therein and Charter Investment, Inc. (formerly known
as Charter Communications, Inc.)*
2.7(c) RAP Indemnity Agreement, dated April 26, 1999, by and among
the sellers listed therein and Charter Investment, Inc.
(formerly known as Charter Communications, Inc.)*
2.7(d) Assignment of Purchase Agreement with Interlink, dated as of
June 30, 1999, by and between Charter Investment, Inc.
(formerly known as Charter Communications, Inc.) and Charter
Communications Operating, LLC*
2.7(e) Assignment of Purchase Agreement with Rifkin, dated as of
June 30, 1999, by and between Charter Investment, Inc.
(formerly known as Charter Communications, Inc.) and Charter
Communications Operating, LLC*
2.7(f) Assignment of RAP Indemnity Agreement, dated as of June 30,
1999, by and between Charter Investment, Inc. (formerly
known as Charter Communications, Inc.) and Charter
Communications Operating, LLC*
3.1 Certificate of Formation of Charter Communications Holdings,
LLC*
3.2 Limited Liability Company Agreement of Charter
Communications Holdings, LLC*
3.3 Certificate of Incorporation of Charter Communications
Holdings Capital Corporation*
3.4 By-Laws of Charter Communications Holdings Capital
Corporation*
4.1(a) Indenture relating to the 8.250% Senior notes due 2007,
dated as of March 17, 1999, between Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank*
4.1(b) Form of 8.250% Senior note due 2007 (included in Exhibit No.
4.1(a))*
4.1(c) Exchange and Registration Rights Agreement, dated March 17,
1999, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns &
Co. Inc., NationsBanc Montgomery Securities LLC, Salomon
Smith Barney Inc., Credit Lyonnais Securities (USA), Inc.,
First Union Capital Markets Corp., Prudential Securities
Incorporated, TD Securities (USA) Inc., CIBC Oppenheimer
Corp. and Nesbitt Burns Securities Inc., relating to the
8.250% Senior notes due 2007*
4.2(a) Indenture relating to the 8.625% Senior notes due 2009,
dated as of March 17, 1999, among Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank*
4.2(b) Form of 8.625% Senior note due 2009 (included in Exhibit No.
4.2(a))*
4.2(c) Exchange and Registration Rights Agreement, dated March 17,
1999, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns &
Co. Inc., NationsBanc Montgomery Securities LLC, Salomon
Smith Barney Inc., Credit Lyonnais Securities (USA), Inc.,
First Union Capital Markets Corp., Prudential Securities
Incorporated, TD Securities (USA) Inc., CIBC Oppenheimer
Corp. and Nesbitt Burns Securities Inc., relating to the
8.625% Senior notes due 2009*
</TABLE>
II-4
<PAGE> 518
<TABLE>
<S> <C>
4.3(a) Indenture relating to the 9.920% Senior Discount notes due
2011, dated as of March 17, 1999, among Charter
Communications Holdings, LLC, Charter Communications
Holdings Capital Corporation and Harris Trust and Savings
Bank*
4.3(b) Form of 9.920% Senior Discount note due 2011 (included in
Exhibit No. 4.3(a))*
4.3(c) Exchange and Registration Rights Agreement, dated March 17,
1999, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns &
Co. Inc., NationsBanc Montgomery Securities LLC, Salomon
Smith Barney Inc., Credit Lyonnais Securities (USA), Inc.,
First Union Capital Markets Corp., Prudential Securities
Incorporated, TD Securities (USA) Inc., CIBC Oppenheimer
Corp. and Nesbitt Burns Securities Inc., relating to the
9.920% Senior Discount notes due 2011*
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding
legality (as amended)
8.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding
tax matters (as amended)
10.1 Credit Agreement, dated as of March 18, 1999, between
Charter Communications Operating, LLC and certain lenders
and agents named therein*
10.2 Amended and Restated Management Agreement, dated March 17,
1999, between Charter Communications Operating, LLC and
Charter Communications, Inc.*
10.3 Consulting Agreement, dated as of March 10, 1999, by and
between Vulcan Northwest Inc., Charter Investment, Inc.
(formerly known as Charter Communications, Inc.) and Charter
Communications Holdings, LLC*
10.4 Charter Communications Holdings, LLC 1999 Option Plan*
10.5 Membership Interests Purchase Agreement, dated July 22,
1999, by and between Charter Communications Holding Company,
LLC and Paul G. Allen
10.6 Employment Agreement, dated as of August 28, 1998, between
Jerald L. Kent and Paul G. Allen
10.7 Employment Agreement, dated as of December 23, 1998, between
Barry L. Babcock and Paul G. Allen
10.8 Employment Agreement, dated as of December 23, 1998, between
Howard L. Wood and Paul G. Allen
10.9 Option Agreement, dated as of May 25, 1999, between Jerald
L. Kent and Charter Communications Holding Company, LLC**
10.10 Letter Agreement, dated as of July 22, 1999 between Charter
Communications Holding Company, LLC and Charter
Communications Holdings, LLC
12.1 Predecessor of Charter Communications Holdings, LLC, Ratio
of Earnings to Fixed Charges Calculation*
12.2 Charter Communications Holdings, LLC, Ratio of Earnings to
Fixed Charges Calculation*
21.1 Subsidiaries of Charter Communications Holdings, LLC and
Charter Communications Capital Holdings Corporation*
23.1 Consent of Paul, Hastings, Janofsky & Walker LLP (contained
in Exhibit No. 5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of KPMG LLP**
23.4 Consent of Ernst & Young LLP**
23.5 Consent of KPMG LLP**
23.6 Consent of PricewaterhouseCoopers LLP**
</TABLE>
II-5
<PAGE> 519
<TABLE>
<S> <C>
23.7 Consent of PricewaterhouseCoopers LLP**
23.8 Consent of Ernst & Young LLP**
23.9 Consent of Ernst & Young LLP**
23.10 Consent of Ernst & Young LLP**
24.1 Power of Attorney (included in Part II of Amendment No. 2 to
the Registration Statement on the signature page)*
25.1 Statement of Eligibility of and Qualification (Form T-1) of
Harris Trust and Savings Bank*
27.1 Financial Data Schedule**
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
</TABLE>
- ---------------
* Filed by prior amendment.
** To be filed by amendment.
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
FINANCIAL STATEMENT SCHEDULES
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information required by
such omitted schedules is set forth in the financial statements or the notes
thereto.
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake that:
(1) Prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to the reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
(2) Every prospectus: (i) that is filed pursuant to the immediately
preceding paragraph or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-6
<PAGE> 520
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person of the registrants
in the successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by then is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-7
<PAGE> 521
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Charter
Communications Holdings, LLC has duly caused this Amendment No. 5 to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of St. Louis, State of Missouri on the 10th day of
August, 1999.
CHARTER COMMUNICATIONS HOLDINGS, LLC:
a registrant
By: CHARTER COMMUNICATIONS HOLDING
COMPANY, LLC, its member
By: CHARTER COMMUNICATIONS, INC., its member
and manager, and the manager of Charter
Communications Holdings, LLC
By: /s/ CURTIS S. SHAW
------------------------------------------
Name: Curtis S. Shaw
Title: Senior Vice President, General
Counsel
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
CAPACITY WITH CHARTER COMMUNICATIONS, INC.
THE MANAGER OF CHARTER COMMUNICATIONS HOLDINGS, LLC
AND THE MANAGER AND SOLE MEMBER OF CHARTER
COMMUNICATIONS HOLDINGS COMPANY,
LLC, THE SOLE MEMBER OF CHARTER
SIGNATURE COMMUNICATIONS HOLDINGS, LLC DATE
--------- --------------------------------------------------- ----
<S> <C> <C>
* Director August 10,
- ------------------------------------ 1999
William D. Savoy
* President, Chief Executive Officer and Director August 10,
- ------------------------------------ (Principal Executive Officer) 1999
Jerald L. Kent
* Senior Vice President and Chief Financial Officer August 10,
- ------------------------------------ (Principal Financial Officer and Principal Accounting 1999
Kent D. Kalkwarf Officer)
*By: /s/ CURTIS S. SHAW
- -----------------------------------
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 522
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Charter
Communications Holdings Capital Corporation has duly caused this Amendment No. 5
to the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of St. Louis, State of Missouri on the
10th day of August, 1999.
CHARTER COMMUNICATIONS HOLDINGS CAPITAL
CORPORATION, a registrant
By: /s/ CURTIS S. SHAW
------------------------------------------
Name: Curtis S. Shaw
Title: Senior Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
* Director August 10,
- ------------------------------------ 1999
William D. Savoy
* President, Chief Executive Officer and Director August 10,
- ------------------------------------ (Principal Executive Officer) 1999
Jerald L. Kent
* Senior Vice President and Chief Financial August 10,
- ------------------------------------ Officer (Principal Financial Officer and 1999
Kent D. Kalkwarf Principal Accounting Officer)
*By: /s/ CURTIS S. SHAW
- -----------------------------------
Attorney-in-Fact
</TABLE>
II-9
<PAGE> 523
EXHIBIT INDEX
<TABLE>
<S> <C>
1.1 Purchase Agreement, dated as of March 12, 1999, by and among
Charter Communications Holdings, LLC, Charter Communications
Holdings Capital Corporation, Goldman, Sachs & Co., Chase
Securities Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Bear, Stearns & Co. Inc., NationsBanc
Montgomery Securities LLC, Salomon Smith Barney Inc., Credit
Lyonnais Securities (USA), Inc., First Union Capital Markets
Corp., Prudential Securities Incorporated, TD
Securities (USA) Inc., CIBC Oppenheimer Corp. and Nesbitt Burns Securities Inc.*
2.1 Merger Agreement, dated March 31, 1999, by and between
Charter Communications Holdings, LLC and Marcus Cable
Holdings, LLC*
2.2(a) Membership Purchase Agreement, dated as of January 1, 1999,
by and between ACEC Holding Company, LLC and Charter
Investment, Inc. (formerly known as Charter Communications,
Inc.)*
2.2(b) Assignment of Membership Purchase Agreement, dated as of
February 23, 1999, by and between Charter Investment, Inc.
(formerly known as Charter Communications, Inc.) and Charter
Communications Entertainment II, LLC*
2.3(a) Asset Purchase Agreement, dated as of February 17, 1999,
among Greater Media, Inc., Greater Media Cablevision, Inc.
and Charter Investment, Inc. (formerly known as Charter
Communications, Inc.)*
2.3(b) Assignment of Asset Purchase Agreement, dated as of February
23, 1999, by and between Charter Investment, Inc. (formerly
known as Charter Communications, Inc.) and Charter
Communications Entertainment I, LLC*
2.4 Purchase Agreement, dated as of February 23, 1999, by and
among Charter Investment, Inc. (formerly known as Charter
Communications, Inc.), Charter Communications, LLC,
Renaissance Media Holdings LLC and Renaissance Media Group
LLC*
2.5 Purchase Agreement, dated as of March 22, 1999, among
Charter Investment, Inc. (formerly known as Charter
Communications, Inc.), Charter Communications, LLC, Charter
Helicon, LLC, Helicon Partners I, L.P., Baum Investments,
Inc. and the limited partners of Helicon Partners I, L.P.*
2.6(a) Asset and Stock Purchase Agreement, dated April 20, 1999,
between InterMedia Partners of West Tennessee, L.P. and
Charter Communications, LLC*
2.6(b) Stock Purchase Agreement, dated April 20, 1999, between TCID
1P-V, Inc. and Charter Communications, LLC*
2.6(c) RMG Purchase Agreement, dated as of April 20, 1999, between
Robin Media Group, Inc., InterMedia Partners of West
Tennessee, L.P. and Charter RMG, LLC*
2.6(d) Asset Exchange Agreement, dated April 20, 1999, among
InterMedia Partners Southeast, Charter Communications, LLC,
Charter Communications Properties, LLC, and Marcus Cable
Associates, L.L.C.*
2.6(e) Asset Exchange Agreement, dated April 20, 1999, among
InterMedia Partners, a California Limited Partnership,
Brenmor Cable Partners, L.P. and Robin Media Group, Inc.*
2.6(f) Common Agreement, dated April 20, 1999, between InterMedia
Partners, InterMedia Partners Southeast, InterMedia Partners
of West Tennessee, L.P., InterMedia Capital Partners IV,
L.P., InterMedia Partners IV, L.P., Brenmor Cable Partners,
L.P., TCID IP-V, Inc., Charter Communications, LLC, Charter
Communications Properties, LLC, Marcus Cable Associates,
L.L.C. and Charter RMG, LLC*+
</TABLE>
<PAGE> 524
<TABLE>
<S> <C>
2.7(a) Purchase and Sale Agreement, dated as of April 26, 1999, by
and among Interlink Communications Partners, LLLP, the
sellers listed therein and Charter Investment, Inc.
(formerly known as Charter Communications, Inc.)*
2.7(b) Purchase and Sale Agreement, dated as of April 26, 1999, by
and among Rifkin Acquisition Partners, L.L.L.P., the sellers
listed therein and Charter Investment, Inc. (formerly known
as Charter Communications, Inc.)*
2.7(c) RAP Indemnity Agreement, dated April 26, 1999, by and among
the sellers listed therein and Charter Investment, Inc.
(formerly known as Charter Communications, Inc.)*
2.7(d) Assignment of Purchase Agreement with Interlink, dated as of
June 30, 1999, by and between Charter Investment, Inc.
formerly known as Charter Communications, Inc.) and Charter
Communications Operating, LLC*
2.7(e) Assignment of Purchase Agreement with Rifkin, dated as of
June 30, 1999, by and between Charter Investment, Inc.
