<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______ to ______.
Commission File Numbers:
333-77499
333-77499-01
CHARTER COMMUNICATIONS HOLDINGS, LLC
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION*
----------------------------------------------------
(Exact names of registrants as specified in their charters)
Delaware 43-1843179
-------- ----------
Delaware 43-1843177
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12444 Powerscourt Drive - Suite 100
St. Louis, Missouri 63131
---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (314) 965-0555
--------------
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
Number of shares of Charter Communications Holdings Capital Corporation common
stock outstanding as of August 10, 2000: 100.
* Charter Communications Holdings Capital Corporation meets the conditions set
forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore
filing this Form with the reduced disclosure format.
<PAGE> 2
CHARTER COMMUNICATIONS HOLDINGS, LLC
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
FORM 10-Q -- FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements -- Charter Communications Holdings, LLC and Subsidiaries. 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 30
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds. 31
Item 6. Exhibits and Reports on Form 8-K. 31
Signatures. 32
</TABLE>
NOTE: Separate financial statements of Charter Communications Holdings
Capital Corporation have not been presented as this entity had no
operations and substantially no assets or equity. Accordingly,
management has determined that these financial statements are not
material.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This Report 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. Many
of the forward-looking statements contained in this Report may be identified by
the use of forward-looking words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential," among others. Important
factors that could cause actual results to differ materially from the
forward-looking statements we make in this Report are set forth in this Report
and in other reports or documents that we file from time to time with the
Securities and Exchange Commission and include, but are not limited to:
o Our plans to achieve growth by offering new products and services and
through acquisitions and swaps;
o Our anticipated capital expenditures for our planned upgrades and the
ability to fund these expenditures;
o Our beliefs regarding the effects of governmental regulation on our
business; and
o Our ability to effectively compete in a highly competitive
environment.
All forward-looking statements attributable to us or a person acting on our
behalf are expressly qualified in their entirety by those cautionary statements.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999*
----------------- ------------------
<S> <C> <C>
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 74,365 $ 114,096
Accounts receivable, less allowance for doubtful accounts of $12,675
and $11,471, respectively 122,869 93,743
Receivables from manager of cable systems - related parties 21,881 --
Prepaid expenses and other 38,260 34,513
----------------- ------------------
Total current assets 257,375 242,352
----------------- ------------------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment, net of accumulated depreciation of
$681,866 and $317,079, respectively 4,202,570 3,490,573
Franchises, net of accumulated amortization of $1,262,944 and $650,476,
respectively 17,338,243 14,985,793
----------------- ------------------
21,540,813 18,476,366
----------------- ------------------
OTHER ASSETS 216,512 220,759
----------------- ------------------
$ 22,014,700 $ 18,939,477
================= ==================
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,033,792 $ 704,734
Payables to manager of cable systems - related parties -- 6,713
----------------- ------------------
Total current liabilities 1,033,792 711,447
----------------- ------------------
LONG-TERM DEBT 11,605,328 8,936,455
----------------- ------------------
LOANS PAYABLE - RELATED PARTIES 5,000 1,079,163
----------------- ------------------
DEFERRED MANAGEMENT FEES - RELATED PARTIES 13,751 21,623
----------------- ------------------
OTHER LONG-TERM LIABILITIES 146,744 142,836
----------------- ------------------
MINORITY INTEREST 634,179 --
----------------- ------------------
MEMBER'S EQUITY:
Member's equity (217,585,246 units issued and outstanding at
June 30, 2000 and December 31, 1999) 8,574,744 8,045,737
Accumulated other comprehensive income 1,162 2,216
----------------- ------------------
Total member's equity 8,575,906 8,047,953
----------------- ------------------
$ 22,014,700 $ 18,939,477
================= ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
---------
* Agrees with the supplemental audited consolidated balance sheet included
in Amendment No. 1 to the Company's Registration Statement on Form S-4.
3
<PAGE> 4
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
--------------------- ---------------------
<S> <C> <C>
REVENUES $ 794,780 $ 308,037
--------------------- ---------------------
OPERATING EXPENSES:
Operating, general and administrative 406,208 158,250
Depreciation 296,912 55,193
Amortization 306,545 104,681
Option compensation expense 10,589 21,543
Corporate expense charges -- related parties 15,007 8,145
--------------------- ---------------------
1,035,261 347,812
--------------------- ---------------------
Loss from operations (240,481) (39,775)
OTHER INCOME (EXPENSE):
Interest expense (249,856) (112,243)
Interest income 347 8,421
Other, net (598) 2,667
--------------------- ---------------------
(250,107) (101,155)
--------------------- ---------------------
Loss before minority interest (490,588) (140,930)
MINORITY INTEREST EXPENSE (3,139) --
--------------------- ---------------------
Net loss $ (493,727) $(140,930)
===================== =====================
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
4
<PAGE> 5
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
--------------------- ---------------------
<S> <C> <C>
REVENUES $ 1,516,384 $ 468,993
--------------------- ---------------------
OPERATING EXPENSES:
Operating, general and administrative 777,977 241,341
Depreciation 549,788 78,728
Amortization 599,769 171,224
Option compensation expense 26,089 38,194
Corporate expense charges -- related parties 27,515 11,073
--------------------- ---------------------
1,981,138 540,560
--------------------- ---------------------
Loss from operations (464,754) (71,567)
OTHER INCOME (EXPENSE):
Interest expense (496,890) (157,669)
Interest income 5,470 10,085
Other, net (466) 2,840
--------------------- ---------------------
(491,886) (144,744)
--------------------- ---------------------
Loss before minority interest and extraordinary item (956,640) (216,311)
MINORITY INTEREST EXPENSE (4,691) --
--------------------- ---------------------
Loss before extraordinary item (961,331) (216,311)
EXTRAORDINARY ITEM -- Loss from early extinguishment of debt -- (7,794)
--------------------- ---------------------
Net loss $ (961,331) $(224,105)
===================== =====================
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
5
<PAGE> 6
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (961,331) $ (224,105)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Minority interest expense 4,691 --
Depreciation and amortization 1,149,557 249,952
Option compensation expense 26,089 38,194
Non-cash interest expense 86,251 42,166
Gain on disposal of property, plant and equipment -- (1,806)
Loss from early extinguishment of debt -- 7,794
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (44,156) 1,180
Prepaid expenses and other 23,041 (282)
Accounts payable and accrued expenses 347,128 19,384
Payables to manager of cable systems -- related parties,
including deferred management fees (36,466) 14,592
Other operating activities (710) (1,245)
-------------------- -------------------
Net cash provided by operating activities 594,094 145,824
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,018,728) (205,450)
Payments for acquisitions, net of cash acquired (100,444) (1,135,074)
Loan to Marcus Cable Holdings, LLC -- (1,680,142)
Other investing activities (5,514) (8,684)
-------------------- -------------------
Net cash used in investing activities (1,124,686) (3,029,350)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt, including proceeds from Charter Holdings Notes 4,026,303 5,129,188
Repayments of long-term debt (2,434,820) (2,008,330)
Borrowings from related parties 444,000 --
Repayments of loans payable to related parties (1,518,000) --
Payments for debt issuance costs (47,848) (107,562)
Capital contribution 47,000 --
Capital distributions (26,591) (9,717)
Payment to related party -- (20,000)
Other financing activities 817 --
-------------------- -------------------
Net cash provided by financing activities 490,861 2,983,579
-------------------- -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (39,731) 100,053
CASH AND CASH EQUIVALENTS, beginning of period 114,096 9,573
-------------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $ 74,365 $ 109,626
==================== ===================
CASH PAID FOR INTEREST $ 247,485 $ 91,672
==================== ===================
NON-CASH TRANSACTIONS:
Transfer of net assets of Marcus Cable Holdings, LLC to the Company $ -- $1,252,370
==================== ===================
Transfer of operating subsidiaries to the Company $ 1,057,890 $ --
==================== ===================
Issuance of equity by parent for acquisition $ 384,621 $ --
==================== ===================
Preferred equity issued by subsidiary for acquisition $ 629,489 $ --
==================== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
6
<PAGE> 7
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited
liability company, owns and operates cable systems serving approximately 6.2
million customers. Charter Holdings offers a full range of traditional cable
television services and digital cable television services, interactive video
programming and high-speed Internet access. Charter Holdings is a subsidiary of
Charter Communications Holding Company, LLC (Charter Holdco), which is a
subsidiary of Charter Communications, Inc. (Charter).
Charter Holdings and its subsidiaries are collectively referred to as the
"Company" herein. All material intercompany transactions and balances have been
eliminated in consolidation.
2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of the Company have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The accompanying consolidated financial statements are unaudited; however,
in the opinion of management, such statements include all adjustments, which
consist of only normal recurring adjustments, necessary for a fair presentation
of the results for the periods presented. Interim results are not necessarily
indicative of results for a full year. For further information, see the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 and
Amendment No.1 to the Company's Registration Statement on Form S-4.
