<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 2000
REGISTRATION NO. 333-77499
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
CHARTER COMMUNICATIONS HOLDINGS, LLC
AND
CHARTER COMMUNICATIONS HOLDINGS
CAPITAL CORPORATION
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
<TABLE>
<S> <C> <C>
DELAWARE 4841 43-1843179
DELAWARE 4841 43-1843177
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (FEDERAL EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBERS)
</TABLE>
12444 POWERSCOURT DRIVE
ST. LOUIS, MISSOURI 63131
(314) 965-0555
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF REGISTRANTS'
PRINCIPAL EXECUTIVE OFFICES)
CURTIS S. SHAW, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
12444 POWERSCOURT DRIVE
ST. LOUIS, MISSOURI 63131
(314) 965-0555
(NAME, ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
DANIEL G. BERGSTEIN, ESQ. ALVIN G. SEGEL, ESQ.
LEIGH P. RYAN, ESQ. IRELL & MANELLA LLP
PATRICIA M. CARROLL, ESQ. 1800 AVENUE OF THE STARS, SUITE 900
PAUL, HASTINGS, JANOFSKY & WALKER LLP LOS ANGELES, CALIFORNIA 90067-4276
399 PARK AVENUE (310) 277-1010
NEW YORK, NEW YORK 10022
(212) 318-6000
</TABLE>
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED EXCHANGE OFFER: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
<PAGE> 2
$1,532,000,000
Offer to Exchange
10.00% Senior Notes due 2009,
10.25% Senior Notes due 2010 and 11.75% Senior Discount Notes due 2010
for any and all outstanding
10.00% Senior Notes due 2009,
10.25% Senior Notes due 2010 and 11.75% Senior Discount Notes due 2010,
respectively, of
CHARTER COMMUNICATIONS HOLDINGS, LLC
and
CHARTER COMMUNICATIONS HOLDINGS
CAPITAL CORPORATION
-------------------------
- This exchange offer expires at 5:00 p.m., New York City time, on May ,
2000, unless extended.
- No public market exists for the original notes or the new notes. We do
not intend to list the new notes on any securities exchange or to seek
approval for quotation through any automated quotation system.
-------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR ORIGINAL NOTES IN THE
EXCHANGE OFFER AND BY PURCHASERS OF THE NOTES FROM PERSONS ELIGIBLE TO USE THIS
PROSPECTUS FOR RESALES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any State in which the offer or sale would be unlawful.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-b OF THE NEW HAMPSHIRE UNIFORM
SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-b IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION
MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE
PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE
PROVISIONS OF THIS PARAGRAPH.
The date of this prospectus is April , 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 15
Forward-Looking Statements.................................. 29
Use of Proceeds............................................. 30
Capitalization.............................................. 31
Unaudited Pro Forma Financial Statements.................... 33
Selected Historical Financial Data.......................... 45
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 46
The Exchange Offer.......................................... 67
Business.................................................... 76
Regulation and Legislation.................................. 104
Management.................................................. 112
Principal Equity Holders.................................... 123
Certain Relationships and Related Transactions.............. 126
Description of Certain Indebtedness......................... 142
Description of Notes........................................ 157
Material United States Federal Income Tax Considerations.... 198
Plan of Distribution........................................ 205
Legal Matters............................................... 206
Experts..................................................... 206
Index to Financial Statements............................... F-1
Index to Supplemental Consolidated Financial Statements..... F-484
</TABLE>
i
<PAGE> 4
SUMMARY
The following summary contains a general discussion of our business, the
exchange offer and summary financial information. It likely does not contain all
the information that is important to you in making a decision to tender your
original notes in exchange for new notes. For a more complete understanding of
the exchange offer, you should read this entire prospectus and the other
documents to which we refer.
Unless stated otherwise, the discussion of our business in this prospectus
includes Charter Holdings and its direct and indirect subsidiaries after giving
effect to the Kalamazoo transaction described below.
OUR BUSINESS
We are the fourth largest operator of cable systems in the United States,
serving approximately 6.2 million customers. After giving effect to the
Kalamazoo transaction, as described below, we will serve approximately 6.3
million customers.
We offer a full range of traditional cable television services and have
begun to offer digital cable television services to customers in some of our
systems. Digital technology enables cable operators to increase the number of
channels a cable system can carry by permitting a significantly increased number
of video signals to be transmitted over a cable system's existing bandwidth.
Bandwidth is a measure of the information-carrying capacity. It is the range of
usable frequencies that can be carried by a cable system.
We have also started to introduce a number of other new products and
services, including interactive video programming, which allows information to
flow in both directions, and high-speed Internet access to the World Wide Web.
We are also exploring opportunities in telephony, which will integrate telephone
services with the Internet through the use of cable. The introduction of these
new services represents an important step toward the realization of our Wired
World(TM) vision, where cable's ability to transmit voice, video and data at
high speeds will enable it to serve as the primary platform for the delivery of
new services to the home and workplace. We are accelerating the upgrade of our
systems to more quickly provide these new services.
We have grown rapidly over the past five years. During this period, our
management team has successfully completed 34 acquisitions, including fourteen
acquisitions closed since January 1, 1999 and a merger with Marcus Cable
Holdings, LLC in April 1999. In addition, we have expanded our customer base
through significant internal growth. In 1999, our internal customer growth,
without giving effect to the cable systems we acquired during that period, was
3.1%, compared to the national industry average of 1.8%. In 1998, our internal
customer growth, without giving effect to the cable systems we acquired in that
year, was 4.8%, more than twice the national industry average of 1.7%.