(formerly known as Charter Communications, Inc.) and Charter
Communications Operating, LLC*
2.7(f) Assignment of RAP Indemnity Agreement, dated as of June 30,
1999, by and between Charter Investment, Inc. (formerly
known as Charter Communications, Inc.) and Charter
Communications Operating, LLC*
3.1 Certificate of Formation of Charter Communications Holdings,
LLC*
3.2 Limited Liability Company Agreement of Charter
Communications Holdings, LLC*
3.3 Certificate of Incorporation of Charter Communications
Holdings Capital Corporation*
3.4 By-Laws of Charter Communications Holdings Capital
Corporation*
4.1(a) Indenture relating to the 8.250% Senior notes due 2007,
dated as of March 17, 1999, between Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank*
4.1(b) Form of 8.250% Senior note due 2007 (included in Exhibit No.
4.1(a))*
4.1(c) Exchange and Registration Rights Agreement, dated March 17,
1999, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns &
Co. Inc., NationsBanc Montgomery Securities LLC, Salomon
Smith Barney Inc., Credit Lyonnais Securities (USA), Inc.,
First Union Capital Markets Corp., Prudential Securities
Incorporated, TD Securities (USA) Inc., CIBC Oppenheimer
Corp. and Nesbitt Burns Securities Inc., relating to the
8.250% Senior notes due 2007*
4.2(a) Indenture relating to the 8.625% Senior notes due 2009,
dated as of March 17, 1999, among Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank*
4.2(b) Form of 8.625% Senior note due 2009 (included in Exhibit No.
4.2(a))*
4.2(c) Exchange and Registration Rights Agreement, dated March 17,
1999, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns &
Co. Inc., NationsBanc Montgomery Securities LLC, Salomon
Smith Barney Inc., Credit Lyonnais Securities (USA), Inc.,
First Union Capital Markets Corp., Prudential Securities
Incorporated, TD Securities (USA) Inc., CIBC Oppenheimer
Corp. and Nesbitt Burns Securities Inc., relating to the
8.625% Senior notes due 2009*
</TABLE>
<PAGE> 525
<TABLE>
<S> <C>
4.3(a) Indenture relating to the 9.920% Senior Discount notes due
2011, dated as of March 17, 1999, among Charter
Communications Holdings, LLC, Charter Communications
Holdings Capital Corporation and Harris Trust and Savings
Bank*
4.3(b) Form of 9.920% Senior Discount note due 2011 (included in
Exhibit No. 4.3(a))*
4.3(c) Exchange and Registration Rights Agreement, dated March 17,
1999, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns &
Co. Inc., NationsBanc Montgomery Securities LLC, Salomon
Smith Barney Inc., Credit Lyonnais Securities (USA), Inc.,
First Union Capital Markets Corp., Prudential Securities
Incorporated, TD Securities (USA) Inc., CIBC Oppenheimer
Corp. and Nesbitt Burns Securities Inc., relating to the
9.920% Senior Discount notes due 2011*
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding
legality (as amended)
8.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding
tax matters (as amended)
10.1 Credit Agreement, dated as of March 18, 1999, between
Charter Communications Operating, LLC and certain lenders
and agents named therein*
10.2 Amended and Restated Management Agreement, dated March 17,
1999, between Charter Communications Operating, LLC and
Charter Communications, Inc.*
10.3 Consulting Agreement, dated as of March 10, 1999, by and
between Vulcan Northwest Inc., Charter Investment, Inc.
(formerly known as Charter Communications, Inc.) and Charter
Communications Holdings, LLC*
10.4 Charter Communications Holdings, LLC 1999 Option Plan*
10.5 Membership Interests Purchase Agreement, dated July 22,
1999, by and between Charter Communications Holding Company,
LLC and Paul G. Allen
10.6 Employment Agreement, dated as of August 28, 1998, between
Jerald L. Kent and Paul G. Allen
10.7 Employment Agreement, dated as of December 23, 1998, between
Barry L. Babcock and Paul G. Allen
10.8 Employment Agreement, dated as of December 23, 1998, between
Howard L. Wood and Paul G. Allen
10.9 Option Agreement, dated as of May 25, 1999, between Jerald
L. Kent and Charter Communications Holding Company, LLC**
10.10 Letter Agreement, dated as of July 22, 1999 between Charter
Communications Holding Company, LLC and Charter
Communications Holdings, LLC
12.1 Predecessor of Charter Communications Holdings, LLC, Ratio
of Earnings to Fixed Charges Calculation*
12.2 Charter Communications Holdings, LLC, Ratio of Earnings to
Fixed Charges Calculation*
21.1 Subsidiaries of Charter Communications Holdings, LLC and
Charter Communications Capital Holdings Corporation*
23.1 Consent of Paul, Hastings, Janofsky & Walker LLP (contained
in Exhibit No. 5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of KPMG LLP**
23.4 Consent of Ernst & Young LLP**
23.5 Consent of KPMG LLP**
23.6 Consent of PricewaterhouseCoopers LLP**
</TABLE>
<PAGE> 526
<TABLE>
<S> <C>
23.7 Consent of PricewaterhouseCoopers LLP**
23.8 Consent of Ernst & Young LLP**
23.9 Consent of Ernst & Young LLP**
23.10 Consent of Ernst & Young LLP**
24.1 Power of Attorney (included in Part II of Amendment No. 2 to
the Registration Statement on the signature page)*
25.1 Statement of Eligibility of and Qualification (Form T-1) of
Harris Trust and Savings Bank*
27.1 Financial Data Schedule**
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
</TABLE>
- -------------------------
* Filed by prior amendment.
** To be filed by amendment.
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
<PAGE> 1
EXHIBIT 5.1
August 10, 1999
Charter Communications Holdings, LLC
Charter Communications Holdings Capital Corporation
12444 Powerscourt Drive
Suite 100
St. Louis, Missouri 63131
Re: Charter Communications Holdings, LLC
Charter Communications Holdings Capital Corporation
Registration Statement on Form S-4
Ladies and Gentlemen:
This opinion is delivered in our capacity as counsel to Charter
Communications Holdings, LLC, a Delaware limited liability company, and Charter
Communications Holdings Capital Corporation, a Delaware corporation (together,
the "Issuers"), in connection with the Issuers' registration statement on Form
S-4 (the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"). The Registration Statement relates to the offering by the
Issuers of 8.250% Senior Notes due 2007, 8.625% Senior Notes due 2009 and 9.920%
Senior Discount Notes due 2011 (collectively, the "Notes")
In connection with this opinion, we have examined copies or originals
of such documents, resolutions, certificates and instruments of the Issuers as
we have deemed necessary to form a basis for the opinion hereinafter expressed.
In addition, we have reviewed certificates of public officials, statutes,
records and other instruments and documents as we have deemed necessary to form
a basis for the opinion hereinafter expressed. In our examination of the
foregoing, we have assumed, without independent investigation, (i) the
genuineness of all signatures and the authority of all persons or entities
signing all documents examined by us, and (ii) the authenticity of all documents
submitted to us as originals and the conformity to authentic original documents
of all copies submitted to us as certified, conformed or photostatic copies.
<PAGE> 2
Charter Communications Holdings, LLC
Charter Communications Holdings Capital Corporation
August 10, 1999
Page 2
With regard to certain factual matters, we have relied, without
independent investigation or verification, upon statements and representations
of representatives of the Issuers.
Based upon and subject to the foregoing, we are of the opinion that, as
of the date hereof, when the Notes have been duly authenticated by Harris Trust
and Savings Bank in its capacity as Trustee, and duly executed and delivered on
behalf of the Issuers against payment therefor as contemplated by the
registration statement, the Notes will be legally issued and will constitute
binding obligations of the Issuers, subject to applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance and transfer, moratorium or
other laws now or hereafter in effect relating to or affecting the rights or
remedies of creditors generally and by general principles of equity (whether
applied in a proceeding at law or in equity) including, without limitation,
standards of materiality, good faith and reasonableness in the interpretation
and enforcement of contracts, and the application of such principles to limit
the availability of equitable remedies such as specific performance.
We are members of the Bar of the State of New York, and, accordingly,
do not purport to be experts on or to be qualified to express any opinion
herein concerning, nor do we express any opinion herein concerning, the laws of
any jurisdiction other than the laws of the State of New York.
We hereby consent to being named as counsel to the Issuers in the
Registration Statement, to the references therein to our firm under the caption
"Legal Matters," and to the inclusion of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not thereby admit that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act, or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
<PAGE> 1
EXHIBIT 8.1
[LETTERHEAD OF PAUL, HASTINGS, JANOFKSY & WALKER LLP]
August 10, 1999
Charter Communications Holdings, LLC
Charter Communications Holdings Capital Corporation
12444 Powerscourt Drive
Suite 100
St Louis, Missouri 63131
Re: Charter Communications Holdings, LLC
Charter Communications Holdings Capital Corporation
Registration Statement on Form S-4
Ladies and Gentlemen:
Reference is made to the registration statement on Form S-4 (the
"Registration Statement") to be filed by Charter Communications Holdings, LLC, a
Delaware limited liability company, and Charter Communications Holdings Capital
Corporation, a Delaware corporation (together, the "Issuers"), with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended. The Registration Statement relates to the offer to exchange (the
"Exchange Offer") by the Issuers the 8.250% Senior Notes due 2007, 8.625% Senior
Notes due 2009 and 9.920% Senior Discount Notes due 2011 (collectively, the "New
Notes") for any and all outstanding 8.250% Senior Notes due 2007, 8.625% Senior
Notes due 2009 and 9.920% Senior Discount Notes due in 2011 of the Issuers
(collectively, the "Original Notes"). Capitalized terms used herein and that are
not separately defined shall have the meanings assigned to them in the
Registration Statement.
We have examined the Registration Statement and such other
documents as we have deemed necessary and appropriate to render our opinion
expressed below. In our examination of such material, we have relied upon the
current and continued accuracy of the factual matters we have considered, and we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity to all original
documents of all copies of documents submitted to us. We assume that all
transactions relating to the exchange pursuant to the Exchange Offer will be
carried out in accordance with the terms of the governing documents without any
amendments thereto or waiver of any terms thereof, and that such documents
represent the entire agreement of the parties thereto.
Based upon and subject to the foregoing, and consideration of
applicable law, the discussion set forth under the caption "Material United
States Federal Income Tax Considerations" in the Registration Statement, subject
to the limitations described therein, constitutes our opinion with respect to
the material United States federal income tax consequences of the Exchange Offer
relevant to U.S. holders, and the ownership and
<PAGE> 2
disposition of the New Notes relevant to the U.S. holders and, in certain
circumstances, non-U.S. holders. Our opinion is based on United States federal
income tax laws, Treasury regulations, Internal Revenue Service ("IRS") rulings,
official pronouncements and judicial decisions, all as in effect on the date
hereof and all of which are subject to change, possibly with retroactive effect,
or different interpretations, and we do not undertake to update or supplement
this letter to reflect any such changes.
No opinion is expressed on any matters other than those specifically
referred to herein. The opinion expressed herein is for your benefit and for the
benefit of the holders of the New Notes and may not be relied upon in any manner
or for any purpose by any other person.
The opinion set forth in this letter has no binding effect on the IRS or
the courts of the United States. We have not sought and will not seek any
rulings from the IRS with respect to any matters referred to herein. No
assurance can be given that, if the matter were contested, the IRS or a court
would agree with the opinion set forth in this letter.
We hereby consent to being named as counsel to the Issuers in the
Registration Statement, to the references therein to our firm under the caption
"Material United States Federal Income Tax Considerations," and to the inclusion
of this opinion as an exhibit to the Registration Statement. In giving this
consent, we do not thereby admit that we are within the category of persons
whose consent is required under Section 7 of the Securities Act, or the rules
and regulations of the Commission thereunder.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
PAUL, HASTINGS, JANOFKSY & WALKER LLP
<PAGE> 1
Exhibit 10.5
MEMBERSHIP INTERESTS PURCHASE AGREEMENT
This Membership Interests Purchase Agreement is entered into as of
July 22, 1999, by and between CHARTER COMMUNICATIONS HOLDING COMPANY, LLC, a
Delaware limited liability company (the "COMPANY") and PAUL G. ALLEN, an
individual ("BUYER") with reference to the following facts.
W I T N E S S E T H
A. The Company is authorized to issue membership interests representing
equity interests in the Company ("Membership Interests");
B. The Company currently has outstanding 217,585,246 Units of
Membership Interests ("Units") and has granted options to purchase another
17,218,976 Units;
C. On March __, 1999, Buyer and Charter Communications Holding Company,
LLC, now a wholly-owned subsidiary of the Company, agreed that Buyer would
commit to invest $1.325 billion in additional equity, as needed, on economic
terms equivalent to those stated herein.
D. The Company wishes to have Buyer or one of his affiliates purchase
an aggregate of $1.325 billion in Units on the terms and conditions set forth
herein in order to facilitate (a) the consummation of certain pending
acquisitions by the Company; and (b) the sale by the Company of Units to Charter
Communications, Inc. ("CCI") in a contemplated initial public offering by CCI,
and the sale by CCI to Buyer of certain shares of its Class B Common Stock
having characteristics no less favorable to Buyer than those reflected in the
Registration Statement on Form S-1 of CCI dated July __, 1999; and
Buyer desires to subscribe for and purchase the additional Units of
Membership Interests on the terms and conditions set forth herein.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the Company and Buyer
hereby agree as follows:
1. Purchase and Sale of Membership Interests. On the terms and subject
to the conditions contained in this Agreement, the Company hereby agrees to
issue and sell to Buyer or his designee, and Buyer hereby agrees to purchase or
cause to be purchased from the Company, (a) at the First Closing (as defined
below), 22,087,622 Units for an aggregate purchase price of Five Hundred Million
Dollars ($500,000,000.00) (the "FIRST ISSUANCE ACQUIRED MEMBERSHIP INTERESTS"),
and (b) at the Second Closing (as defined below), an additional 36,445,577 Units
for an aggregate purchase price of Eight Hundred Twenty-Five Million Dollars
($825,000,000.00) (the "SECOND ISSUANCE ACQUIRED MEMBERSHIP INTERESTS", and
collectively with the First Issuance Acquired Membership Interests, the
"Acquired Membership Interests")).