3. ACQUISITIONS AND TRANSFERS
On January 1, 2000, Charter Holdco and Charter Holdings effected a number
of transactions in which certain cable systems acquired by Charter Holdco in
November 1999 were contributed to Charter Holdings (the "Transferred Systems").
Effective January 1, 2000, Charter Holdings accounted for the contribution of
the Transferred Systems as a reorganization of entities under common control in
a manner similar to a pooling of interests. The accompanying consolidated
balance sheet as of December 31, 1999, reflects this reorganization. The
accounts of the Transferred Systems are included in Charter Holdings' financial
statements from the date the Transferred Systems were acquired by Charter
Holdco.
On February 14, 2000, Charter Holdco and Charter Holdings completed the
acquisition of Bresnan Communications Company Limited Partnership (Bresnan). The
Bresnan cable systems acquired are primarily located in Michigan, Minnesota,
Wisconsin and Nebraska and serve approximately 691,900 customers at June 30,
2000.
The purchase price for Bresnan was $3.1 billion, subject to adjustment, and
was comprised of $1.1 billion in cash, $384.6 million of equity (14.8 million
Class C common membership units) in Charter Holdco and $629.5 million of equity
(24.2 million Class A preferred membership units) in CC VIII, LLC (CC VIII), a
subsidiary of Charter Holdings, and $963.3 million in assumed debt. The holders
of the Class A preferred membership units are entitled to a 2% annual return.
All of the membership units received by the sellers are exchangeable on a
one-for-one basis for Class A common stock of Charter. The Bresnan sellers who
acquired Class C common membership units of Charter Holdco and Class A preferred
membership units in CC VIII may
7
<PAGE> 8
have rescission rights against Charter Holdco and Charter arising out of
possible violations of Section 5 of the Securities Act of 1933, as amended, in
connection with the offers and sales of these equity interests (see Note 5).
The Bresnan acquisition was accounted for using the purchase method of
accounting, and, accordingly, results of operations of the acquired assets have
been included in the financial statements from the date of acquisition. The
purchase price was allocated to assets acquired and liabilities assumed based on
their relative fair values, including amounts assigned to franchises of $2.8
billion. The allocation of the purchase price for the Bresnan acquisition is
based, in part, on preliminary information, which is subject to adjustment upon
obtaining complete valuation information. Management believes that finalization
of the purchase price and allocation will not have a material impact on the
consolidated results of operations or financial position of the Company.
In April 2000, one of Charter's subsidiaries purchased a cable system from
Falcon/Capital Cable Partners, L.P. (Capital Cable) and another cable system
from Farmington Cablevision Company (Farmington). These cable systems are
primarily located in Illinois, Indiana and Missouri and serve approximately
29,500 customers at June 30, 2000. The aggregate purchase price for these
acquisitions was $75.0 million in cash and was funded with borrowings from the
Charter Operating Credit Facilities (see Note 4).
Pro forma operating results of the Company as though the Bresnan, Capital
Cable and Farmington acquisitions, transfers and the issuance and sale of the
January 2000 Charter Holdings Notes (see Note 4) had occurred on January 1,
1999, with adjustments to give effect to amortization of franchises, interest
expense, and certain other adjustments, follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------ ----------------------------------
2000 1999 2000 1999
-------------- ----------------- -------------- ----------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues $ 794,780 $ 724,047 $ 1,553,874 $ 1,438,405
Loss from operations (240,481) (114,875) (481,615) (238,535)
Net loss (493,727) (346,507) (1,008,828) (718,609)
</TABLE>
The pro forma information has been presented for comparative purposes and
does not purport to be indicative of the results of operations had these
transactions been completed as of the assumed date or which may be obtained in
the future.
In March 2000, Charter entered into an agreement providing for the merger
of Cablevision of Michigan, Inc., the indirect owner of a cable system in
Kalamazoo, Michigan, with and into Charter. The merger consideration of
approximately $172.5 million will be paid in Class A common stock of Charter.
After the merger, Charter will contribute 100% of the equity interests of the
direct owner of the Kalamazoo system to Charter Holdco in exchange for
membership units. Charter Holdco will in turn contribute 100% of the assets and
100% of the equity interests to Charter Holdings. The Kalamazoo cable system has
approximately 49,300 customers at June 30, 2000 and had revenues of
approximately $10.2 million for the six months ended June 30, 2000. This
acquisition is expected to close in the third quarter of 2000.
8
<PAGE> 9
4. LONG-TERM DEBT
JANUARY 2000 CHARTER HOLDINGS NOTES. On January 12, 2000, Charter Holdings
and Charter Communications Holdings Capital Corporation issued notes with a
principal amount of $1.5 billion (January 2000 Charter Holdings Notes). The
January 2000 Charter Holdings Notes consist of $675.0 million 10.00% Senior
Notes due 2009, $325.0 million 10.25% Senior Notes due 2010 and $532.0 million
11.75% Senior Discount Notes due 2010. The net proceeds were approximately $1.3
billion, after giving effect to discounts, commissions and expenses. The
proceeds from the sale of the January 2000 Charter Holdings Notes were used to
finance the repurchases of debt assumed in certain transactions, as described
below.
In June 2000, Charter Holdings and Charter Communications Holdings Capital
Corporation exchanged these notes for new January 2000 Charter Holdings Notes,
with substantially similar terms, except that the new January 2000 Charter
Holdings Notes are registered under the Securities Act of 1933, as amended, and,
therefore, do not bear legends restricting their transfer.
CC V HOLDINGS, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "AVALON") NOTES. In
January 2000, through change of control offers and purchases in the open market,
all of the Avalon 9.375% Senior Subordinated Notes due 2008 with a principal
amount of $150.0 million were repurchased for $153.7 million. In addition, also
through change of control offers, $16.3 million in aggregate principal amount at
maturity of the Avalon 11.875% Senior Discount Notes due 2008 was repurchased
for $10.5 million. As of June 30, 2000, Avalon 11.875% notes with an aggregate
principal amount of $179.8 million at maturity and an accreted value of $121.2
million remain outstanding.
CC VII HOLDINGS, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "FALCON")
DEBENTURES. In February 2000, through change of control offers and purchases in
the open market, all of the Falcon 8.375% Senior Debentures due 2010 with a
principal amount of $375.0 million were repurchased for $388.0 million, and all
of the Falcon 9.285% Senior Discount Debentures due 2010 with an aggregate
principal amount at maturity of $435.3 million were repurchased for $328.1
million.
CC VIII, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "BRESNAN") CREDIT
FACILITIES. Upon the closing of the Bresnan acquisition on February 14, 2000,
the then-existing Bresnan credit facilities were amended and assumed. The
Bresnan credit facilities provide for borrowings of up to $900.0 million,
consisting of: two term facilities, one with a principal amount of $403.0
million (Term A) and the other with a principal amount of $297.0 million (Term
B), and a reducing revolving loan facility in the amount of $200.0 million. The
Bresnan credit facilities provide for the amortization of the principal amount
of the Term A loan facility and the reduction of the revolving loan facility
beginning March 31, 2002 with a final maturity date of June 30, 2007. The
amortization of the Term B loan facility is substantially "back-ended" with more
than ninety percent of the principal balance due on the final maturity date of
February 2, 2008. The Bresnan credit facilities also provide for an incremental
facility of up to $200.0 million that is conditioned upon receipt of additional
commitments from lenders. Amounts under the Bresnan credit facilities bear
interest at the Base Rate or the Eurodollar Rate, as defined, plus a margin of
up to 2.75%. A quarterly commitment fee of between 0.250% and 0.375% is payable
on the unborrowed balance of Term A and the revolving loan facility. At the
closing of the Bresnan acquisition, $599.9 million was borrowed to replace the
borrowings outstanding under the previous credit facilities, and an additional
$31.3 million was borrowed to fund a portion of the Bresnan purchase price. As
of June 30, 2000, $638.9 million was outstanding, and $261.1 million was
available for borrowing.
BRESNAN NOTES. Upon the closing of the Bresnan acquisition, Charter Holdco
and Charter assumed Bresnan's $170.0 million in principal amount of 8% Senior
Notes due 2009 and $275.0 million in principal amount at maturity of 9.25%
Senior Discount Notes due 2009. In March 2000, all of the outstanding Bresnan
notes were repurchased at 101% of the outstanding principal amounts plus accrued
and unpaid interest or accreted value, as applicable, for a total of $369.7
million using proceeds from the sale of the January 2000 Charter Holdings Notes.
9
<PAGE> 10
CHARTER COMMUNICATIONS OPERATING, LLC CREDIT FACILITIES. In March 2000, the
Charter Operating Credit Facilities were amended to increase the amount of the
supplemental credit facility to $1.0 billion. In connection with this amendment,
$600.0 million of the supplemental credit facility was exercised, thereby
increasing the total borrowing capacity to $4.7 billion. The remaining $400.0
million of the supplemental credit facility is subject to the Company's ability
to obtain additional commitments from the lenders. As of June 30, 2000,
outstanding borrowings were $4.2 billion, and the unused availability was $0.5
billion.
CHARTER HOLDINGS SENIOR BRIDGE LOAN FACILITY. On August 4, 2000, Morgan
Stanley Senior Funding, Inc. and other lenders, and Charter Holdings and Charter
Communications Holdings Capital Corporation entered into a senior bridge loan
agreement providing for senior increasing rate bridge loans in an aggregate
principal amount of up to $1.0 billion.
On August 14, 2000, the Company borrowed $1.0 billion under the bridge loan
facility and used the proceeds to repay a portion of the amounts outstanding
under certain of its credit facilities. This loan initially bears interest at an
annual rate equal to the yield corresponding to the bid price on Charter
Holdings 10.25% notes less 0.25% calculated as of August 14, 2000, the funding
date of the loan. If this loan is not repaid within 90 days following August 14,
2000, the interest rate will increase by 1.25% at the end of such 90-day period
and will increase by an additional 0.50% at the end of each additional 90-day
period. Unless additional default interest is assessed, the interest rate on
this bridge loan will be between 9% and 15% annually. The bridge loan matures
one year from August 14, 2000 and upon payment of any accrued and unpaid
interest shall convert to a term loan that matures on the tenth anniversary of
the initial bridge loan borrowing. The term loan will bear interest at a rate
equal to the greater of the applicable rate of the bridge loan on the date on
the conversion plus 0.50%, and the yield corresponding to the bid price on
Charter Holdings 10.25% notes as of the date immediately prior to the
conversion. If the term loan is not repaid within 90 days after the conversion
from the bridge loan, the interest rate will increase by 0.50% at the end of
each 90-day period. The interest rate on the term loan will be between 9% and
15% annually.
5. POSSIBLE RESCISSION LIABILITY
The Company acquired Helicon I, L.P. and affiliates (Helicon) in July 1999
and acquired Rifkin Acquisition Partners L.L.L.P. and InterLink Communications
Partners, LLLP (collectively, "Rifkin") in September 1999. Charter Holdco
acquired Falcon Communications, L.P. (Falcon) in November 1999, and the Company
acquired Bresnan in February 2000. In connection with these acquisitions, the
Rifkin, Falcon and Bresnan sellers who acquired Charter Holdco membership units
or, in the case of Bresnan, additional equity interests in a subsidiary of
Charter Holdings and the Helicon sellers who acquired shares of Class A common
stock in Charter's initial public offering may have rescission rights against
Charter and Charter Holdco arising out of possible violations of Section 5 of
the Securities Act of 1933, as amended, in connection with the offers and sales
of these equity interests.
If all of these equity holders successfully exercised their possible
rescission rights, Charter or Charter Holdco would become obligated to
repurchase all such equity interests, and the total repurchase obligation could
be as much as up approximately $1.8 billion as of June 30, 2000. If Charter and
Charter Holdco fail to obtain capital sufficient to fund any required
repurchases, they could seek funds from Charter Holdings and its subsidiaries.
This could adversely affect the Company's consolidated financial condition and
results of operations. These possible rescission rights expire one year from the
dates of issuance or purchase of these equity interests.
10
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6. REVENUES
Revenues consist of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- ------------------- -------------- --------------
<S> <C> <C> <C> <C>
Basic $ 569,197 $ 218,600 $ 1,093,744 $ 328,190
Premium 58,194 27,432 113,967 42,776
Pay-per-view 8,796 5,711 16,027 10,361
Digital 15,066 7,752 24,262 7,942
Advertising sales 41,794 15,483 75,072 23,322
Data 13,626 1,457 23,338 2,175
Other 88,107 31,602 169,974 54,227
--------------- ------------------- -------------- --------------
$ 794,780 $ 308,037 $ 1,516,384 $ 468,993
=============== =================== ============== ==============
</TABLE>
7. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------- --------------------------------
2000 1999 2000 1999
-------------- ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Programming $ 181,635 $ 71,521 $ 346,460 $ 107,947
General and administrative 133,881 53,800 259,173 81,056
Service 46,594 19,298 93,685 29,616
Advertising 14,271 1,694 26,548 5,353
Marketing 17,644 9,525 29,337 13,123
Other 12,183 2,412 22,774 4,246
-------------- ------------------ -------------- ---------------
$ 406,208 $ 158,250 $ 777,977 $ 241,341
============== ================== ============== ===============
</TABLE>
8. COMPREHENSIVE LOSS (in thousands)
Comprehensive loss was $493,721 and $140,930 for the three months ended
June 30, 2000 and 1999, respectively, and $962,385 and $224,105 for the six
months ended June 30, 2000 and 1999, respectively. The Company owns common stock
of WorldGate Communications, Inc. and of Motorola, Inc. that is classified as
"available for sale" and reported at market value, with unrealized gains and
losses recorded as accumulated other comprehensive income in the accompanying
consolidate balance sheet.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Reference is made to the "Certain Trends and Uncertainties" section below
in this Management's Discussion and Analysis for a discussion of important
factors that could cause actual results to differ from expectations and
non-historical information contained herein.
INTRODUCTION
We do not believe that our historical financial condition and results of
operations are accurate indicators of future results because of certain past and
pending events, including:
(1) the merger of Marcus Cable Holdings, LLC (Marcus Holdings) with and
into Charter Communications Holdings, LLC (Charter Holdings) in March
1999;
(2) our acquisitions and transfers completed in 1999 and 2000, and the
pending Kalamazoo transaction;
(3) the refinancing or replacement of previous credit facilities; and
(4) the purchase of publicly held notes that had been issued by several of
our direct and indirect subsidiaries.
As of June 30, 2000, our cable systems served approximately 400% more customers
than we served as of December 31, 1998.
GENERAL
Charter Communications, Inc. (Charter) and its subsidiaries own and operate
cable systems serving approximately 6.2 million customers. We currently offer
our customers a full array of traditional cable television services and advanced
high bandwidth services such as digital video and related enhancements,
interactive video programming, Internet access through television-based service,
dial-up telephone modems and high-speed cable modem service. We plan to
continually enhance and upgrade these services, including adding new programming
and other telecommunications services such as interactive programming and
telephony.
12
<PAGE> 13
The following statistics for June 30, 2000 and June 30, 1999, are actual;
the statistics for December 31, 1999, are pro forma for acquisitions and
transfers completed since that date, including the Bresnan acquisition.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA ACTUAL
JUNE 30, 2000 DECEMBER 31, 1999 JUNE 30, 1999
------------- ----------------- -------------
<S> <C> <C> <C>
CABLE TELEVISION
Homes Passed 10,006,700 9,914,000 4,509,000
Basic Customers 6,214,100 6,144,600 2,734,000
Basic Penetration 62.1% 62.0% 60.6%
Premium Subscriptions 3,297,000 3,114,400 1,676,000
Premium Penetration 53.1% 50.7% 61.3%
Average Monthly Revenue per
Basic Customer (quarter) $42.63 $41.12 $37.56
DIGITAL VIDEO
Homes Passed 6,528,100 4,675,000 330,000
Digital Customers 375,000 155,400 10,900
Penetration 5.7% 3.3% 3.3%
Digital Converters Deployed 456,100 176,600 12,400
DATA
Homes Passed 5,201,700 4,422,000 1,450,700
Data Customers 149,300 84,400 13,500
Penetration 2.9% 1.9% 0.9%
TELEVISION-BASED INTERNET ACCESS
Homes Passed 429,000 429,000 245,200
Customers 7,200 7,100 4,300
Penetration 1.7% 1.7% 1.8%
</TABLE>
13
<PAGE> 14
ACQUISITIONS AND TRANSFERS
The following table sets forth information on our acquisitions in 1999:
<TABLE>
<CAPTION>
PURCHASE PRICE,
INCLUDING DEBT CUSTOMERS
ACQUISITION ASSUMED AS OF
DATE (IN MILLIONS) JUNE 30, 2000
----------- --------------- -------------
<S> <C> <C> <C>
Renaissance Media Group LLC 4/99 $ 459 135,000
American Cable Entertainment, LLC 5/99 240 68,700
Cable systems of Greater Media Cablevision, Inc. 6/99 500 177,100
Helicon Partners I, L.P. and affiliates 7/99 550 173,100
Vista Broadband Communications, L.L.C. 7/99 126 26,800
Cable systems of Cable Satellite of South Miami, Inc. 8/99 22 8,100
Rifkin Acquisition Partners, L.L.L.P. and
InterLink Communications Partners, LLLP 9/99 1,460 458,200
Cable systems of InterMedia Capital Partners IV, L.P.