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<PAGE> 2
2. Closing; Deliveries.
(a) First Closing. The closing of the purchase and sale of the First
Issuance Acquired Membership Interests (the "FIRST CLOSING") shall occur at the
offices of Irell & Manella LLP ("I&M"), 1800 Avenue of the Stars, Suite 900, Los
Angeles, California 90067, on a date on or before July 30, 1999 to be agreed
upon by the Company and Buyer. At the First Closing, the Company shall deliver
to Buyer or his designee one or more certificates evidencing the First Issuance
Acquired Membership Interests registered in the name of Buyer or his designee
and Buyer shall pay or cause to be paid to the Company the purchase price for
the First Issuance Acquired Membership Interests by check or wire transfer. The
date on which the First Closing occurs is hereinafter referred to as the "FIRST
CLOSING DATE."
(b) Second Closing. The closing of the purchase and sale of the Second
Issuance Acquired Membership Interests (the "SECOND CLOSING") shall occur at the
offices of I&M on a date after July 30, 1999 and on or before September 1, 1999
to be agreed upon by the Company and Buyer. At the Second Closing, the Company
shall deliver to Buyer or his designee one or more certificates evidencing the
Second Issuance Acquired Membership Interests registered in the name of Buyer or
his designee and Buyer shall pay or cause to be paid to the Company the purchase
price for the Second Issuance Acquired Membership Interests by check or wire
transfer. The date on which the Second Closing occurs is hereinafter referred to
as the "SECOND CLOSING DATE."
3. Programming. The Company shall grant Buyer the right to program up
to eight digital channels on each cable system now or hereafter owned or
operated by the Company or its subsidiaries, the exact numbers of channels to be
determined based on the megahertz level of each such system. The terms and
conditions of such grants shall be finalized prior to the Second Closing.
4. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, as such laws are applied to
contracts entered into and performed in such state without resort to that
state's conflict-of-laws rules.
(b) Severability. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
(c) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be an original, but all of which, when taken
together, shall constitute one and the same agreement. This Agreement shall
become effective when one or more counterparts has been signed by each of the
parties and delivered to the other party.
(d) Headings. The section headings in this Agreement have been inserted
for identification and reference and shall not by themselves determine the
meaning or interpretation of any provision of this Agreement.
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<PAGE> 3
(e) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
personal representatives and permitted assigns. The Company acknowledges that
Buyer may assign its rights but not its obligations under this Agreement to any
entity that Buyer owns all of the outstanding equity interests in.
(f) Costs of Enforcement. If any party to this Agreement seeks to
enforce its rights under this Agreement by legal proceedings or otherwise, or
seeks a declaration of any rights or obligations under this Agreement, the
non-prevailing party shall pay all costs and expenses incurred by the prevailing
party, including, without limitation, all legal fees and expenses.
(g) Entire Agreement. This Agreement constitutes and contains the
entire agreement of the parties with respect to the transactions contemplated by
this Agreement and supersedes all prior or contemporaneous negotiations,
correspondence, arrangements, letters of intent, understandings and agreements
relating to the substance thereof.
(h) Notices. Any notice or delivery that any party hereto is required
or desires to give hereunder to any other party shall be in writing and may be
given by hand delivery or by nationally recognized overnight courier or by
mailing the same to the other party at the address set forth below (or to such
other address as may have theretofore been substituted therefor by written
notice to the other party hereto given as herein provided) by certified or
registered United States mail, postage prepaid or by confirmed telecopy. Notices
and deliveries shall be deemed given as follows: when sent, if sent by telecopy
with delivery confirmed; when delivered and receipted for (or upon the date of
attempted delivery where delivery is refused), if hand delivered or delivered by
nationally recognized overnight courier; or when receipted for (or upon the date
of attempted delivery where delivery is refused or a properly addressed and
mailed notice is returned as undeliverable or unclaimed), if sent by certified
or registered mail. Whenever under the terms hereof the time for giving a notice
or performing an act fails on a Saturday, Sunday or holiday, such time shall be
extended to the next business day. For the purpose of this Agreement the
addresses of the parties hereto shall be as follows until changed in accordance
with the terms hereof:
If to the COMPANY:
Charter Communications Holding Company LLC
12444 Powerscourt Drive, Suite 400
St. Louis, MO 63131
Attn: Jerald L. Kent, President and Chief Executive Officer
If to BUYER:
Paul G. Allen
110th Avenue N.E., Suite 550
Bellevue, WA 98004
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<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CHARTER COMMUNICATIONS HOLDING COMPANY LLC,
a Delaware limited liability company
By: /s/ Jerald L. Kent
--------------------------------------
Its: Chief Executive Officer
--------------------------------------
BUYER
/s/ Paul G. Allen
--------------------------------------
Paul G. Allen
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<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of the 28th day of August, 1998 by
and between Jerald L. Kent, an individual residing in the State of Missouri (the
"EXECUTIVE"), and Paul G. Allen, an individual residing in the State of
Washington ("ALLEN").
W I T N E S S E T H:
WHEREAS, Allen, Charter Communications, Inc., a Delaware corporation
("CCI"), and certain other parties are entering into a Purchase Agreement (the
"CHARTER PURCHASE AGREEMENT") dated the date hereof providing for the sale (the
"SALE TRANSACTION") to Allen by CCI and certain other parties of their
respective equity interests in CCI and certain subsidiaries and affiliates of
CCI which, directly and indirectly through their respective subsidiaries, own
and operate cable television systems and businesses in respect thereof in
various areas of the United States (the "CHARTER SYSTEMS");
WHEREAS, Allen is the owner, indirectly, through corporations,
partnerships and other entities controlled by him, of the cable television
systems and businesses in respect thereof purchased pursuant to that certain
Purchase Agreement dated as of April 3, 1998 by and among Vulcan Cable, Inc.,
Marcus Cable Properties, Inc. ("MARCUS CABLE") and certain other parties (the
"MARCUS SYSTEMS");
WHEREAS, it is the intention of Allen to operate the Charter Systems
and the Marcus Systems under the management and supervision of the Executive and
potentially to combine such systems either prior to or following the closing of
the Sale Transaction (the "CLOSING");
WHEREAS, the Executive currently serves as President, Chief Executive
Officer and a member of the Board of Directors of CCI and, as of the
Effectiveness Date, as President and Chief Executive Officer of Marcus Cable;
WHEREAS, the Employer (as defined below) desires to have the benefits
of the Executive's knowledge and experience in the cable television industry by
having the Executive serve as President and Chief Executive Officer of the
Employer from the Effectiveness Date (as defined below) until the Closing and
President, Chief Executive Officer and a member of the Board of Directors of the
Employer on and after the Closing on the terms and conditions set forth herein;
WHEREAS, the Executive desires to serve as President and Chief
Executive Officer of the Employer from the Effectiveness Date until the Closing
and President, Chief Executive Officer and a member of the Board of Directors of
the Employer on and after the Closing on the terms and conditions set forth
herein;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties hereto hereby agree as follows:
<PAGE> 2
1. Interpretation.
1.1 Defined Terms.
"AFFILIATE" shall mean with respect to any person or entity, any other
person or entity who controls, is controlled by or is under common control with
such person or entity.
"CHANGE OF CONTROL" means a sale of more than 49.9% of the outstanding
capital stock of the Employer, except where Allen and his Affiliates retain
effective voting control of the Employer, the merger or consolidation of the
Employer, with or into any other corporation or entity, other than a
wholly-owned subsidiary of the Employer, except where Allen and his Affiliates
have effective voting control of the surviving entity, or any other transaction,
or event, a result of which is that Allen holds less than 50.1% of the voting
power of the surviving entity, except where Allen and his Affiliates retain
effective voting control of the Employer, or a sale of all or substantially all
of the assets of the Employer (other than to an entity majority-owned or
controlled by Allen and his Affiliates).
"EFFECTIVENESS DATE" means August 28, 1998.
"EMPLOYER" shall mean CCI, and upon the acquisition by Allen of control
over Marcus Cable, the term "Employer" shall also include Marcus Cable. Upon the
creation of an entity that results from the combination of the Marcus Systems
and the Charter Systems, the term "Employer" shall thereafter mean such entity.
"FAIR MARKET VALUE" shall mean for all purposes under this Agreement,
(i) if the Employer is privately held at the occurrence of an event triggering a
Fair Market Value calculation hereunder (a "TRIGGER EVENT"), 13.7 times the
projected cash flow of the Employer (as established in the budget for such
entity approved by its Board of Directors or, in the event no such budget has as
of the date of the Trigger Event been approved by the Board, as established by
the Board of Directors within thirty days of any such Trigger Event taking into
account the most recent forecasts for such entity presented to its Board of
Directors) including all future acquisitions by the Employer to the extent of
its interest for its fiscal year following its fiscal year in which the Trigger
Event occurs, and (ii) if the applicable entity is a public company at the time
of a Trigger Event, then a price per share equal to an average of the closing
price of such entity's publicly traded stock on the 20 trading days immediately
prior to the Trigger Event.
"INITIAL PUBLIC OFFERING" means the consummation of a firm commitment
underwritten initial public offering pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended, covering the offer
and sale of shares of Common Stock of the Employer (the "COMMON STOCK").
"OPTION SPREAD" shall mean an amount equal to (i) the difference
between the exercise price of an option and the Fair Market Value per share of
stock or other underlying equity unit with respect to such option, times (ii)
the number of shares or equity units covered by such option at the time of the
exercise.
"TOTAL ACQUISITION COST" shall mean the sum of the amounts equal to (i)
13.7 times the projected Operating Cash Flow of the Marcus Systems for the 1999
fiscal year, but in no
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<PAGE> 3
event less than Allen's actual acquisition cost for Marcus Cable and its
affiliates (provided that the projected Operating Cash Flow for the Marcus
Systems will be the 1999 Marcus Cable budgeted operating cash flow approved by
the Board of the Employer, and (ii) 13.7 times the projected Operating Cash Flow
of the Charter Systems for the 1999 fiscal year.
2. Employment, Duties and Authority. The Employer hereby agrees to employ the
Executive, and the Executive agrees to be employed, as President and Chief
Executive Officer of the Employer. As President and Chief Executive Officer, the
Executive shall report directly to the Board of Directors of the Employer (the
"BOARD") and shall be responsible for the nationwide general management,
administration and operation of all present and future business of the Employer
and its subsidiaries. The Executive shall be responsible for and shall have the
authority to select the management team of the Employer from time to time,
subject to prior consultation with the Board. The Executive shall devote
substantially all of his business time, attention, energies, best efforts and
skills to the diligent performance of his duties hereunder. Notwithstanding the
foregoing, it is understood that the Executive may expend a reasonable amount of
time for personal, charitable, investment and other activities so long as such
activities shall not interfere in any material respect with the performance by
the Executive of his duties and responsibilities hereunder.
The Employer also agrees to elect, or cause to be elected, the
Executive as a member of, and the Executive agrees to serve on, the Board
without any additional compensation. Prior to an Initial Public Offering by the
Employer, the Board shall consist of three Directors which shall be comprised of
the Executive, Allen and William Savoy ("SAVOY"). If either Allen or Savoy
should die or become disabled, the survivor of them shall designate a successor.
Prior to an Initial Public Offering, the size of the Board may be increased,
provided that any such increase shall have been approved by the Board, including
the Executive, Allen and Savoy, it being understood that the Executive will not
unreasonably withhold such approval if in contemplation of an Initial Public
Offering. After an Initial Public Offering, the Board shall consist of such
number of Directors as is customary for a publicly traded company with market
value similar to that of the Employer.
3. Term. The term of this Agreement shall commence on the Closing Date and shall
terminate on the third anniversary of the Closing (the "INITIAL TERM");
provided, however, that the Initial Term shall be extended and this Agreement
shall automatically be renewed for successive one-year periods ("RENEWAL Terms")
unless (i) this Agreement is terminated in accordance with the provisions of
Section 10 hereof, or (ii) the Executive or the Employer provides written notice
to the other of such party's desire not to extend this Agreement at least sixty
(60) days prior to the expiration of the Initial Term, or any Renewal Term, as
the case may be, of this Agreement under this Section 3. If the Closing does not
occur, for any reason, this Agreement shall be of no force or effect and neither
the Executive nor Allen shall have any rights, obligations or liabilities under
or arising out of this Agreement or the failure to consummate the Sale
Transaction (except as provided in the Charter Purchase Agreement).
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<PAGE> 4
4. Compensation and Benefits.
4.1 Cash Compensation.
(a) Base Salary. During the Initial Term of this Agreement,
the Employer shall pay the Executive an annual base salary at the rate of One
Million Two Hundred Fifty Thousand Dollars ($1,250,000) or such higher rate as
may from time to time be determined by the Board in its discretion, which shall
be payable consistent with the Employer's payroll practices.