InterMedia Partners and affiliates 10/99 873+ 409,800
systems swap (142,000)(a)
-------------- --------------
267,800
--------------
Total $4,230 1,314,800
============== ==============
</TABLE>
--------
(a) As part of the October 1999 transaction with InterMedia Capital Partners IV,
L.P., InterMedia Partners and affiliates (collectively, "InterMedia"), we agreed
to swap some of our non-strategic cable systems located in Indiana, Montana,
Utah and northern Kentucky, representing 142,000 basic customers. We transferred
cable systems with 112,000 customers to InterMedia in connection with this swap
in October 1999. The remaining cable system, with customers totaling 30,000, was
transferred in March 2000 after receipt of the necessary regulatory approvals.
This swap is reflected in its entirety in the 1999 acquisition table above.
In addition, in April 1999, Marcus Cable Holdings, LLC (Marcus Holdings)
was merged into Charter Holdings, and the operating subsidiaries of Marcus
Holdings and all of the cable systems they owned came under the ownership of
Charter Holdings. As of June 30, 2000, Marcus Holdings had 961,900 customers.
On January 1, 2000, as a result of transfers from Charter Communications
Holding Company, LLC (Charter Holdco), Charter Holdings became the indirect
owner of the Fanch, Falcon and Avalon cable systems acquired by Charter Holdco
in November 1999.
The following table sets forth information on transfers from Charter Holdco
to Charter Holdings in January 2000:
<TABLE>
<CAPTION>
PURCHASE PRICE,
INCLUDING DEBT CUSTOMERS
TRANSFER ASSUMED AS OF
DATE (IN MILLIONS) JUNE 30, 2000
-------- --------------- -------------
<S> <C> <C> <C>
Fanch 1/00 2,400 535,300
Falcon 1/00 3,481 964,800
Avalon 1/00 832 257,600
-------------- -----------
Total $ 6,713 1,757,700
============== ===========
</TABLE>
14
<PAGE> 15
On February 14, 2000, Charter Holdco and Charter Holdings completed the
acquisition of Bresnan Communications Company Limited Partnership (Bresnan). The
Bresnan cable systems acquired are located primarily in Michigan, Minnesota,
Wisconsin and Nebraska. The purchase price for Bresnan was $3.1 billion, subject
to adjustment, and was comprised of $1.1 billion in cash, $384.6 million and
$629.5 million in equity in Charter Holdco and CC VIII, LLC (CC VIII),
respectively, and approximately $963.3 million in assumed debt. The holders of
the CC VIII equity are entitled to a 2% annual return. All of the membership
units received by the sellers are exchangeable on a one-for-one basis for Class
A common stock of Charter.
The following table sets forth information on acquisitions since January 1,
2000:
<TABLE>
<CAPTION>
PURCHASE PRICE,
INCLUDING DEBT CUSTOMERS
ACQUISITION ASSUMED AS OF
DATE (IN MILLIONS) JUNE 30, 2000
----------- --------------- -------------
<S> <C> <C> <C>
Cable system of Interlake
Cablevision Enterprises, LLC (ICE) 2/00 $ 13 5,800
Bresnan 2/00 3,100 691,900
Cable system of Falcon/Capital
Cable Partners, L.P. 4/00 60 23,900
Cable system of Farmington
Cablevision Company 4/00 15 5,600
------- -------
Total $ 3,188 727,200
======= =======
</TABLE>
PENDING KALAMAZOO TRANSACTION
In March 2000, Charter entered into an agreement providing for the merger
of Cablevision of Michigan, Inc., the owner of a cable system in Kalamazoo,
Michigan, with and into Charter. The merger consideration of $172.5 million will
be paid in Charter's Class A common stock. After the merger, Charter will
contribute 100% of the equity interests of the direct owner of the Kalamazoo
system to Charter Holdco in exchange for membership units. Charter Holdco will,
in turn, contribute all of the assets and all of the equity interests to us. The
Kalamazoo cable system has approximately 49,300 customers and had revenues of
approximately $10.2 million for the six months ended June 30, 2000. We
anticipate that this acquisition will close in the third quarter of 2000.
OVERVIEW OF OPERATIONS
Approximately 87% and 88% of our historical revenues for the three months
and six months ended June 30, 2000, respectively, are attributable to monthly
subscription fees charged to customers for our basic, expanded basic and premium
cable television programming services, equipment rental and ancillary services
provided by our cable systems. In addition, we derive other revenues from
installation and reconnection fees charged to customers to commence or reinstate
service, pay-per-view programming, where users are charged a fee for individual
programs requested, advertising revenues and commissions related to the sale of
merchandise by home shopping services. We have generated increased revenues in
each of the past three years, primarily through internal customer growth, basic
and expanded tier rate increases, customer growth from acquisitions, and
revenues from new services and products. These new services and products are
expected to significantly contribute to our future revenues provided that the
necessary equipment is available from our vendors. One of these services is
digital cable, which provides customers with additional programming options. We
are also offering high-speed Internet access to the World Wide Web through cable
modems. In addition, we are launching video on demand service in certain
systems. Our television-based Internet access allows us to offer users TV-based
e-mail and other Internet access. Finally, we continue to work together with
several companies in a field trial of telephony.
Our expenses primarily consist of operating costs, general and
administrative expenses, depreciation and
15
<PAGE> 16
amortization expense, interest expense and 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 accounted for approximately 45% of our operating,
general and administrative expenses for the three months and six months ended
June 30, 2000. Programming costs have increased in recent years and are expected
to continue to increase due to additional programming being provided to
customers and increased cost to purchase cable programming due to inflation and
other factors affecting the cable television industry. As we continue to upgrade
and rebuild our cable systems, additional channel capacity will be available
resulting in increased programming costs. In each year we have operated, our
costs to acquire programming have exceeded customary inflationary increases.
Significant factors with respect to increased programming costs are 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 benefited in the past from our membership
in an industry cooperative that provided members with volume discounts from
programming networks. This industry cooperative no longer exists. However, our
increased size is believed to give us substantially equivalent buying power.
Also, we have been able to negotiate favorable terms with premium networks in
conjunction with the premium packages we offer, 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 (both increase with the closing of acquisitions).
Corporate expense charges are fees paid or charges for management services.
Pursuant to various management agreements with Charter, Charter manages and
operates the cable systems owned by Charter Holdings and its subsidiaries.
Pursuant to a mutual services agreement between Charter and Charter Investment,
Inc. (Charter Investment), each entity provides services to the other in order
to manage Charter Holdco and to manage and operate the cable systems owned by
its subsidiaries, including Charter Holdings. We record actual expenses incurred
by Charter on our behalf. All expenses and costs incurred by Charter with
respect to the services provided are paid by us. Our credit facilities limit the
amount of such reimbursements.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. The principal reasons for our prior and
anticipated net losses include depreciation and amortization expenses associated
with our acquisitions and 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.
16
<PAGE> 17
RESULTS OF OPERATIONS
The following discusses the results of operations for:
(1) Charter Holdings, comprised of the Charter companies (Charter
Communications Properties Holdings, LLC, CCA Group, and CharterComm
Holdings, LLC) and the following for the three months and six months
ended June 30, 1999:
o Marcus Holdings for the period from March 31, 1999, the date Mr.
Allen acquired voting control, through June 30, 1999;
o Renaissance Media Group LLC for the period from April 30, 1999,
the acquisition date, through June 30, 1999; and
o American Cable Entertainment, LLC for the period from May 7,
1999, the acquisition date, through June 30, 1999.
(2) Charter Holdings, comprised of the Charter companies, all acquisitions
closed during 1999 (including the transfer of the Fanch, Falcon and
Avalon cable systems) and the following for the three months and six
months ended June 30, 2000:
o ICE from February 2, 2000, the acquisition date, through June 30,
2000;
o Bresnan from February 14, 2000, the acquisition date, through
June 30, 2000;
o Cable system of Farmington from April 1, 2000, the acquisition
date, through June 30, 2000; and
o Cable system of Capital Cable from April 1, 2000, the acquisition
date, through June 30, 2000.
Since January 1, 1999, we have closed numerous acquisitions. In addition,
we merged with Marcus Holdings effective in April 1999. Thus, amounts for the
three months and six months ended June 30, 2000, are not comparable to those for
the three months and six months ended June 30, 1999.