(b) Bonus. The Executive shall be eligible to receive an
annual bonus in an aggregate amount not to exceed Six Hundred Twenty-Five
Thousand Dollars ($625,000) consisting of (i) an amount not to exceed Three
Hundred Twelve Thousand Five Hundred Dollars ($312,500) (the "MERIT BONUS"), to
be determined by the Board based upon the Board's assessment in its discretion,
of the performance by the Executive of his duties as President and Chief
Executive Officer during the applicable period, and (ii) an amount not to exceed
Three Hundred Twelve Thousand Five Hundred Dollars ($312,500) (the "FORMULA
BONUS") determined by application of a formula to be agreed upon by the Board
with respect to each year, based upon the achievement of budgeted cash flow and
such other targets of the Employer as the Board and the Executive shall mutually
agree. The Merit Bonus and the Formula Bonus shall be paid to the Executive in
cash within sixty (60) days following the Employer's determination of cash flow
or such other targets for the applicable period.
(c) Interim Period Compensation. In recognition of Executive's
increased responsibilities relative to Marcus Cable after the Effectiveness
Date, Executive shall be entitled to a payment equal to the difference between
the base salary provided in Section 4.1(a) and the actual base salary received
by Executive from August 28, 1998 through the Closing which amount shall be paid
on a current basis. In addition, Executive shall be eligible to receive a
prorated bonus referable to such period consistent with the provisions of
Section 4.1(b), which bonus shall be paid on January 4, 1999.
4.2 Benefit Plans.
The Executive shall be entitled to participate in any disability
insurance, pension, or other benefit plan of the Employer now existing or
hereafter adopted for the benefit of the employees generally or of the
executives of the Employer, which benefits shall be no less generous than those
currently enjoyed by the Executive.
4.3 Vacation. The Executive shall be entitled to not less than one (1)
month of compensated vacation in each fiscal year, to be taken at times which do
not unreasonably interfere with the performance of the Executive's duties
hereunder. Unused vacation time shall not be carried over nor paid in cash in
lieu thereof except with the Board's prior approval.
4.4 Life Insurance. The Employer shall, promptly upon receipt of
written request therefor from the Executive, reimburse the Executive for life
insurance premiums paid by the Executive, such reimbursement not to exceed
thirty thousand dollars ($30,000) per year.
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<PAGE> 5
Any amount over and above $30,000 for premiums due for any insurance policy
contemplated by this paragraph shall be the sole responsibility of the
Executive.
4.5 Expenses. The Executive shall be entitled to receive reimbursement
for all reasonable out-of-pocket expenses incurred by the Executive in the
performance of his duties hereunder, provided that such expenses are incurred
and accounted for in accordance with the policies and procedures established by
the Employer.
4.6 Other Benefits. The Employer agrees to make available to the
Executive the airplane currently owned by CCI for personal use by the Executive,
the costs of any such use by the Executive to be in compliance with the rules
and regulations of the Internal Revenue Service. In addition, the Employer shall
provide a car valued at up to $100,000 for the Executive's use and shall pay all
business expenses associated with the use of such car by the Executive. The
Employer shall pay periodic fees and dues for the Executive's membership in a
country club selected by the Executive.
5. Options. As a matter of separate inducement and agreement in connection with
his employment hereunder and not in lieu of any salary or other compensation
upon the Closing, the Employer shall grant to the Executive options (the
"EXECUTIVE OPTIONS") to purchase three percent (3%) of the net equity value of
the Employer. The exercise price for such interest shall be equal to three
percent (3%) of the Total Acquisition Cost. Subject to the rights of Allen and
the Employer under Section 10.3 hereof, the Executive Options shall have a term
of ten years and shall vest twenty-five percent (25%) on the Closing Date and
the remaining seventy-five percent (75%) shall vest 1/36 on the first day of
each of 36 months commencing on the first day of the thirteenth month following
the Closing Date; provided, that the Executive is employed by the Employer or
any of its Affiliates, or by Marcus Cable and CCI, as the case may be, on the
applicable vesting date. Executive understands that in connection with the
restructuring of CCI, Marcus Cable, Vulcan Cable, Inc. and Vulcan Cable II,
Inc., the options contemplated by this Section 5 of this Agreement may be
granted as options, equity interests or profit participations by parent or
subsidiary entities of the Employer as determined by the Board of Directors of
CCI, it being understood that in making such determination the Board will use
good faith efforts to structure such options, interests or profit participations
so that they provide at least as favorable economic consequences (including
without limitation tax consequences) for Executive as would a grant at the
Employer level. Notwithstanding the foregoing sentence, the Executive Options
shall immediately vest if the Executive's employment is terminated (i) by the
Executive for Good Reason (as defined in Section 10.1 hereof) or (ii) by the
Employer without Cause (as defined in Section 10.2 hereof).
The Employer agrees to consider the granting of additional options to
the Executive (y) after future acquisitions, if any, by the Employer, and (z) on
or about the third anniversary of the Closing.
6. Stay Bonuses. The Employer shall pay at the Closing an aggregate of
Twenty-Five Million Dollars ($25,000,000), which amount shall have been
deducted, pursuant to Section 2.2 of the Charter Purchase Agreement, from the
Purchase Price payable thereunder, in stay bonuses (each a "MANAGER STAY
BONUS"), to those managers (the "STAY MANAGERS") of CCI and its Affiliates
designated by the Executive in his sole discretion but with prior
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<PAGE> 6
consultation with Savoy or Allen, allocated among such individuals pursuant to
the written instructions of the Executive provided to the Employer at least five
(5) days prior to the Closing. Neither the Executive, Barry L. Babcock
("BABCOCK") nor Howard L. Wood ("WOOD") shall be eligible to receive a Manager
Stay Bonus.
The Manager Stay Bonuses shall each be granted in the form of a loan
from the Employer to each of the Stay Managers. Subject to the provisions of
Section 8 hereof and except as provided in Section 9.2 (b) hereof, one-third of
the principal amount outstanding on each such loan shall be forgiven on each of
the first three anniversaries of the grants thereof; provided, that the Stay
Manager is employed by the Employer or any of its Affiliates on the applicable
anniversary date. The Manager Stay Bonuses shall be paid to the Stay Managers at
the Closing conditioned upon delivery to the Employer of a promissory note
issued by the Stay Manager in favor of the Employer to contain the terms set
forth herein and other reasonable terms as determined by the Employer in
consultation with the Executive prior to the Closing. Upon voluntary termination
by a Stay Manager of his employment with the Employer, all of the principal
amount outstanding under the promissory note issued to such Stay Manager,
together with interest, shall become immediately due and payable from the Stay
Manager to the Employer. The failure of any of the designated Stay Managers to
execute a promissory note shall not interfere with the payment of Manager Stay
Bonuses to the other individuals designated to receive such bonuses.
7. Employee Option Plan.
7.1 General Provisions. The Employer covenants and agrees that it will
adopt an option plan (the "OPTION PLAN") within ninety (90) days after the
Closing, providing inter alia, for the issuance of options (the "EMPLOYEE
OPTIONS") to purchase an aggregate of ten percent (10%) of the capital stock or
other equity interests of the Employer outstanding on the date thereof.
Executive understands that in connection with the restructuring of CCI, Marcus
Cable, Vulcan Cable, Inc. and Vulcan Cable II, Inc., the options contemplated by
this Section 7 of this Agreement may be granted as options, equity interests or
profit participations by parent or subsidiary entities of the Employer as
determined by the Board of Directors of CCI. Forty percent (40%) of the Employee
Options shall be issued within three months of the Closing. All Employee Options
granted within such three-month period shall specify an exercise price equal to
the Total Acquisition Cost divided by the percentage interest of the recipient
therein. The Employee Options shall be issued to such members of the management
team (each an "OPTIONEE") and in such allocations as shall be designated by the
Board based on the recommendation of Executive. The Employee Options shall have
a ten-year term, subject to earlier termination as herein provided, and shall
vest 20% on the first anniversary of the Closing and 1/48th of the remaining
grant on each of the 48 months following such first anniversary, subject to
continued employment by the Employer or its Affiliates as of the applicable
vesting date. Terms and conditions of the Option Plan in addition to those set
forth in this Agreement shall be subject to approval by the Executive and the
Board.
7.2 Effect of Change of Control. Notwithstanding any other provision of
this Agreement, upon a Change of Control, any unvested Employee Options shall
immediately vest.
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7.3 Effect of Breach of Relocation Covenant. Upon a breach of the
covenant set forth in Section 8 of this Agreement, the holders of Employee
Options shall be entitled to the amounts as provided herein. Appropriate
agreements reflecting the same shall be entered into concurrently with the
option grants.
7.4 Effect of Termination of Employment.
(a) Upon termination of an Optionee by the Employer prior to
an Initial Public Offering for any reason other than for cause, Allen or, at his
option, the Employer, shall have the right exercisable for ninety days after any
such termination (but not the obligation except as herein provided), to pay to
the Optionee with respect to all vested Employee Options (or underlying stock or
other equity interest if such Employee Options have been exercised) held by such
individual, the Option Spread as of the date of termination (or the Fair Market
Value if equity interests are purchased), such payment to be made at the option
of Allen or the Employer, in cash or in stock. Concurrent with any such payment,
the options shall be cancelled and the stock or equity interests transferred to
Allen or the Employer, as the case may be.
(b) Subsequent to an Initial Public Offering, upon termination
of an Optionee by the Employer for any reason other than for cause, such
Optionee shall have the right to exercise any vested Employee Options within
sixty (60) days of the termination of employment. After such sixty-day period,
all unexercised Employee Options held by such individual shall automatically be
cancelled.
(c) If within four (4) years after the Closing, the Optionee
voluntarily terminates his employment with the Employer, such Optionee shall
have the right to exercise all of his vested Employee Options within thirty days
after such termination of employment, after which all unexercised options lapse.
For a period of ninety days following such exercise, Allen or, at his option,
the Employer shall have the right, but not the obligation, to purchase the
shares or other equity interests received on exercise of the Employee Options
pursuant to the preceding sentence and any other shares or other equity
interests theretofore acquired on the exercise of Employee Options at the option
exercise price.
If at any time after the fourth anniversary of the
Closing an Optionee voluntarily terminates his employment with the Employer,
such Optionee shall, within ninety days after the termination of his employment,
offer for purchase and Allen or, at his option, the Employer shall have the
right, but not the obligation, to purchase all of such Optionee's vested
Employee Options (or underlying stock or equity interests) for an amount equal
to the Option Spread (or Fair Market Value if equity interests are purchased),
such amount to be paid in cash or stock at the option of Allen or the Employer,
as the case may be.
(d) Upon termination of an Optionee for cause, all Employee
Options shall automatically be canceled.
(e) Upon termination of an Optionee for any reason, all
unvested options shall immediately be cancelled and the Optionee shall not be
entitled to any payment
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therefor except as expressly provided for herein. Except as otherwise expressly
provided herein, all vested options shall be automatically cancelled if not
exercised within ninety (90) days after termination.
8. Location of the Executive Offices of the Charter Entities Subsequent to
Closing.
8.1 Covenant Regarding Relocation of Headquarters. Effective upon the
Closing and for a period of three (3) years immediately following the
Closing, the Employer shall not relocate the existing Headquarters (as
hereinafter defined) of the Employer outside the greater St. Louis,
Missouri area without the prior written consent of the Executive, or
Babcock and Wood if the Executive is not surviving at the time such
consent is sought. The term "HEADQUARTERS" shall mean (i) the principal
offices of the Employer, (ii) the location of all material managerial
functions currently maintained by CCI at its existing headquarters,
including, without limitation all corporate, finance, accounting,
legal, engineering, marketing, regulatory and administrative functions
and (iii) all material employees of CCI performing such functions.
8.2 Effect of Breach. In the event of the breach by the Employer of the
covenant set forth in Section
8.1 hereof, then:
(a) with respect to the Executive, any Executive Options not
yet vested shall immediately vest;
(b) with respect to any employee to whom Employee Options have
been granted and who do not relocate, if less than 40% of the Employee
Options held by such employee have vested, then for purposes of this
paragraph (b) 40% of all Employee Options held by such individual will
be deemed to have vested. With respect to such employee's Employee
Options which have vested or are deemed to have vested pursuant to this
paragraph (b), the Employer shall pay, to each such individual an
amount equal to the greater of (i) the Option Spread or (ii) (A) if the
breach occurs within one (1) year of the Closing, an amount equal to
three (3) times the annual base salary of such individual, or (B) if
the breach occurs thereafter but within two (2) years of the Closing,
an amount equal to two (2) times the annual base salary of such
individual, or (C) if the breach occurs thereafter but within three (3)
years of the Closing, an amount equal to the annual base salary of such
individual.
(c) If any payment is made to any individual pursuant to
Section 8.2(b) hereof, then all options granted to such individual
shall be automatically cancelled; and
(d) the Employer shall, within 30 days of the relocation of
the Headquarters, pay the aggregate amount of $5,000,000 in cash to
such employees of the Employer who do not relocate, to be allocated
among such employees, as shall be designated by the Executive in his
sole discretion; provided, however, that individuals who receive
Manager Stay Bonuses shall not be entitled to any cash payment pursuant
to this paragraph.
8.3 Successors. In the event of the Executive's death, mental
incapacity or other failure to continue as President and Chief
Executive Officer of the Employer during the term
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<PAGE> 9
of this Agreement following the Closing Date, then the rights to be exercised by
him under this Section 8 shall be exercised jointly by Babcock and Wood.
Amounts payable pursuant to this Section 8 shall be in addition to all other
amounts accrued for the benefit of any individuals covered by this Section 8
through the date of termination of their employment with the Employer, but shall
otherwise be in full satisfaction of any other rights of such employees with
respect to their employment by the Employer.