17
<PAGE> 18
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
The following table sets forth the percentages of revenues that items in
the statements of operations constitute for the indicated periods (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------------------- ---------------------------
AMOUNT % AMOUNT %
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues................................ $ 794,780 100.0% $ 308,037 100.0%
---------- ----- --------- -----
Operating expenses:
Operating............................. 272,327 34.3% 104,450 33.9%
General and administrative............ 133,881 16.8% 53,800 17.5%
Depreciation.......................... 296,912 37.4% 55,193 17.9%
Amortization.......................... 306,545 38.6% 104,681 34.0%
Option compensation expense........... 10,589 1.3% 21,543 7.0%
Corporate expense charges............. 15,007 1.9% 8,145 2.6%
---------- ----- --------- -----
Total operating expenses................ 1,035,261 130.3% 347,812 112.9%
---------- ----- --------- -----
Loss from operations.................... (240,481) (30.3%) (39,775) (12.9%)
Interest expense........................ (249,856) (31.4%) (112,243) (36.4%)
Interest income......................... 347 0.1% 8,421 2.7%
Other income (expense).................. (598) (0.1%) 2,667 0.8%
---------- ----- --------- -----
Loss before minority interest........... (490,588) (61.7%) (140,930) (45.8%)
Minority interest expense............... (3,139) (0.4%) -- --
---------- ----- --------- -----
Net loss................................ $ (493,727) (62.1%) $(140,930) (45.8%)
========== ===== ========= =====
</TABLE>
REVENUES. Revenues increased by $486.7 million, from $308.0 million for the
three months ended June 30, 1999, to $794.8 million for the three months ended
June 30, 2000. The increase in revenues primarily resulted from acquisitions.
OPERATING COSTS. Operating costs increased by $167.9 million, from $104.5
million for the three months ended June 30, 1999, to $272.3 million for the
three months ended June 30, 2000. This increase was due primarily to
acquisitions.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased by $80.1 million, from $53.8 million for the three months ended June
30, 1999, to $133.9 million for the three months ended June 30, 2000. This
increase was due primarily to acquisitions.
DEPRECIATION. Depreciation expense increased by $241.7 million, from $55.2
million for the three months ended June 30, 1999, to $296.9 million for the
three months ended June 30, 2000. This increase was due primarily to
acquisitions. In addition, capital expenditures for system upgrades have
increased, resulting in greater property, plant and equipment balances and a
corresponding increase in depreciation expense.
AMORTIZATION. Amortization expense increased by $201.9 million, from $104.7
million for the three months ended June 30, 1999, to $306.5 million for the
three months ended June 30, 2000. This increase was due primarily to franchises
acquired.
OPTION COMPENSATION EXPENSE. Option compensation expense decreased by $11.0
million, from $21.5 million for the three months ended June 30, 1999, to $10.6
million for the three months ended June 30, 2000. This expense results from
granting options to employees prior to Charter's initial public offering at
exercise prices less than the estimated fair values of the underlying membership
units at time of grant, resulting in compensation expense being accrued over the
vesting period of each grant.
CORPORATE EXPENSE CHARGES. Corporate expense charges increased by $6.9
million, from $8.1 million for the three months ended June 30, 1999, to $15.0
million for the three months ended June 30, 2000. The increase was primarily the
result of increased costs incurred by the manager due to the Company's growth
from acquisitions.
18
<PAGE> 19
INTEREST EXPENSE. Interest expense increased by $137.6 million, from $112.2
million for the three months ended June 30, 1999, to $249.9 million for the
three months ended June 30, 2000. This increase resulted primarily from interest
on debt used to finance acquisitions.
INTEREST INCOME. Interest income decreased by $8.1 million, from $8.4
million for the three months ended June 30, 1999, to $0.3 million for the three
months ended June 30, 2000. This decrease is attributed to the fact that we had
more excess cash for investment in 1999 (resulting from required credit
facilities drawdowns and the issuance and sale of the March 1999 Charter
Holdings notes) as compared to the amount available in 2000 (resulting from the
issuance and sale of the January 2000 Charter Holdings notes prior to completing
the change of control offers described herein).
OTHER INCOME (EXPENSE). Other income (expense) decreased by $3.3 million,
from $2.7 million of income for the three months ended June 30, 1999, to $0.6
million of expense for the three months ended June 30, 2000. The amount in 1999
reflected a gain on the sale of aircraft.
MINORITY INTEREST EXPENSE. Minority interest expense for the three months
ended June 30, 2000, represents the accretion of dividends on the preferred
membership units in an indirect subsidiary of Charter Holdings held by certain
Bresnan sellers.
NET LOSS. Net loss increased by $352.8 million for the three months ended
June 30, 2000, compared to the three months ended June 30, 1999. The increase in
revenues that resulted from acquisitions was not sufficient to offset the
increased expenses (including depreciation and amortization) associated with the
acquired systems.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
The following table sets forth the percentages of revenues that items in
the statements of operations constitute for the indicated periods (dollars in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------------------- ---------------------------
AMOUNT % AMOUNT %
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues................................ $ 1,516,384 100.0% $ 468,993 100.0%
----------- ----- --------- -----
Operating expenses:
Operating............................. 518,804 34.2% 160,285 34.2%
General and administrative............ 259,173 17.1% 81,056 17.3%
Depreciation.......................... 549,788 36.3% 78,728 16.8%
Amortization.......................... 599,769 39.5% 171,224 36.5%
Option compensation expense........... 26,089 1.7% 38,194 8.1%
Corporate expense charges............. 27,515 1.8% 11,073 2.4%
----------- ----- --------- -----
Total operating expenses................ 1,981,138 130.6% 540,560 115.3%
----------- ----- --------- -----
Loss from operations.................... (464,754) (30.6%) (71,567) (15.3%)
Interest expense........................ (496,890) (32.8%) (157,669) (33.6%)
Interest income......................... 5,470 0.3% 10,085 2.2%
Other income (expense).................. (466) -- 2,840 0.6%
----------- ----- --------- -----
Loss before minority interest
and extraordinary item................ (956,640) (63.1%) (216,311) (46.1%)
Minority interest expense............... (4,691) (0.3%) -- --
Extraordinary item...................... -- -- (7,794) (1.7%)
----------- ----- --------- -----
Net loss................................ $ (961,331) (63.4%) $(224,105) (47.8%)
=========== ===== ========== =====
</TABLE>
REVENUES. Revenues increased by $1,047.4 million, from $469.0 million for
the six months ended June 30, 1999, to $1,516.4 million for the six months ended
June 30, 2000. The increase in revenues primarily resulted from acquisitions.
19
<PAGE> 20
OPERATING COSTS. Operating costs increased by $358.5 million, from $160.3
million for the six months ended June 30, 1999, to $518.8 million for the six
months ended June 30, 2000. This increase was due primarily to acquisitions.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased by $178.1 million, from $81.1 million for the six months ended June
30, 1999, to $259.2 million for the six months ended June 30, 2000. This
increase was due primarily to acquisitions.
DEPRECIATION. Depreciation expense increased by $471.1 million, from $78.7
million for the six months ended June 30, 1999, to $549.8 million for the six
months ended June 30, 2000. This increase was due primarily to acquisitions. In
addition, capital expenditures for system upgrades have increased, resulting in
greater property, plant and equipment balances and a corresponding increase in
depreciation expense.
AMORTIZATION. Amortization expense increased by $428.5 million, from $171.2
million for the six months ended June 30, 1999, to $599.8 million for the six
months ended June 30, 2000. This increase was due primarily to franchises
acquired.
OPTION COMPENSATION EXPENSE. Option compensation decreased by $12.1
million, from $38.2 million for the six months ended June 30, 1999, to $26.1
million for the six months ended June 30, 2000. This expense results from
granting options to employees prior to Charter's initial public offering at
exercise prices less than the estimated fair values of the underlying membership
units at time of grant, resulting in compensation expense being accrued over the
vesting period of each grant.
CORPORATE EXPENSE CHARGES. Corporate expense charges increased by $16.4
million, from $11.1 million for the six months ended June 30, 1999, to $27.5
million for the six months ended June 30, 2000. The increase was primarily the
result of increased costs incurred by the manager due to the Company's growth
from acquisitions.
INTEREST EXPENSE. Interest expense increased by $339.2 million, from $157.7
million for the six months ended June 30, 1999, to $496.9 million for the six
months ended June 30, 2000. This increase resulted primarily from interest on
debt used to finance acquisitions.
INTEREST INCOME. Interest income decreased by $4.6 million, from $10.1
million for the six months ended June 30, 1999, to $5.5 million for the six
months ended June 30, 2000. This decrease is attributed to the fact that we had
more excess cash for investment in 1999 (resulting from required credit
facilities drawdowns and the issuance and sale of the March 1999 Charter
Holdings notes) as compared to the amount available in 2000 (resulting from the
issuance and sale of the January 2000 Charter Holdings notes prior to completing
the change of control offers described herein).