9. Indemnification. The Employer agrees to indemnify and hold harmless to the
maximum extent permitted by law the Executive from and against any claims,
damages, liabilities, losses, costs or expenses in connection with or arising
out of the performance by the Executive of his duties as an officer, director or
President and Chief Executive Officer of CCI, Marcus Cable, or any of their
respective Subsidiaries or Affiliates and any activities engaged in by the
Executive on behalf of CCI, Marcus Cable or any of their respective Subsidiaries
or Affiliates or as an officer, director or employee of the Employer or any of
the foregoing which the Executive believed in good faith to be within the scope
of such duties prior to and after the Closing.
10. Termination. This Agreement may be terminated as follows:
10.1 By the Executive for Good Reason. The Executive may terminate this
Agreement for Good Reason (as defined below) upon thirty (30) days' advance
written notice to the Employer. "GOOD REASON" shall exist if: (a) there is an
assignment to the Executive of any duties materially inconsistent with, or which
constitutes a material reduction of the Employee's position, duties,
responsibilities, status or authority with the Employer and Employer shall not
have rectified same within twenty (20) days of written notice from Executive,
or, the Executive is required to report, directly or indirectly, to persons
other than the Board of Directors of the Employer; or removal of the Executive
from, or failure to re-elect the Executive to any of the positions he holds
pursuant hereto, except in connection with the termination of the Executive for
Cause (as defined below); (b) the aggregate benefits enjoyed by Executive shall
be materially diminished and Employer shall not have rectified same within
thirty (30) days of written notice; (c) within three (3) years of the Closing,
any material function of the Headquarters or a material number of personnel of
the Employer and its subsidiaries is relocated outside the greater St. Louis,
Missouri area, provided such relocation has not been instigated by the
Executive; or (d) there is a Change of Control.
10.2 By the Employer for Cause. The Employer may terminate this
Agreement for Cause upon thirty (30) days' advance written notice to the
Executive. "CAUSE" shall mean (i) commission of a felony offense, (ii) the
refusal to comply with the lawful directives of the Board, within ten (10) days
after written notice thereof from the Board or (iii) conduct on the part of the
Executive which constitutes gross negligence or willful misconduct which conduct
is not cured within ten (10) days after written notice thereof from the Board.
The Employer agrees that if the Executive has been terminated for Cause pursuant
to clause (i) above and it is subsequently reasonably demonstrated that there
was no commission of a felony offense, then upon the Executive's written
request, Employer shall immediately reinstate the Executive who shall resume his
duties hereunder with no change in the respective rights and obligations of the
parties set forth herein and with full reinstatement of
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economic benefits to the Executive which existed prior to termination as if the
Executive had not been terminated.
10.3 Effect of Termination. In the event of the expiration of this
Agreement in accordance with its terms as a result of the Employer giving the
Executive notice of its intention not to extend the Initial Term for an
additional year as contemplated by Section 3 hereof or a termination of this
Agreement by the Executive pursuant to Section 10.1 hereof or by the Employer
without Cause, (a) the Employer shall pay to the Executive an amount equal to
the aggregate base salary due the Executive during the remainder of the Initial
Term or Renewal Term, as the case may be, of this Agreement and the Board shall,
in its sole discretion, consider additional amounts, if any, to be paid to the
Executive to compensate the Executive for lost opportunities to receive bonus
amounts as provided in Section 4.1(b) hereof; and (b) any unvested Executive
Options shall immediately vest. Upon expiration of this Agreement in accordance
with its terms due to the Executive giving notice of his intention not to renew
or otherwise failing to perform this Agreement, all unvested Executive Options
shall immediately be cancelled. In the event this Agreement is terminated other
than by the Employer for Cause (including any expiration of this Agreement in
accordance with its terms), Allen or, if he does not exercise such right, the
Employer, at its option, shall within sixty (60) days after such termination (or
within sixty (60) days after the end of the Initial Term if such termination
occurs prior to such time) purchase or redeem the Executive's options (or
underlying common stock or other equity interests obtained upon the exercise
thereof) for a cash payment equal to the Option Spread (or the Fair Market
Value, in the case of equity interests). In the event of a termination of this
Agreement, by the Employer pursuant to Section 10.2 hereof, (a) all unvested
Executive Options shall automatically be cancelled and (b) Allen or the Employer
shall for a period of three (3) years from the date of termination, have the
right, but not the obligation, to purchase or redeem all of the vested Executive
Options (or underlying common stock or equity interests obtained upon the
exercise thereof) for an amount equal to the Option Spread (or the Fair Market
Value, in the case of equity interest), such amount to be paid in cash.
11. Covenant Not to Compete; Confidentiality.
11.1 Covenant Not to Compete. The Executive recognizes and acknowledges
that the Employer is placing its confidence and trust in the Executive. The
Executive, therefore, covenants and agrees that during the Applicable
Non-Compete Period (as defined below) the Executive shall not, either directly
or indirectly, without the prior written consent of the Board:
(a) Engage in or carry on any business or in any way become
associated with any business which is similar to or is in competition with the
Business of the Employer. As used in this Section 11, the term "BUSINESS OF THE
EMPLOYER" shall mean the business of owning or operating cable television
systems;
(b) Solicit the business of any person or entity, on behalf of
himself or any other person or entity, which is or has been at any time during
the term of this Agreement a customer or supplier of the Employer including, but
not limited to, former or
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<PAGE> 11
present customers or suppliers with whom the Executive has had personal contact
during, or by reason of, his relationship with the Employer;
(c) Be or become an employee, agent, consultant,
representative, director or officer of, or be otherwise in any manner associated
with, any person, firm, corporation, association or other entity which is
engaged in or is carrying on any business which is in competition with the
Business of the Employer;
(d) For a period of twenty-four (24) months after termination
by the Executive without Good Reason or by the Employer for Cause, solicit for
employment or employ any person employed by the Employer or any of its
subsidiaries at the time of such termination; or
(e) Be or become a shareholder, joint venturer, owner (in
whole or in part), or partner, or be or become associated with or have any
proprietary or financial interest in or of any firm, corporation, association or
other entity which is engaged in or is carrying on any business which is similar
to or in competition with the Business of the Employer, provided, however, that
nothing contained in this Section 11 shall prohibit the Executive from owning
less than 2% of the shares of a publicly held corporation engaged in the
Business of the Employer.
The Executive hereby recognizes and acknowledges that the existing
Business of the Employer extends throughout the United States of America and
therefore agrees that the covenants not to compete contained in this Section 11
shall be applicable nationally. In the event that a court of competent
jurisdiction determines that the scope of the non-compete provisions set forth
in this Section 11 are unenforceable in any respect, then these provisions shall
be deemed to be modified as necessary so that the scope of the non-compete
provisions contained herein are nonetheless as broad as possible and yet
enforceable under applicable law in accordance with their terms.
As used in this Section 11, "APPLICABLE NON-COMPETE PERIOD" shall mean
(i) the Initial Term of this Agreement for so long as the Executive is employed
hereunder, or (ii) if the Executive's employment was terminated for Cause or by
him voluntarily without Good Reason, then any unexpired portion of the Initial
Term. The covenant contained in this Section 11 shall not apply if the
Executive's employment under this Agreement is terminated without Cause or by
him for Good Reason.
11.2 Confidentiality. The Executive will not divulge, and will not
permit or suffer the divulgence of, any confidential knowledge or confidential
information with respect to the operations or finances of the Employer or any of
its Affiliates or with respect to confidential or secret customer lists,
processes, machinery, plans, devices or products licensed, manufactured or sold,
or services rendered, by the Employer or any of its Affiliates other than in the
regular course of business of the Employer or as required by law; provided,
however, that the Executive has no obligation, express or implied, to refrain
from using or disclosing to others any such knowledge or information which is or
hereafter shall become available to the public otherwise than by disclosure by
the Executive in breach of this Agreement.
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<PAGE> 12
12. Assignment of this Agreement. The parties agree that at the Closing, Allen
will (i) assign all of his rights hereunder to the Employer if a restructuring
has occurred or to one or more of the parent entities of the Marcus Systems and
the Charter Systems which in the aggregate shall have the financial resources to
fulfill the Employer's obligations hereunder and (ii) cause the Employer to
assume all of the rights and obligations of the Employer hereunder. Furthermore
the parties acknowledge that this Agreement is being entered into in reliance on
such assignment in order to afford sufficient time to determine the structure
for the functional combination of the Marcus Entities and the Charter Entities
prior to the Closing. It is the intention of the parties that this Agreement
become effective only upon the Closing. In no event shall Allen have any
personal obligations or liabilities hereunder regardless of whether the Closing
occurs.
13. Notices. Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be sufficiently given if delivered in
person or transmitted by telecopy or similar means of recorded electronic
communication to the relevant party as follows:
(a) in the case of the Executive, to the address set forth
opposite his name on the signature page hereto, with a copy to:
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue
New York, NY 10022
Attention: Daniel G. Bergstein, Esq.
Telecopy: (212) 319-4090;
(b) in the case of the Employer, to:
110 110th Street, N.E.
Suite 550
Bellevue, WA 98004
Attention: William Savoy
Telecopy: (310) 203-7199
with a copy to:
Irell & Manella LLP
1800 Avenue of the Stars
Suite 900
Los Angeles, CA 90067
Attention: Alvin Segel, Esq.
Telecopy: (310) 203-7199
Any such notice or other communication shall be deemed to have been
given and received on the day on which it is delivered or telecopied (or, if
such day is not a business day or if the notice or other communication is not
telecopied during business hours, at the place of receipt, on the next following
business day). Any party may change its address for the purposes of this Section
by giving notice to the other parties in accordance with the foregoing.
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<PAGE> 13
14. Assignability and Enforceability. This Agreement shall be binding on and
enforceable by the parties and their respective successors and permitted
assigns. Except as provided in Section 12 hereof, no party may assign any of its
rights or benefits under this Agreement to any person without the prior written
consent of the other party.
15. Expenses of this Agreement. All costs and expenses of the Employer
(including, without limitation, legal, accounting and other professional fees)
incurred in connection with this Agreement or the transactions contemplated
hereby shall be paid by the Employer. All costs and expenses (including, without
limitation, legal, accounting and other professional fees) of the Executive
incurred in connection with this Agreement or the transactions contemplated
hereby shall be paid by CCI, but shall be included within the aggregate $10
million cap on such expenses as provided in the Charter Purchase Agreement.
16. Consultation. The parties shall consult with each other before issuing any
press release or making any other public announcement with respect to this
Agreement or the transactions contemplated hereby and, except as required by any
applicable law or regulatory or stock exchange requirement, neither of them
shall issue any such press release or make any such public announcement without
the prior written consent of the other, which consent shall not be unreasonably
withheld or delayed.
17. Governing Law. This Agreement shall be governed and construed in accordance
with the laws of the State of New York, without giving effect to the principles
of conflicts of laws thereof.
18. Third Party Beneficiaries. Except for the purposes of Section 6 hereof (with
respect to the Stay Managers), Section 7 hereof (with respect to the recipients
of options described therein) and Section 8 hereof (with respect to the holders
of any options or the recipients of any payments described therein), no person
other than the parties hereto shall have any rights under this Agreement. No
individual (other than Babcock or Wood to the extent specifically provided
herein) shall have any rights for purposes of Sections 6, 7 or 8 unless and
until such individual has been designated a Stay Manager or been granted an
option or been designated as a recipient of a payment under Section 8 and then
only to the extent of and as expressly provided in such Stay Manager award,
option grant or other payment.
19. Counterparts. This Agreement may be executed in counterparts, each of which
shall constitute an original and all of which taken together shall constitute
one and the same instrument.
20. Currency. Unless otherwise indicated, all dollar amounts in this Agreement
are expressed in United States dollars.
21. Sections and Headings. The division of this Agreement into Sections and the
insertion of headings are for reference purposes only and shall not affect the
interpretation of this Agreement.
22. Number and Gender. In this Agreement, words importing the singular number
only shall include the plural and vice versa and words importing gender shall
include all genders.
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<PAGE> 14
23. Entire Agreement. This Agreement and any agreements or documents referred to
herein or executed contemporaneously herewith, constitutes the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and discussions, whether written
or oral. There are no conditions, covenants, agreements, representations,
warranties or other provisions, express or implied, collateral, statutory or
otherwise, relating to the subject matter hereof except as herein provided.
24. Severability. If any provision of this Agreement is determined by a court of
competent jurisdiction to be invalid, illegal or unenforceable in any respect,
such determination shall not impair or affect the validity, legality or
enforceability of the remaining provisions hereof, and each provision is hereby
declared to be separate, severable and distinct.
25. Amendments and Waivers. No amendment or waiver of any provision of this
Agreement shall be binding on any party unless consented to in writing by such
party. No waiver of any provision of this Agreement shall be construed as a
waiver of any other provision nor shall any waiver constitute a continuing
waiver unless otherwise expressly provided. No provision of this Agreement shall
be deemed waived by a course of conduct unless such waiver is in writing signed
by all parties and stating specifically that it was intended to modify this
Agreement.
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<PAGE> 15
26. Survival. The provisions of Sections 9 and 11 shall survive the termination
of this Agreement.
IN WITNESS WHEREOF the parties have executed this Agreement.
PAUL G. ALLEN
By: /s/ Paul G. Allen by William D. Savoy
_____________________________________
William D. Savoy,
Attorney-In-Fact
JERALD L. KENT
13351 Buckland Hall Road
St. Louis, Missouri 63181
/s/ Jerald L. Kent
___________________________
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<PAGE> 1
Exhibit 10.7
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of the 23rd day of December, 1998
by and between Barry L. Babcock, an individual residing in the State of Missouri
(the "EMPLOYEE"), and Paul G. Allen, an individual residing in the State of
Washington ("ALLEN").
W I T N E S S E T H:
WHEREAS, Allen, Charter Communications, Inc., a Delaware corporation
("CCI"), and certain other parties are entering into a Purchase Agreement (the
"CHARTER PURCHASE AGREEMENT") dated the date hereof providing for the sale (the
"Sale TRANSACTION") to Allen by CCI and certain other parties of their
respective equity interests in CCI and certain subsidiaries and affiliates of
CCI which, directly and indirectly through their respective subsidiaries, own
and operate cable television systems and businesses in respect thereof in
various areas of the United States (the "CHARTER SYSTEMS");
WHEREAS, Allen is the owner, indirectly, through corporations,
partnerships and other entities controlled by him, of the cable television
systems and businesses in respect thereof purchased pursuant to that certain
Purchase Agreement dated as of April 3, 1998 by and among Vulcan Cable, Inc.,
Marcus Cable Properties, Inc. ("MARCUS CABLE") and certain other parties (the
"MARCUS SYSTEMS");
WHEREAS, it is the intention of Allen to operate the Charter Systems
and the Marcus Systems under common management and supervision and potentially
to combine such systems either prior to or following the closing of the Sale
Transaction (the "CLOSING");
WHEREAS, the Employee currently serves as Chairman of the Board and
Director of CCI;
WHEREAS, the Employer (as defined below) desires to have the benefits,
subsequent to the Sale Transaction, of the Employee's knowledge and experience
in the cable television industry by having the Employee serve as Vice Chairman
of the Employer on the terms and conditions set forth herein;
WHEREAS, the Employee desires to serve as Vice Chairman of the Employer
subsequent to the Sale Transaction on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties hereto hereby agree as follows:
<PAGE> 2
1. INTERPRETATION.
1.1. DEFINITIONS.
"AFFILIATE" shall mean with respect to any person or entity,
any other person or entity who controls, is controlled by or is under common
control with such person or entity.
"CHANGE OF CONTROL" means a sale of more than 49.9% of the
outstanding capital stock of the Employer, except where Allen and his Affiliates
retain effective voting control of the Employer, the merger or consolidation of
the Employer, with or into any other corporation or entity, other than a
wholly-owned subsidiary of the Employer, except where Allen and his Affiliates
have effective voting control of the surviving entity, or any other transaction,
or event, a result of which is that Allen holds less than 50.1% of the voting
power of the surviving entity, except where Allen and his Affiliates retain
effective voting control of Employment, or a sale of all or substantially all of
the assets of the Employer (other than to an entity majority-owned or controlled
by Allen and his Affiliates).
"EMPLOYER" shall mean CCI, and upon the acquisition by Allen
of control over Marcus Cable, the term "Employer" shall also include Marcus
Cable. Upon the creation of an entity that results from the combination of the
Marcus Systems and the Charter Systems, the term "Employer" shall thereafter
mean such entity.
"FAIR MARKET VALUE" shall mean for all purposes under this
Agreement, (i) if the Employer is privately held at the occurrence of an event
triggering a Fair Market Value calculation hereunder (a "TRIGGER EVENT"), 13.7
times the projected cash flow of the Employer (as established in the budget for
such entity approved by its Board of Directors or, in the event no such budget
has as of the date of the Trigger Event been approved by the Board, as
established by the Board of Directors within thirty (30) days of any such
Trigger Event, taking into account the most recent forecasts for such entity
presented to its Board of Directors) including all future acquisitions by the
Employer to the extent of its interest for its fiscal year following its fiscal
year in which the Trigger Event occurs, and (ii) if the applicable entity is a
public company at the time of a Trigger Event, then a price per share equal to
an average of the closing price of such entity's publicly traded stock on the 20
trading days immediately prior to the Trigger Event.
"INITIAL PUBLIC OFFERING" means the consummation of a firm
commitment underwritten initial public offering pursuant to an effective
registration statement filed under the Securities Act of 1933, as amended,
covering the offer and sale of shares of Common Stock of the Employer (the
"Common Stock").
"OPTION SPREAD" shall mean an amount equal to (i) the
difference between the exercise price of an option and the Fair Market Value per
share of stock or other underlying equity unit with respect to such option,
times (ii) the number of shares or equity units covered by such option at the
time of the exercise.
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<PAGE> 3
2. EMPLOYMENT, DUTIES AND AUTHORITY. The Employer hereby agrees to
employ the Employee, and the Employee agrees to be employed, as an officer, with
the title Vice Chairman of the Employer. The Employee shall report directly to
the President and Chief Executive Officer of the Employer (the "CEO") and shall
be responsible for duties relating to the government and public relations of the
Employer and such other duties as the CEO may reasonably determine from time to
time. The Employee shall serve as the Employer's representative to the National
Cable Television Association (NCTA), and other industry organizations, in his
capacity as a director or such other position consistent with representing the
Employer. In addition, the Employee shall, jointly with Howard L. Wood ("WOOD"),
exercise the duties of the CEO, with respect to the stay bonuses referred to in
Section 2.2 of the Charter Purchase Agreement, if the CEO is unable to exercise
such duties. The Employee shall devote substantially all of his business time,
attention, energies, best efforts and skills to the diligent performance of his
duties hereunder. Notwithstanding the foregoing, it is understood that the
Employee may expend a reasonable amount of time for personal, charitable,
investment and other activities. The expenditure by the Employee of time for
personal, charitable, investment and other activities shall not interfere in any
material respect with the performance by the Employee of his duties and
responsibilities hereunder.
3. TERM. The term of this Agreement shall commence effective upon the
Closing and shall terminate on the first anniversary thereof (the "INITIAL
TERM"); provided, however, that the Initial Term shall be extended and this
Agreement shall automatically be renewed for successive one-year periods
("RENEWAL Terms") unless (i) this Agreement is terminated in accordance with the
provisions of Section 8 hereof, or (ii) the Employee or the Employer provides
written notice to the other of such party's desire not to extend this Agreement
at least sixty (60) days prior to the expiration of the Initial Term or any
Renewal Term, as the case may be, of this Agreement, under this Section 3. If
the Closing does not occur for any reason, this Agreement shall be of no force
or effect and neither the Employee nor Allen shall have any rights, obligations
or liabilities under or arising out of this Agreement or the failure to
consummate the Sale Transaction (except as provided in the Charter Purchase
Agreement).
4. COMPENSATION AND BENEFITS.
4.1. CASH COMPENSATION.
(a) Base Salary. During the Initial Term of this
Agreement , the Employer shall pay the
Employee an annual base salary at the rate
of Six Hundred Twenty-Five Thousand Dollars
($625,000) or such higher rate as may from
time to time be determined by the CEO in his
discretion, which shall be payable in equal
monthly installments on the first day of
each month.
(b) Discretionary Bonus. The Employee shall be
eligible to receive an annual bonus in an
amount to be determined by
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<PAGE> 4
the Board of Directors of the Employer in
its discretion, which shall be payable as
determined by the Board.
(c) Special Payment. As a matter of separate
inducement and agreement in connection with
his employment as provided hereunder and not
in lieu of any salary or other compensation
for his services, the Employee shall receive
a one-time payment in the amount of Five
Hundred Eight Thousand Seventy Dollars
($508,070), which amount shall be paid to
the Employee in cash on March 16, 1999.
4.2. BENEFIT PLANS. The Employee shall be entitled to
participate in any disability insurance, pension or other benefit plan of the
Employer now existing or hereafter adopted for the benefit of the employees
generally or the executives of the Employer generally, which benefits shall be
no less generous than those currently enjoyed by the Employee.
4.3. VACATION. The Employee shall be entitled to not less than
one (1) month of compensated vacation in each fiscal year, to be taken at times
which do not unreasonably interfere with the performance of the Employee's
duties hereunder. Unused vacation time shall not be carried over nor paid in
cash in lieu thereof except with the Board's prior approval.
4.4. EXPENSES. The Employee shall be entitled to receive
reimbursement for all reasonable out-of-pocket expenses incurred by the Employee
in the performance of his duties hereunder, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Employer.
4.5. OTHER BENEFITS. The Employer agrees to make available to
the Employee the airplane currently owned by CCI for personal use by the
Employee, the costs of any such use by the Employee to be in compliance with the
rules and regulations of the Internal Revenue Service.
5. OPTIONS. As a matter of separate inducement and agreement in
connection with his employment hereunder and not in lieu of any salary or other
compensation upon the Closing of the Sale Transaction, the Employer shall grant
to the Employee options (the "EMPLOYEE OPTIONS") to purchase such number of
shares of Common Stock in the Employer (the "COMMON STOCK") as shall be
determined by the Board of Directors in its sole discretion. The terms and
conditions of such options shall be as set forth in the option plan to be
adopted by the Employer within ninety (90) days after the Closing.
6. LOCATION OF THE EXECUTIVE OFFICES OF THE CHARTER ENTITIES SUBSEQUENT TO
CLOSING.
6.1. COVENANT REGARDING RELOCATION OF HEADQUARTERS. Effective
upon the Closing and for a period of three (3) years following the Closing, the
Employer shall
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<PAGE> 5
not relocate the existing Headquarters (as defined below) of the Employer
outside the greater St. Louis, Missouri area without the prior written consent
of the CEO, or the Employee and Wood if the CEO is not surviving at the time
such consent is sought. The term "HEADQUARTERS" shall mean (i) the principal
offices of the Employer, (ii) the location of all material managerial functions
currently maintained by CCI at its existing headquarters, including, without
limitation all corporate, finance, accounting, legal, engineering, marketing,
regulatory and administrative functions and (iii) all material employees of CCI
performing such functions.
6.2. EFFECT OF BREACH. In the event of the breach by the
Employer of the covenant set forth in Section 6.1 hereof while the Employee is
employed under this Agreement, or if the Employee was terminated by the Employer
in contemplation of a breach of Section 6.1 hereof, whether during the Initial
Term or any Renewal Term, then if the Employee does not relocate and less than
40% of his Employee Options have vested, then for purposes of this Section 6.2,
40% of the Employee's Options shall be deemed to have vested. With respect to
the Employee Options which have vested or are deemed to have vested pursuant to
this Section 6.2, the Company shall pay, to the Employee, an amount equal to the
greater of (i) the Option Spread or (ii) (A) if the breach occurs within one (1)
year of the Closing, an amount equal to three (3) times the annual base salary
of the Employee, or (B) if the breach occurs after the first anniversary but
within two (2) years of the Closing, an amount equal to two (2) times the annual
base salary of the Employee, or (C) if the breach occurs after the second
anniversary but within three (3) years of the Closing, an amount equal to the
annual base salary of the Employee. If any payment is made to the Employee
pursuant to this Section 6.2, then all Employee Options of the Employee shall be
automatically cancelled. Amounts payable pursuant to this Section 6.2 shall be
in addition to all other amounts accrued for the benefit of the Employee on the
date of the termination of his employment with the Employer but shall otherwise
be in full satisfaction of any other rights of the Employee with respect to his
employment.
7. INDEMNIFICATION. The Employer agrees to indemnify and hold harmless
to the maximum extent permitted by law the Employee from and against any claims,
damages, liabilities, losses, costs or expenses in connection with or arising
out of the performance by the Employee of his duties as an officer, director or
Chairman of the Board and Director of CCI, Marcus Cable or any of their
respective Subsidiaries or Affiliates and any activities engaged in by the
Employee on behalf of CCI or any of their respective Subsidiaries or Affiliates
or as an officer, director or employee of the Employer or any of the foregoing,
which the Employee believed in good faith to be within the scope of such duties
prior to and after the Closing.
8. TERMINATION. This Agreement may be terminated as follows:
8.1. AT WILL. At any time, either the Employer or the Employee
may terminate this Agreement for any reason, by giving thirty (30) days' advance
written notice to the other party.
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<PAGE> 6
8.2. BY THE EMPLOYEE FOR GOOD REASON. The Employee may
terminate this Agreement for Good Reason (as defined below) upon thirty (30)
days' advance written notice to the Employer. "GOOD REASON" shall exist if: (a)
there is an assignment to the Employee of any duties materially inconsistent
with, or which constitutes a material reduction of the Employee's position,
duties, responsibilities, status or authority with the Employer and Employer
shall not have rectified same within twenty (20) days' of written notice from
the Employee, or the Employee is required to report, directly or indirectly, to
persons other than Jerald L. Kent; or removal of the Employee from the positions
he holds pursuant hereto, except in connection with the termination of the
Employee for Cause (as defined below); (b) the aggregate benefits enjoyed by the
Employee shall be materially diminished and the Employer shall not have
rectified same within thirty (30) days of written notice from the Employee; or
(c) within three years of the Closing, any material function of the Headquarters
or a material number of personnel of the Employer is relocated outside the
greater St. Louis, Missouri area; or (d) there is a Change of Control.
8.3. BY THE EMPLOYER FOR CAUSE. The Employer may terminate
this Agreement for Cause upon thirty (30) days' advance written notice to the
Employee. "CAUSE" shall mean (i) commission of a felony offense, (ii) the
refusal to comply with the lawful directives of the CEO, within ten (10) days'
after written notice thereof from the CEO or (iii) conduct on the part of the
Employee which constitutes gross negligence or willful misconduct which conduct
is not cured within ten (10) days after written notice thereof from the CEO. The
Employer agrees that if the Employee has been terminated for Cause pursuant to
clause (i) above and it is subsequently reasonably demonstrated that there was
no commission of a felony offense, then upon the Employee's written request,
Employer shall immediately reinstate the Employee who shall resume his duties
hereunder with no change in the respective rights and obligations of the parties
set forth herein and with full reinstatement of economic benefits to the
Employee which existed prior to termination as if the Employee had not been
terminated.