OTHER INCOME (EXPENSE). Other income (expense) decreased by $3.3 million,
from $2.8 million of income for the six months ended June 30, 1999, to $0.5
million of expense for the six months ended June 30, 2000. The amount in 1999
reflected a gain on the sale of aircraft.
MINORITY INTEREST EXPENSE. Minority interest expense for the six months
ended June 30, 2000, represents the accretion of dividends on the preferred
membership units in an indirect subsidiary of Charter Holdings held by certain
Bresnan sellers.
EXTRAORDINARY ITEM. In March 1999, the Company extinguished all
then-existing long-term debt, excluding borrowings of the Company under its
credit facilities, and refinanced substantially all then-existing credit
facilities at various subsidiaries with a new credit facility. The excess of the
amount paid over the carrying value, net of deferred financing costs, of the
then-existing long-term debt was recorded as an extraordinary item.
NET LOSS. Net loss increased by $737.2 million for the six months ended
June 30, 2000, compared to the
20
<PAGE> 21
six months ended June 30, 1999. The increase in revenues that resulted from
acquisitions was not sufficient to offset the increased expenses (including
depreciation and amortization) associated with the acquired systems.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant cash to fund acquisitions, capital
expenditures, debt service costs and ongoing operations. We have historically
funded and expect to fund future liquidity and capital requirements through cash
flows from operations, equity contributions, borrowings under our credit
facilities, and debt and equity financings.
Our historical cash flows from operating activities were $594.1 million and
$145.8 million for the six months ended June 30, 2000 and 1999, respectively.
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We make
capital expenditures primarily to upgrade, rebuild and expand our 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.
We made capital expenditures, excluding acquisitions of cable systems, of
$1.0 billion and $205.5 million for the six months ended June 30, 2000 and 1999,
respectively. The majority of these capital expenditures relate to our
accelerated rebuild and upgrade program and converters, and were funded from
cash flows from operations and borrowings under credit facilities.
For the period from January 1, 2000 to December 31, 2002, we plan to spend
approximately $6.4 billion for capital expenditures, approximately $3.2 billion
of which will be used to upgrade and rebuild our systems to a bandwidth capacity
of 550 megahertz or greater and add two-way capability, so that we may offer
advanced services. The remaining $3.2 billion will be used for extensions of
systems, roll-out of new products and services, converters and system
maintenance. Capital expenditures for 2000 are expected to be approximately $2.7
billion, and aggregate capital expenditures for 2001 and 2002 are expected to be
approximately $3.7 billion. We currently expect to finance the anticipated
capital expenditures with cash generated from operations and additional
borrowings under credit facilities, including a bridge loan entered into on
August 4, 2000. We cannot be assured that these amounts will be sufficient to
accomplish our planned system upgrades, expansion and maintenance, or that we
can acquire necessary plant and equipment from vendors to complete these as
scheduled. If we are not able to obtain amounts sufficient for our planned
upgrades and other capital expenditures, it 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. See "--
Certain Trends and Uncertainties" for further information.
FINANCING ACTIVITIES
As of June 30, 2000, our total debt was approximately $11.6 billion. Our
significant amount of debt may adversely affect our ability to obtain financing
in the future and react to changes in our business. Our credit facilities and
other debt instruments contain various financial and operating covenants that
could adversely impact our ability to operate our business, including
restrictions on the ability of our operating subsidiaries to distribute cash to
their parents. See "-- Certain Trends and Uncertainties -- Restrictive
Covenants," for further information.
21
<PAGE> 22
JANUARY 2000 CHARTER HOLDINGS NOTES. On January 12, 2000, Charter Holdings
and Charter Communications Holdings Capital Corporation issued notes with a
principal amount of $1.5 billion (January 2000 Charter Holdings Notes). The
January 2000 Charter Holdings Notes are comprised of $675.0 million 10.00%
Senior Notes due 2009, $325.0 million 10.25% Senior Notes due 2010, and $532.0
million 11.75% Senior Discount Notes due 2010. The net proceeds were
approximately $1.3 billion, after giving effect to discounts, commissions and
expenses. The proceeds from the January 2000 Charter Holdings Notes were used to
finance the repurchases of debt assumed in certain transactions, as described
below.
In June 2000, Charter Holdings and Charter Communications Holdings Capital
Corporation exchanged these notes for new January 2000 Charter Holdings Notes,
with substantially similar terms, except that the new January 2000 Charter
Holdings Notes are registered under the Securities Act of 1933, as amended, and,
therefore, do not bear legends restricting their transfer.
CC V HOLDINGS, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "AVALON") NOTES. In
January 2000, through change of control offers and purchases in the open market,
all of the Avalon 9.375% Senior Subordinated Notes due 2008 with a principal
amount of $150.0 million were repurchased for $153.7 million. In addition, also
through change of control offers, $16.3 million in aggregate principal amount at
maturity of the Avalon 11.875% Senior Discount Notes due 2008 was repurchased
for $10.5 million. As of June 30, 2000, Avalon 11.875% notes with an aggregate
principal amount of $179.8 million at maturity and an accreted value of $121.2
million remain outstanding.
CC VII HOLDINGS, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "FALCON")
DEBENTURES. In February 2000, through change of control offers and purchases in
the open market, all of the Falcon 8.375% Senior Debentures due 2010 with a
principal amount of $375.0 million were repurchased for $388.0 million, and all
of the Falcon 9.285% Senior Discount Debentures due 2010 with an aggregate
principal amount at maturity of $435.3 million were repurchased for $328.1
million.
CC VIII, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "BRESNAN") CREDIT
FACILITIES. Upon the closing of the Bresnan acquisition on February 14, 2000,
the then-existing Bresnan credit facilities were amended and assumed. The
Bresnan credit facilities provide for borrowings of up to $900.0 million,
consisting of: two term facilities, one with a principal amount of $403.0
million (Term A) and the other with a principal amount of $297.0 million (Term
B), and a reducing revolving loan facility in the amount of $200.0 million. The
Bresnan credit facilities provide for the amortization of the principal amount
of the Term A loan facility and the reduction of the revolving loan facility
beginning March 31, 2002 with a final maturity date of June 30, 2007. The
amortization of the Term B loan facility is substantially "back-ended" with more
than ninety percent of the principal balance due on the final maturity date of
February 2, 2008. The Bresnan credit facilities also provide for an incremental
facility of up to $200.0 million that is conditioned upon receipt of additional
commitments from lenders. Amounts under the Bresnan credit facilities bear
interest at the Base Rate or the Eurodollar Rate, as defined, plus a margin of
up to 2.75%. A quarterly commitment fee of between 0.250% and 0.375% is payable
on the unborrowed balance of Term A and the revolving loan facility. At the
closing of the Bresnan acquisition, $599.9 million was borrowed to replace the
borrowings outstanding under the previous credit facilities, and an additional
$31.3 million was borrowed to fund a portion of the Bresnan purchase price. As
of June 30, 2000, $638.9 million was outstanding, and $261.1 million was
available for borrowing.
BRESNAN NOTES Upon the closing of the Bresnan acquisition, Charter Holdco
and Charter assumed Bresnan's $170.0 million in principal amount of 8% Senior
Notes due 2009 and $275.0 million in principal amount at maturity of 9.25%
Senior Discount Notes due 2009. In March 2000, all of the outstanding Bresnan
notes were repurchased at 101% of the outstanding principal amounts plus accrued
and unpaid interest or accreted value, as applicable, for a total of $369.7
million using proceeds from the sale of the January 2000 Charter Holdings Notes.
CHARTER COMMUNICATIONS OPERATING, LLC CREDIT FACILITIES. In March 2000, the
Charter Operating Credit Facilities were amended to increase the amount of the
supplemental credit facility to $1.0 billion. In connection with this amendment,
$600.0 million of the supplemental credit facility was exercised, thereby
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<PAGE> 23
increasing the total borrowing capacity to $4.7 billion. The remaining $400.0
million of the supplemental credit facility is subject to the Company's ability
to obtain additional commitments from the lenders. As of June 30, 2000,
outstanding borrowings were $4.2 billion, and the unused availability was $0.5
billion.
CHARTER HOLDINGS SENIOR BRIDGE LOAN FACILITY. On August 4, 2000, Morgan
Stanley Senior Funding, Inc. (Sole Arranger) and others, and Charter Holdings
and Charter Communications Holdings Capital Corporation entered into a senior
bridge loan agreement providing for senior increasing rate bridge loans in an
aggregate principal amount of up to $1.0 billion.