8.4. EFFECT OF TERMINATION. In the event of a termination of
this Agreement by the Employee pursuant to Section 8.1 or by the Employer
pursuant to Section 8.3 hereof, the Employer shall pay the Employee the
compensation and any other amounts to which he is entitled pursuant to this
Agreement through the end of the notice period, and thereafter all obligations
of the Employer shall terminate. In the event of a termination of this Agreement
by the Employer pursuant to Section 8.1 or by the Employee pursuant to Section
8.2 hereof or by the Employer without Cause, (a) the Employer shall pay to the
Employee an amount equal to the aggregate base salary due the Employee during
the remainder of the Initial Term, or Renewal Term, as the case may be, of this
Agreement; and (b) Allen, or at his option, the Employer, shall, within sixty
(60) days after such termination, redeem the Employee's vested options by
payment, in cash of an amount equal to the Option Spread. Unvested stock options
held by the Employee at the time of termination shall be treated as set forth in
option plan to be adopted by the Employer as contemplated in Section 5 hereof.
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9. ASSIGNMENT OF THIS AGREEMENT. The parties agree that at the Closing,
Allen will (i) assign all of his rights hereunder to the Employer if a
restructuring has occurred or to one or more of the parent entities of the
Marcus Systems and the Charter Systems which in the aggregate shall have the
financial resources to fulfill the Employer's obligations hereunder and (ii)
cause the Employer to assume all of the rights and obligations of the Employer
hereunder. Furthermore the parties acknowledge that this Agreement is being
entered into in reliance on such assignment in order to afford sufficient time
to determine the structure for the functional combination of the Marcus Entities
and the Charter Entities prior to the Closing. It is the intention of the
parties that this Agreement become effective only upon the Closing. In no event
shall Allen have any personal obligations or liabilities hereunder regardless of
whether the Closing occurs.
10. NOTICES. Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be sufficiently given if
delivered in person or transmitted by telecopy or similar means of recorded
electronic communication to the relevant party as follows:
(a) in the case of the Employee, to the address
set forth opposite his name on the signature
page hereto, with a copy to:
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue
New York, NY 10022
Attention: Daniel G. Bergstein, Esq.
Telecopy: (212) 319-4090;
(b) in the case of the Employer, to:
110 110th Street, N.E.
Suite 550
Bellevue, WA 98004
Attention: William Savoy
Telecopy: (310) 203-7199
with a copy to:
Irell & Manella LLP
1800 Avenue of the Stars
Suite 900
Los Angeles, CA 90067
Attention: Alvin Segel, Esq.
Telecopy: (310) 203-7199
Any such notice or other communication shall be deemed to have been
given and received on the day on which it is delivered or telecopied (or, if
such day is not a business
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<PAGE> 8
day or if the notice or other communication is not telecopied during business
hours, at the place of receipt, on the next following business day). Any party
may change its address for the purposes of this Section 10 by giving notice to
the other parties in accordance with the foregoing.
11. ASSIGNABILITY AND ENFORCEABILITY. This Agreement shall be binding
on and enforceable by the parties and their respective successors and permitted
assigns. Except as provided in Section 9 hereof, no party may assign any of its
rights or benefits under this Agreement to any person without the prior written
consent of the other party.
12. EXPENSES OF THIS AGREEMENT. All costs and expenses of the Employer
(including, without limitation, legal, accounting and other professional fees)
incurred in connection with this Agreement or the transactions contemplated
hereby shall be paid by the Employer. All costs and expenses (including, without
limitation, legal, accounting and other professional fees) of the Employee
incurred in connection with this Agreement or the transactions contemplated
hereby shall be paid by CCI, but shall be included within the aggregate $10
million cap on such expenses as provided in the Charter Purchase Agreement.
13. CONSULTATION. The parties shall consult with each other before
issuing any press release or making any other public announcement with respect
to this Agreement or the transactions contemplated hereby and, except as
required by any applicable law or regulatory or stock exchange requirement,
neither of them shall issue any such press release or make any such public
announcement without the prior written consent of the other, which consent shall
not be unreasonably withheld or delayed.
14. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of New York, without giving effect to the
principles of conflicts of laws thereof.
15. THIRD PARTY BENEFICIARIES. Except for the purposes of Section 2
hereof (with respect to the exercise of authority regarding stay bonuses) and
Section 6 hereof (with respect to the exercise of consent to relocation of the
Headquarters), no person other than the parties hereto shall have any rights
under this Agreement.
16. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall constitute an original and all of which taken together shall
constitute one and the same instrument.
17. CURRENCY. Unless otherwise indicated, all dollar amounts in this
Agreement are expressed in United States dollars.
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<PAGE> 9
18. SECTIONS AND HEADINGS. The division of this Agreement into Sections
and the insertion of headings are for reference purposes only and shall not
affect the interpretation of this Agreement.
19. NUMBER AND GENDER. In this Agreement, words importing the singular
number only shall include the plural and vice versa and words importing gender
shall include all genders.
20. ENTIRE AGREEMENT. This Agreement and any agreements or documents
referred to herein or executed contemporaneously herewith, constitutes the
entire agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements, understandings, negotiations and discussions,
whether written or oral. There are no conditions, covenants, agreements,
representations, warranties or other provisions, express or implied, collateral,
statutory or otherwise, relating to the subject matter hereof except as herein
provided.
21. SEVERABILITY. If any provision of this Agreement is determined by a
court of competent jurisdiction to be invalid, illegal or unenforceable in any
respect, such determination shall not impair or affect the validity, legality or
enforceability of the remaining provisions hereof, and each provision is hereby
declared to be separate, severable and distinct.
22. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of
this Agreement shall be binding on any party unless consented to in writing by
such party. No waiver of any provision of this Agreement shall be construed as a
waiver of any other provision nor shall any waiver constitute a continuing
waiver unless otherwise expressly provided. No provision of this Agreement shall
be deemed waived by a course of conduct unless such waiver is in writing signed
by all parties and stating specifically that it was intended to modify this
Agreement.
23. SURVIVABILITY. Notwithstanding any contrary provision in this
Agreement, the provisions of Section 7 hereof shall survive the termination of
this Agreement.
IN WITNESS WHEREOF the parties have executed this Agreement.
/s/ Paul G. Allen by William D. Savoy
-----------------------------------
William D. Savoy
Attorney-In-Fact
BARRY L. BABCOCK
/s/ Barry L. Babcock
-----------------------------------
-----------------------------------
-----------------------------------
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<PAGE> 1
Exhibit 10.8
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of the 23rd day of December, 1998
by and between Howard L. Wood, an individual residing in the State of Missouri
(the "EMPLOYEE") and Paul G. Allen, an individual residing in the State of
Washington ("ALLEN").
W I T N E S S E T H:
WHEREAS, Allen, Charter Communications, Inc., a Delaware corporation
("CCI"), and certain other parties are entering into a Purchase Agreement (the
"CHARTER PURCHASE AGREEMENT") dated the date hereof providing for the sale (the
"SALE TRANSACTION") to Allen by CCI and certain other parties of their
respective equity interests in CCI and certain subsidiaries and affiliates of
CCI which, directly and indirectly through their respective subsidiaries, own
and operate cable television systems and businesses in respect thereof in
various areas of the United States (the "CHARTER SYSTEMS");
WHEREAS, Allen is the owner, indirectly, through corporations,
partnerships and other entities controlled by him, of the cable television
systems and businesses in respect thereof purchased pursuant to that certain
Purchase Agreement dated as of April 3, 1998 by and among Vulcan Cable, Inc.,
Marcus Cable Properties, Inc. ("MARCUS CABLE") and certain other parties (the
"MARCUS SYSTEMS");
WHEREAS, it is the intention of Allen to operate the Charter Systems
and the Marcus Systems under common management and supervision and potentially
to combine such systems either prior to or following the closing of the Sale
Transaction (the "CLOSING");
WHEREAS, the Employee currently serves as Vice Chairman of the Board
and Director of CCI;
WHEREAS, the Employer (as defined below) desires to have the benefits,
subsequent to the Sale Transaction, of the Employee's knowledge and experience
in the cable television industry by having the Employee render services to the
Employer on the terms and conditions set forth herein;
WHEREAS, the Employee desires to render services to the Employer
subsequent to the Sale Transaction on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
set forth, the parties hereto hereby agree as follows:
<PAGE> 2
1. INTERPRETATION.
1.1. DEFINITIONS.
"AFFILIATE" shall mean with respect to any person or entity, any other
person or entity who controls, is controlled by or is under common control with
such person or entity.
"CHANGE OF CONTROL" means a sale of more than 49.9% of the outstanding
capital stock of the Employer, except where Allen and his Affiliates retain
effective voting control of the Employer, the merger or consolidation of the
Employer, with or into any other corporation or entity, other than a
wholly-owned subsidiary of the Employer, except where Allen and his Affiliates
have effective voting control of the surviving entity, or any other transaction,
or event, a result of which is that Allen holds less than 50.1% of the voting
power of the surviving entity, except where Allen and his Affiliates retain
effective voting control of Employment, or a sale of all or substantially all of
the assets of the Employer (other than to an entity majority-owned or controlled
by Allen and his Affiliates).
"EMPLOYER" shall mean CCI, and upon the acquisition by Allen of control
over Marcus Cable, the term "Employer" shall also include Marcus Cable. Upon the
creation of an entity that results from the combination of the Marcus Systems
and the Charter Systems, the term "Employer" shall thereafter mean such entity.
"FAIR MARKET VALUE" shall mean for all purposes under this Agreement,
(i) if the Employer is privately held at the occurrence of an event triggering a
Fair Market Value calculation hereunder (a "TRIGGER EVENT"), 13.7 times the
projected cash flow of the Employer (as established in the budget for such
entity approved by its Board of Directors), or, in the event no such budget has
as of the date of the Trigger Event been approved by the Board (as established
by the Board of Directors within thirty days of any such Trigger Event, taking
into account the most recent forecasts for such entity presented to its Board of
Directors) including all future acquisitions by the Employer to the extent of
its interest for its fiscal year following its fiscal year in which the Trigger
Event occurs, and (ii) if the applicable entity is a public company at the time
of a Trigger Event, then a price per share equal to an average of the closing
price of such entity's publicly traded stock on the 20 trading days immediately
prior to the Trigger Event.
"INITIAL PUBLIC OFFERING" means the consummation of a final commitment
underwritten initial public offering pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended, covering the offer
and sale of shares of Common Stock of the Employer (the "COMMON STOCK").
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<PAGE> 3
2. EMPLOYMENT, DUTIES AND AUTHORITY. The Employer hereby agrees to
employ the Employee, and the Employee agrees to be employed, as an officer of
the Employer and the Employee desires to render services to the Employer subject
to the terms and conditions hereof. The Employee shall report directly to the
President and Chief Executive Officer of the Employer (the "CEO") and shall be
responsible for such duties as the CEO may reasonably determine from time to
time. In addition, the Employee shall, jointly with Barry L. Babcock
("Babcock"), exercise the duties of the CEO, with respect to the stay bonuses
referred to in Section 2.2 of the Charter Purchase Agreement, if the CEO is
unable to exercise such duties.
3. TERM. The term of this Agreement shall commence effective upon the
Closing and shall terminate on the first anniversary thereof (the "INITIAL
TERM"); provided, however, that the Initial Term shall be extended and this
Agreement shall automatically be renewed for successive one-year periods
("RENEWAL TERMS") unless (i) this Agreement is terminated in accordance with the
provisions of Section 7 hereof, or (ii) the Employee or the Employer provides
written notice to the other of such party's desire not to extend this Agreement
at least sixty (60) days prior to the expiration of the Initial Term or any
Renewal Term, as the case may be, of this Agreement, under this Section 3. If
the Closing does not occur for any reason, this Agreement shall be of no force
or effect and neither the Employee nor Allen shall have any rights, obligations
or liabilities under or arising out of this Agreement or the failure to
consummate the Sale Transaction (except as provided in the Charter Purchase
Agreement).
4. COMPENSATION AND BENEFITS.
4.1. CASH COMPENSATION.
(a) Base Salary. During the Initial Term of this
Agreement , the Employer shall pay the
Employee an annual base salary at the rate
of Three Hundred Twelve Thousand Five
Hundred Dollars ($312,500) or such higher
rate as may from time to time be determined
by the CEO in his discretion, which shall be
payable in equal monthly installments on the
first day of each month.
(b) Discretionary Bonus. The Employee shall be
eligible to receive an annual bonus in an
amount to be determined by the Board of
Directors of the Employer in its discretion,
which shall be payable as determined by the
Board.
(c) Special Payment. As a matter of separate
inducement and agreement in connection with
his employment as provided hereunder and not
in lieu of any salary or other compensation
for his services, the Employee shall receive
a one-time payment in the amount of Two
Hundred Fifty-Four Thousand
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<PAGE> 4
Thirty-Five Dollars ($254,035), which amount
shall be paid to the Employee in cash on
March 16, 1999.
4.2. BENEFIT PLANS. The Employee shall be entitled to
participate in any disability insurance, pension or other benefit plan of the
Employer now existing or hereafter adopted for the benefit of the employees
generally or the executives of the Employer, which benefits shall be no less
generous than those currently enjoyed by the Employee.
4.3. VACATION. The Employee shall be entitled to not less than
one (1) month of compensated vacation in each fiscal year, to be taken at times
which do not unreasonably interfere with the performance of the Employee's
duties hereunder. Unused vacation time shall not be carried over nor paid in
cash in lieu thereof except with the Board's prior approval.