On August 14, 2000, the Company borrowed $1.0 billion under the bridge loan
facility and used the proceeds to repay a portion of the amounts outstanding
under certain of its credit facilities. This loan initially bears interest at an
annual rate equal to the yield corresponding to the bid price on Charter
Holdings 10.25% notes less 0.25% calculated as of August 14, 2000, the funding
date of the loan. If this loan is not repaid within 90 days following August 14,
2000, the interest rate will increase by 1.25% at the end of such 90-day period
and will increase by an additional 0.50% at the end of each additional 90-day
period. Unless additional default interest is assessed, the interest rate on
this bridge loan will be between 9% and 15% annually. The bridge loan matures
one year from August 14, 2000 and shall convert to a term loan that matures on
the tenth anniversary of the initial bridge loan borrowing. Any accrued and
unpaid interest on the bridge loan shall be due and payable prior to the
conversion of the bridge loan to a term loan. The term loan will bear interest
at a fixed rate equal to the greater of the applicable rate of the bridge loan
on the date on the conversion plus 0.50%, and the yield corresponding to the bid
price on Charter Holdings 10.25% notes as of the date immediately prior to the
conversion. If the term loan is not repaid within 90 days after the conversion
from the bridge loan, the interest rate will increase by 0.50% at the end of
each 90-day period. The interest rate on the term loan will be between 9% and
15% annually.
This financing did not increase our leverage. We expect to refinance the
bridge loan facility before the end of the year with permanent financing.
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and uncertainties,
in addition to those discussed elsewhere in this Quarterly Report, that could
materially impact our business, results of operations and financial condition.
SUBSTANTIAL LEVERAGE. As of June 30, 2000, our total debt was approximately
$11.6 billion. We anticipate incurring significant additional debt in the future
to fund the expansion, maintenance and upgrade of our cable systems.
Our ability to make payments on our debt and to fund our planned capital
expenditures for upgrading our cable systems and our ongoing operations will
depend on our ability to generate cash and secure financing in the future. This,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond our control. We cannot assure
you that our business will generate sufficient cash flow from operations, or
that future borrowings will be available to us under our existing credit
facilities, new facilities or from other sources of financing at acceptable
rates or 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. At June 30, 2000, approximately 44% of our debt
bears interest at variable rates that are linked to short-term interest rates.
In addition, a significant portion of debt we might arrange in the future will
bear interest at variable rates. If interest rates rise, our costs relative to
those obligations will also rise. At June 30, 2000, our weighted average rate on
outstanding bank commitments is approximately 8.6% and approximately 9.5% on
high-yield debt resulting in a blended weighted average rate of 9.0%. See
discussion in Item 3.
RESTRICTIVE COVENANTS. Our credit facilities and the indentures governing
our outstanding debt contain a number of significant covenants that, among other
things, restrict our ability and the ability of our
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<PAGE> 24
subsidiaries to:
o pay dividends or make other distributions;
o make certain investments or acquisitions;
o dispose of assets or merge;
o incur additional debt;
o issue equity;
o repurchase or redeem equity interests and debt;
o create liens; and
o pledge assets.
Furthermore, in accordance with our credit facilities we are required to
maintain specified financial ratios and meet financial tests. The ability to
comply with these provisions may be affected by events beyond our control. The
breach of any of these covenants will result in a default under the applicable
debt agreement or instrument, which could trigger acceleration of the debt. Any
default under our credit facilities or the indentures governing our outstanding
debt may adversely affect our growth, our financial condition and our results of
operations.
NEW SERVICES AND PRODUCTS GROWTH STRATEGY. We expect that a substantial
portion of any of our future growth will be achieved through revenues from
additional services. We cannot assure you that we will be able to offer new
advanced services successfully to our customers or that those new advanced
services will generate revenues. The amount of our capital expenditures and
related roll-out of advanced services may be limited by the availability of
certain equipment (in particular, digital converter boxes and cable modems) due
to production capacity constraints of certain vendors and materials shortages.
We continue to work with our primary vendors to address such problems and have
been assured that we will have an adequate supply to meet our demand. 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. We have experienced 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. No significant severance cost was
incurred in conjunction with acquisitions in 1999 and 2000. 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.
REGULATION AND LEGISLATION. Cable systems are extensively regulated at the
federal, state, and local level. Effective March 31, 1999, the scope of rate
regulation was reduced so that it continues to impact only the lowest level of
basic cable service and associated equipment. 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
(FCC) were to require cable systems to carry both the analog and digital
versions of local broadcast signals. The FCC is currently conducting a
proceeding in which it is considering this channel usage possibility.
There is also uncertainty whether local franchising authorities, state
regulators, the FCC, or the U.S. Congress will impose obligations on cable
operators to provide unaffiliated Internet service providers with access to
cable plant on non-discriminatory terms. If they were to do so, and the
obligations were found to be lawful, it could complicate our operations in
general, and our Internet operations in particular, from a technical and
marketing standpoint. These access obligations could adversely impact our
profitability and
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<PAGE> 25
discourage system upgrades and the introduction of new products and services.
Recently, a federal district court in Virginia and a federal circuit court in
California struck down as unlawful open access requirements imposed by two
different franchising authorities. The federal circuit court ruling reversed an
earlier district court decision that had upheld an open access requirement. The
FCC has announced that it will soon consider how Internet service provided over
cable systems should be classified for regulatory purposes and what, if any,
regulations should be imposed.
POSSIBLE RESCISSION LIABILITY. The Rifkin, Falcon and Bresnan sellers who
acquired Charter Holdco membership units or, in the case of Bresnan, additional
equity interests in one of our subsidiaries, in connection with these respective
acquisitions and the Helicon sellers who acquired shares of Class A common stock
in Charter's initial public offering may have rescission rights against Charter
and Charter Holdco arising out of possible violations of Section 5 of the
Securities Act of 1933, as amended, in connection with the offers and sales of
these equity interests.
If all of these equity holders successfully exercised their possible
rescission rights, Charter or Charter Holdco would become obligated to
repurchase all such equity interests, and the total repurchase obligation could
be as much as approximately $1.8 billion as of June 30, 2000. If Charter and
Charter Holdco fail to obtain capital sufficient to fund any required
repurchases, they could seek funds from us and our subsidiaries. This could
adversely affect our consolidated financial condition and results of operations.
These rescission rights expire one year from the dates of issuance or purchase
of those equity interests.
ACCOUNTING STANDARDS RECENTLY IMPLEMENTED
FASB Interpretation No. 44 (FIN No. 44), Accounting for Certain
Transactions Involving Stock Compensation, provides guidance for applying APB
Opinion No. 25, Accounting for Stock Issued to Employees. FIN No. 44 applies
prospectively, with certain exceptions, to new awards, exchanges of awards in a
business combination, modifications to outstanding awards and changes in grantee
status on or after July 1, 2000. Management believes that the adoption of FIN
No. 44 will not have a significant effect on our financial condition or results
of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), Revenue Recognition in Financial Statements, which summarizes certain of
the SEC staff's views on applying generally accepted accounting principles to
revenue recognition in financial statements. We adopted the accounting
provisions of SAB 101 effective April 1, 2000. Management believes that the
implementation of SAB 101 has not had a significant effect on our financial
condition or results of operations.
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<PAGE> 26
SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL DATA
The following Supplemental Unaudited Pro Forma Financial Data is based on
the historical financial data of Charter Holdings. Our financial data, on a
consolidated basis, is adjusted on a pro forma basis to illustrate the estimated
effects of the Bresnan, Capital Cable and Farmington acquisitions. The pro forma
impact of the issuance and sale of the January 2000 Charter Holdings Notes is
not significant for the six months ended June 30, 2000, and is therefore not
taken into account below.
The Supplemental Unaudited Pro Forma Financial Data reflects the
application of the principles of purchase accounting to the ICE, Bresnan,
Capital Cable and Farmington acquisitions completed since January 1, 2000. The
allocation of the Bresnan purchase price is based, in part, on preliminary
information, which is subject to adjustment upon obtaining complete valuation
information of intangible assets and is subject to post-closing purchase price
adjustments. We believe that finalization of the purchase price allocation will
not have a material impact on our results of operations or financial position.
The Supplemental Unaudited Pro Forma Financial Data does not purport to be
indicative of what our 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.
Supplemental Unaudited Pro Forma Financial Data is not presented for the
three months ended June 30, 2000, as there is no impact on actual numbers for
this quarter.
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<PAGE> 27
<TABLE>
<CAPTION>
SUPPLEMENTAL UNAUDITED PRO FORMA DATA
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------------------------
CHARTER
HOLDINGS ACQUISITIONS (a) TOTAL
---------- ---------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Basic............................... $1,093,744 $ 27,652 $ 1,121,396
Premium............................. 113,967 3,005 116,972
Pay-per-view........................ 16,027 296 16,323
Digital............................. 24,262 754 25,016
Advertising......................... 75,072 2,361 77,433
Data................................ 23,338 1,643 24,981
Other............................... 169,974 1,779 171,753
---------- ---------- -------------
Total revenues.................... 1,516,384 37,490 1,553,874
OPERATING EXPENSES:
Programming......................... 346,460 9,703 356,163
General and administrative.......... 259,173 6,623 265,796
Service............................. 93,685 5,072 98,757
Advertising......................... 26,548 1,222 27,770
Marketing........................... 29,337 636 29,973
Other............................... 22,774 1,718 24,492
Depreciation........................ 549,788 6,849 556,637
Amortization........................ 599,769 22,129 621,898
Option compensation expense......... 26,089 -- 26,089
Corporate expense charges........... 27,515 399 27,914
--------- ---------- -------------
Total operating expenses.......... 1,981,138 54,351 2,035,489
--------- ---------- -------------
Loss from operations................ (464,754) (16,861) (481,615)
Interest expense.................... (496,890) (24,381) (521,271)
Interest income..................... 5,470 46 5,516
Other income (expense).............. (466) (6) (472)
--------- ---------- -------------
Loss before minority interest....... (956,640) (41,202) (997,842)
Minority interest expense (b)....... (4,691) (6,295) (10,986)
--------- ---------- -------------
Net loss............................ $ (961,331) $ (47,497) $ (1,008,828)
========== ========= =============
OTHER FINANCIAL DATA:
EBITDA (c).......................... $ 684,337 $ 12,111 $ 696,448
EBITDA margin (d)................... 45.1% 32.3% 44.8%
Adjusted EBITDA (e)................. $ 738,407 $ 12,516 $ 750,923
OPERATING DATA (at end of period,
except for average):
Homes passed (f).................... 10,006,700
Basic customers (g)................. 6,214,100
Basic penetration (h)............... 62.1%
Premium units (i)................... 3,297,000
Premium penetration (j)............. 53.1%
Average monthly revenue per basic
customer (k)...................... $ 41.68
</TABLE>
----------
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(a) Comprised of Bresnan's results of operations through February 14, 2000, the
date of acquisition, and the results of operations of cable systems
acquired by Bresnan through the respective dates of acquisition, as well as
Capital Cable's and Farmington's results of operations through April 1,
2000, the date of acquisition.
(b) Represents the accretion of dividends on the preferred membership units in
an indirect subsidiary of Charter Holdings held by certain Bresnan sellers.
(c) EBITDA represents earnings (loss) before interest, income taxes,
depreciation and amortization, and minority interest. EBITDA is presented
because it is a widely accepted financial indicator of a cable 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.
(d) EBITDA margin represents EBITDA as a percentage of revenues.
(e) Adjusted EBITDA means EBITDA before option compensation expense, corporate
expense charges, management fees and other income (expense). Adjusted
EBITDA is presented because it is a widely accepted financial indicator of
a cable company's ability to service its indebtedness. However, adjusted
EBITDA should not be considered as an alternative to income from operations
or to cash flows from operating, investing or financing activities, as
determined in accordance with generally accepted accounting principles.
Adjusted EBITDA should 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.
(f) Homes passed are the number of living units, such as single residence
homes, apartments and condominium units, passed by the cable 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.
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<PAGE> 29
The following information presents operating results and data for the three
months ended June 30, 2000, as compared to the three months ended June 30, 1999,
for the cable systems owned or managed by us as of April 1, 1999.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, PERCENT
2000 1999 VARIANCE
------------ --------- ---------
(Dollar amounts in thousands, except average
monthly revenue per basic customer)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS (Unaudited)
Revenues:
Basic....................................................... $211,975 $193,615
Premium..................................................... 24,046 24,655
Pay-per-view................................................ 4,117 5,098
Digital..................................................... 7,969 474
Advertising sales........................................... 17,855 13,664
Data........................................................ 5,021 1,409
Other....................................................... 39,559 36,358
---------- ---------
Total revenues........................................... 310,542 275,273 12.8%
---------- ---------
Operating Expenses:
Programming................................................. 70,499 63,696
General and administrative.................................. 52,243 48,297
Service..................................................... 16,555 17,590
Marketing................................................... 6,586 6,911
Advertising sales........................................... 5,494 3,136
Other operating expenses.................................... 5,059 2,333
---------- ---------
Total operating expenses................................. 156,436 141,963 10.2%
---------- ---------
Adjusted EBITDA............................................... $ 154,106 $ 133,310 15.6%
========== =========
</TABLE>
<TABLE>
<CAPTION>
PERCENT
JUNE 30, 2000 JUNE 30, 1999 VARIANCE
------------- ------------- --------
<S> <C> <C> <C>
OPERATING DATA (Unaudited)
Homes passed.................................................. 3,895,600 3,820,100
Basic customers............................................... 2,268,400 2,216,800 2.3%
Basic penetration............................................. 58.2% 58.0%
Premium units................................................. 1,428,800 1,388,800 2.9%
Digital video customers....................................... 212,900 10,900
Data customers................................................ 74,800 13,500
Average monthly revenue per basic customer.................... $ 45.63 $ 41.39 10.2%
</TABLE>
Revenues increased by $35.3 million, or 12.8%, when comparing the revenues
for the three months ended June 30, 2000, to the results for the comparable
systems for the three months ended June 30, 1999. This increase is primarily due
to a net gain of approximately 51,600, or 2.3%, basic customers between quarters
and retail rate increases implemented in certain of our systems. In addition,
both digital and data revenues rose due to the roll-out of these services.
Advertising revenues increased 30.7% as a result of launching advertising in new
markets and increasing the number of cable channels on which advertising is
sold. Furthermore, in 2000 we began to sell more of our ad avails inventory
internally as opposed to using third parties.
Total operating expenses increased approximately $14.5 million, or 10.2%,
when comparing the operating expenses for the three months ended June 30, 2000,
to the results for the same systems for the three months ended June 30, 1999.
This increase is primarily due to increases in license fees paid for programming
as a result of additional subscribers, new channels launched and increases in
the rates paid for programming services. We believe that the increases in
programming expense are consistent with industry-wide increases.
We experienced growth in adjusted EBITDA of approximately $20.8 million, or
15.6%, when comparing adjusted EBITDA for the three months ended June 30, 2000,
to the results for the same systems for the three months ended June 30, 1999.
Adjusted EBITDA margin increased from 48.4% to 49.6% when comparing the similar
periods.
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<PAGE> 30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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 the credit facilities of our
subsidiaries. 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.
Our 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.
At June 30, 2000, we had outstanding $2.4 billion , $15.0 million and $760.0
million in notional amounts of interest rate swaps, caps and collars,
respectively. The notional amounts of interest rate instruments 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 costs
(proceeds) to settle the outstanding contracts. While swaps, caps and collars
represent an integral part of our interest rate risk management program, their
incremental effect on interest expense for the three months and six months ended
June 30, 2000 and 1999, was not significant.
The fair value of fixed-rate debt at June 30, 2000, was $4.0 billion. The
fair value of fixed-rate debt is based on quoted market prices. The fair value
of variable-rate debt approximates the carrying value of $6.95 billion at June
30, 2000, since this debt bears interest at current market rates.
30
<PAGE> 31
PART II. OTHER INFORMATION.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In June 2000, Charter Holdings and Charter Communications Holdings Capital
Corporation exchanged the $1.5 billion January 2000 Charter Holdings Notes for
new January 2000 Charter Holdings Notes, with substantially similar terms,
except that the new January 2000 Charter Holdings Notes are registered under the
Securities Act of 1933, as amended, and, therefore, do not bear legends
restricting their transfer. No cash or other consideration was received in the
exchange.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.34 Senior Bridge Loan Agreement, dated as of August 4, 2000, by and
among Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation as borrowers and the
initial lenders named therein and Morgan Stanley Senior Funding,
Inc. as sole arranger, syndication agent and administrative
agent. *
27.1 Financial Data Schedule (supplied for the information of the
Commission).*
---------
* Filed herewith.
(b) REPORTS ON FORM 8-K
o On May 26, 2000, an 8-K dated May 26, 2000, was filed to announce
that Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation had extended until
June 1, 2000, the offer to exchange the January 2000 Charter
Holdings Notes for notes registered under the Securities Act of
1933, as amended (Item 5. Other Items and Item 7. Exhibits).
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<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
CHARTER COMMUNICATIONS HOLDINGS, LLC,
a registrant
By: CHARTER COMMUNICATIONS, INC.,
-----------------------------
sole manager
Dated August 14, 2000 By: /s/ Kent D. Kalkwarf
--------------------
Name: Kent D. Kalkwarf
Title: Executive Vice
President and Chief
Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
CHARTER COMMUNICATIONS HOLDINGS
CAPITAL CORPORATION,
a registrant
Dated August 14, 2000 By: /s/ Kent D. Kalkwarf
--------------------
Name: Kent D. Kalkwarf
Title: Executive Vice President
and Chief Financial
Officer (Principal
Financial Officer and
Principal Accounting
Officer)
32