4.4. EXPENSES. The Employee shall be entitled to receive
reimbursement for all reasonable out-of-pocket expenses incurred by the Employee
in the performance of his duties hereunder, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Employer.
4.5. OTHER BENEFITS. The Employer agrees to make available to
the Employee the airplane currently owned by CCI for personal use by the
Employee, the costs of any such use by the Employee to be in compliance with the
rules and regulations of the Internal Revenue Service. In addition, the Employer
shall continue to maintain an office in Bonne Terre, Missouri where the
Employee's office shall be located and the Employer shall pay for one full-time
secretary to be employed in such office. In addition, at the Employee's request,
the Employer shall provide to the Employee an office at the Employer's
Headquarters (as defined below).
5. LOCATION OF THE EXECUTIVE OFFICES OF THE CHARTER ENTITIES SUBSEQUENT
TO CLOSING.
5.1. COVENANT REGARDING RELOCATION OF HEADQUARTERS. Effective
upon the Closing and for a period of three (3) years following the Closing, the
Employer shall not relocate the existing Headquarters (as defined below) of the
Employer outside the greater St. Louis, Missouri without the prior written
consent of the CEO, or the Employee and Babcock if the CEO is not surviving at
the time such consent is sought. The term "HEADQUARTERS" shall mean (i) the
principal offices of the Employer, (ii) the location of all material managerial
functions currently maintained by CCI at its existing headquarters including
without limitation all corporate, finance, accounting, legal, engineering,
marketing, regulatory and administrative functions and (iii) all material
employees of CCI performing such functions.
5.2. EFFECT OF BREACH. In the event of the breach by the
Employer of the covenant set forth in Section 5.1 hereof while the Employee is
employed under this Agreement, whether during the Initial Term or any Renewal
Term, then if the Employee
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<PAGE> 5
does not relocate, the Company shall pay to the Employee (A) if the breach
occurs within one (1) year of the Closing, an amount equal to three (3) times
the annual base salary of the Employee, or (B) if the breach occurs after the
first anniversary but within two (2) years of the Closing, an amount equal to
two (2) times the annual base salary of the Employee, or (C) if the breach
occurs after the second anniversary but within three (3) years of the Closing,
an amount equal to the annual base salary of the Employee. Amounts payable
pursuant to this Section 5.2 shall be in addition to all other amounts accrued
for the benefit of the Employee on the date of the termination of his employment
with the Employer but shall otherwise be in full satisfaction of any other
rights of the Employee with respect to his employment.
6. INDEMNIFICATION. The Employer agrees to indemnify and hold harmless
to the maximum extent permitted by law the Employee from and against any claims,
damages, liabilities, losses, costs or expenses in connection with or arising
out of the performance by the Employee of his duties as an officer, director or
Vice Chairman of the Board and Director of CCI, Marcus Cable or any of their
respective Subsidiaries or Affiliates and any activities engaged in by the
Employee on behalf of CCI or any of their respective Subsidiaries or Affiliates
or as an officer, director or employee of the Employer or any of the foregoing,
which the Employee believed in good faith to be within the scope of such duties
prior to and after the Closing.
7. TERMINATION. This Agreement may be terminated as follows:
7.1. AT WILL. At any time, either the Employer or the Employee
may terminate this Agreement for any reason, by giving thirty (30) days' advance
written notice to the other party.
7.2. BY THE EMPLOYEE FOR GOOD REASON. The Employee may
terminate this Agreement for Good Reason (as defined below) upon thirty (30)
days' advance written notice to the Employer. "GOOD REASON" shall exist if: (a)
there is an assignment to the Employee of any duties materially inconsistent
with, or which constitutes a material reduction of the Employee's position,
duties, responsibilities, status or authority with the Employer and Employer
shall not have rectified same within twenty (20) days of written notice from the
Employee, or the Employee is required to report, directly or indirectly, to
persons other than Jerald L. Kent; or removal of the Employee from the positions
he holds pursuant hereto, except in connection with the termination of the
Employee for Cause (as defined below); (b) the aggregate benefits enjoyed by the
Employee shall be materially diminished and the Employer shall not have
rectified same within thirty (30) days of written notice from the Employee; or
(c) within three (3) years of the Closing, any material function of the
Headquarters or a material number of personnel of the Employer is relocated
outside the greater St. Louis, Missouri area; or (d) there is a Change of
Control.
7.3. BY THE EMPLOYER FOR CAUSE. The Employer may terminate
this Agreement for Cause upon thirty (30) days' advance written notice to the
Employee. "CAUSE" shall mean (i) commission of a felony offense, (ii) the
refusal to comply with the
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<PAGE> 6
lawful directives of the CEO, within ten (10) days' after written notice thereof
from the CEO or (iii) conduct on the part of the Employee which constitutes
gross negligence or willful misconduct which conduct is not cured within ten
(10) days after written notice thereof from the CEO. The Employer agrees that if
the Employee has been terminated for Cause pursuant to clause (i) above and it
is subsequently reasonably demonstrated that there was no commission of a felony
offense, then upon the Employee's written request, Employer shall immediately
reinstate the Employee who shall resume his duties hereunder with no change in
the respective rights and obligations of the parties set forth herein and with
full reinstatement of economic benefits to the Employee which existed prior to
termination as if the Employee had not been terminated.
7.4. EFFECT OF TERMINATION. In the event of a termination of
this Agreement by the Employee pursuant to Section 7.1 or by the Employer
pursuant to Section 7.3 hereof, the Employer shall pay the Employee the
compensation and any other amounts to which he is entitled pursuant to this
Agreement through the end of the notice period, and thereafter all obligations
of the Employer shall terminate. In the event of a termination of this Agreement
by the Employer pursuant to Section 7.1 or by the Employee pursuant to Section
7.2 hereof or by the Employer without Cause, the Employer shall pay to the
Employee an amount equal to the aggregate base salary due the Employee during
the remainder of the Initial Term, or Renewal Term, as the case may be, of this
Agreement.
8. ASSIGNMENT OF THIS AGREEMENT. The parties agree that at the Closing,
Allen will (i) assign all of his rights hereunder to the Employer if a
restructuring has occurred or to one or more of the parent entities of the
Marcus Systems and the Charter Systems which in the aggregate shall have the
financial resources to fulfill the Employer's obligations hereunder and (ii)
cause the Employer to assume all of the rights and obligations of the Employer
hereunder. Furthermore the parties acknowledge that this Agreement is being
entered into in reliance on such assignment in order to afford sufficient time
to determine the structure for the functional combination of the Marcus Entities
and the Charter Entities prior to the Closing. It is the intention of the
parties that this Agreement become effective only upon the Closing. In no event
shall Allen have any personal obligations or liabilities hereunder regardless of
whether the Closing occurs.
9. NOTICES. Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be sufficiently given if
delivered in person or transmitted by telecopy or similar means of recorded
electronic communication to the relevant party as follows:
(a) in the case of the Employee, to the address
set forth opposite his name on the signature
page hereto, with a copy to:
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue
New York, NY 10022
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<PAGE> 7
Attention: Daniel G. Bergstein, Esq.
Telecopy: (212) 319-4090;
(b) in the case of the Employer, to:
110 110th Street, N.E.
Suite 550
Bellevue, WA 98004
Attention: William Savoy
Telecopy: (310) 203-7199
with a copy to:
Irell & Manella LLP
1800 Avenue of the Stars
Suite 900
Los Angeles, CA 90067
Attention: Alvin Segel, Esq.
Telecopy: (310) 203-7199
Any such notice or other communication shall be deemed to have been
given and received on the day on which it is delivered or telecopied (or, if
such day is not a business day or if the notice or other communication is not
telecopied during business hours, at the place of receipt, on the next following
business day). Any party may change its address for the purposes of this Section
9 by giving notice to the other parties in accordance with the foregoing.
10. ASSIGNABILITY AND ENFORCEABILITY. This Agreement shall be binding
on and enforceable by the parties and their respective successors and permitted
assigns. Except as provided in Section 8 hereof, no party may assign any of its
rights or benefits under this Agreement to any person without the prior written
consent of the other party.
11. EXPENSES OF THIS AGREEMENT. All costs and expenses of the Employer
(including, without limitation, legal, accounting and other professional fees)
incurred in connection with this Agreement or the transactions contemplated
hereby shall be paid by the Employer. All costs and expenses (including, without
limitation, legal, accounting and other professional fees) of the Employee
incurred in connection with this Agreement or the transactions contemplated
hereby shall be paid by CCI, but shall be included within the aggregate $10
million cap on such expenses as provided in the Charter Purchase Agreement.
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<PAGE> 8
12. CONSULTATION. The parties shall consult with each other before
issuing any press release or making any other public announcement with respect
to this Agreement or the transactions contemplated hereby and, except as
required by any applicable law or regulatory or stock exchange requirement,
neither of them shall issue any such press release or make any such public
announcement without the prior written consent of the other, which consent shall
not be unreasonably withheld or delayed.
13. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of New York, without giving effect to the
principles of conflicts of laws thereof.
14. THIRD PARTY BENEFICIARIES. Except for the purposes of Section 2
hereof (with respect to the exercise of authority regarding stay bonuses) and
Section 5 hereof (with respect to the exercise of consent to relocation of the
Headquarters), no person other than the parties hereto shall have any rights
under this Agreement.
15. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall constitute an original and all of which taken together shall
constitute one and the same instrument.
16. CURRENCY. Unless otherwise indicated, all dollar amounts in this
Agreement are expressed in United States dollars.
17. SECTIONS AND HEADINGS. The division of this Agreement into Sections
and the insertion of headings are for reference purposes only and shall not
affect the interpretation of this Agreement.
18. NUMBER AND GENDER. In this Agreement, words importing the singular
number only shall include the plural and vice versa and words importing gender
shall include all genders.
19. ENTIRE AGREEMENT. This Agreement and any agreements or documents
referred to herein or executed contemporaneously herewith, constitutes the
entire agreement among the parties with respect to the subject matter hereof and
supersedes all prior agreements, understandings, negotiations and discussions,
whether written or oral. There are no conditions, covenants, agreements,
representations, warranties or other provisions, express or implied, collateral,
statutory or otherwise, relating to the subject matter hereof except as herein
provided.
20. SEVERABILITY. If any provision of this Agreement is determined by a
court of competent jurisdiction to be invalid, illegal or unenforceable in any
respect, such determination shall not impair or affect the validity, legality or
enforceability of the remaining provisions hereof, and each provision is hereby
declared to be separate, severable and distinct.
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<PAGE> 9
21. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of
this Agreement shall be binding on any party unless consented to in writing by
such party. No waiver of any provision of this Agreement shall be construed as a
waiver of any other provision nor shall any waiver constitute a continuing
waiver unless otherwise expressly provided. No provision of this Agreement shall
be deemed waived by a course of conduct unless such waiver is in writing signed
by all parties and stating specifically that it was intended to modify this
Agreement.
-9-
<PAGE> 10
22. SURVIVABILITY. Notwithstanding any contrary provision in this
Agreement, the provisions of Section 6 hereof shall survive the termination of
this Agreement.
IN WITNESS WHEREOF the parties have executed this Agreement.
/s/ Paul G. Allen by William D. Savoy
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By William D. Savoy, Attorney-In-Fact
HOWARD L. WOOD
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<PAGE> 1
Exhibit 10.10
CHARTER COMMUNICATIONS HOLDING COMPANY, LLC
July 22, 1999
Charter Communications Holdings, LLC
12444 Powerscourt Drive
St. Louis, Missouri 63131
Re: Contribution of Capital to Charter Communications Holdings, LLC
To Whom it May Concern:
Introduction. Reference is hereby made to that certain Membership
Interests Purchase Agreement dated as of July 22, 1999 by and between Charter
Communications Holding Company, LLC, a Delaware limited liability company (the
"Company") and Paul G. Allen, an individual ("Allen"), pursuant to which Allen
agreed to purchase membership interests in the Company for a total purchase
price of $1.325 billion (the "Purchase Price").
Agreement. The Company hereby agrees to contribute, immediately upon
receipt of such purchase price, or any portion thereof, the full amount of such
purchase price, or such portion thereof, to the capital of Charter
Communications Holdings, LLC to be used to fund the pending acquisitions of
Charter Communications Holdings, LLC.
Governing Law. This Letter Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, as such laws are applied
to contracts entered into and performed in such state without resort to that
state's conflict-of-laws rules.
<PAGE> 2
Charter Communications Holdings, LLC
July 22, 1999
page 2
Counterparts. This Letter Agreement may be executed in one or more
counterparts, each of which shall be an original, but all of which, when taken
together, shall constitute one and the same agreement. This Letter Agreement
shall become effective when one or more counterparts has been signed by each of
the parties and delivered to the other party.
CHARTER COMMUNICATIONS HOLDING COMPANY,
LLC
By: /s/ Curtis S. Shaw
--------------------------------------
Name: Curtis S. Shaw
Title: Senior Vice President
Acknowledged and agreed
this 22nd day of July, 1999.
CHARTER COMMUNICATIONS
HOLDINGS, LLC
By: /s/ Curtis S. Shaw
---------------------------
Name: Curtis S. Shaw
Title: Senior Vice President
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
covering the audited financial statements of Charter Communications Holdings,
LLC, CCA Group, CharterComm Holdings, L.P., Long Beach Acquisition Corp., Sonic
Communications Cable Television Systems, and Greater Media Cablevision Systems
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
ST. LOUIS, MISSOURI
AUGUST 10, 1999