Our principal executive offices are located at 12444 Powerscourt Drive, St.
Louis, Missouri 63131. Our telephone number is (314) 965-0555 and our web site
is located at www.chartercom.com. The information on our web site is not part of
this prospectus.
1
<PAGE> 5
BUSINESS STRATEGY
Our objective is to increase our operating cash flow by increasing our
customer base and the amount of cash flow per customer. To achieve this
objective, we are pursuing the following strategies:
- rapidly integrate acquired cable systems and apply our core operating
strategies to raise the financial and operating performance of these
acquired systems;
- expand the array of services we offer to our customers through the
implementation of our Wired World vision;
- upgrade the bandwidth capacity of our systems to 550 megahertz or greater
to enable greater channel capacity and add two-way capability to
facilitate interactive communication. Two-way capability is the ability
to have bandwidth available for upstream, or two-way, communication;
- maximize customer satisfaction by providing reliable, high-quality
service offerings, superior customer service and attractive programming
choices at reasonable rates;
- employ innovative marketing programs tailored to local customer
preferences to generate additional revenues;
- emphasize local management autonomy to better serve our customers while
providing support from regional and corporate offices and maintaining
centralized financial controls; and
- improve the geographic clustering of our cable systems by selectively
trading or acquiring systems to increase operating efficiencies and
improve operating margins. Clusters refer to cable systems under common
ownership which are located within geographic proximity to each other.
2
<PAGE> 6
CHARTER ORGANIZATIONAL STRUCTURE
The new notes to be issued in the exchange offer will be issued by Charter
Communications Holdings, LLC and Charter Communications Capital Corporation, the
co-issuers of the original notes.
The chart below sets forth our organizational structure and that of our
direct and indirect parent companies and assumes that:
(1) none of the outstanding options to purchase membership units of Charter
Communications Holding Company have been exercised. See
"Management -- Option Plan."
(2) the pending merger of Cablevision of Michigan, Inc. with and into
Charter Communications, Inc. has been completed. See "-- Pending
Kalamazoo Transaction"; and
(3) none of the outstanding membership units in Charter Communications
Holding Company or membership units in an indirect subsidiary of
Charter Holdings, held by certain sellers in the Bresnan acquisition,
have been exchanged for shares of Class A common stock in Charter
Communications, Inc. See "Business -- Charter Organizational
Structure -- Bresnan Sellers."
Our cable systems, which are managed by Charter Communications, Inc., are
owned by our wholly owned subsidiaries.
[CHARTER COMMUNICATIONS FLOW CHART]
* In this merger, Charter Communications, Inc. will issue shares of its
Class A common stock in exchange for shares of Cablevision of Michigan,
Inc. The number of shares to be issued will be based upon the average
NASDAQ closing price for the 20 trading days preceding the closing date
of this merger. No estimate of the number of shares is provided here and
the percentages of equity ownership in Charter Communications, Inc. by
Mr. Allen and the public indicated on the
3
<PAGE> 7
chart do not reflect the decrease that will occur upon the issuance of
shares in the merger transaction.
** These equity interests are exchangeable for shares of Class A common
stock in Charter Communications, Inc.
For a more detailed description of each entity and how it relates to us,
see "Business -- Charter Organizational Structure."
4
<PAGE> 8
RECENT EVENTS
ACQUISITIONS IN 1999 AND 2000 AND RECENT TRANSFERS
Since January 1, 1999, we completed eleven acquisitions of cable systems,
including the Bresnan acquisition completed in February 2000.
On January 1, 2000, Charter Holdings and Charter Communications Holding
Company effected a number of transactions to transfer cable systems acquired in
the Fanch, Falcon and Avalon acquisitions to Charter Holdings. These
transactions are referred to in this prospectus as the "recent transfers". As a
result of these transactions, Charter Holdings became the indirect parent of the
Fanch, Falcon and Avalon cable systems.
A summary of information regarding these acquisitions and recent transfers
is as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
PURCHASE PRICE DECEMBER 31, 1999
ACQUISITION (INCLUDING -----------------------------
OR TRANSFER ASSUMED DEBT) REVENUES
DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS)
----------- -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Renaissance Media Group LLC................. 4/99 $ 459 134,000 $ 62,428
American Cable Entertainment, LLC........... 5/99 240 69,000 37,216
Cable systems of Greater Media Cablevision,
Inc....................................... 6/99 500 176,000 85,933
Helicon Partners I, L.P. and affiliates..... 7/99 550 171,000 85,224
Vista Broadband Communications, L.L.C. ..... 7/99 126 26,000 14,112
Cable system of Cable Satellite of South
Miami, Inc................................ 8/99 22 9,000 4,859
Rifkin Acquisition Partners, L.L.L.P. and
InterLink Communications Partners, LLLP... 9/99 1,460 463,000 219,878
Cable systems of InterMedia Capital Partners
IV, L.P., InterMedia Partners and
affiliates................................ 10/99 873+ 420,000 179,259
systems swap (142,000)(a) (53,056)(b)
--------- ----------
278,000 126,203
Cable systems of Fanch Cablevision L.P. and
affiliates................................ 1/00 2,400 528,000 218,197
Falcon Communications, L.P. ................ 1/00 3,481 955,000 427,668
Avalon Cable of Michigan Holdings, Inc. .... 1/00 845(c) 258,000(c) 109,943(d)
Bresnan Communications Company
Limited Partnership....................... 2/00 3,100 686,000(e) 290,697(f)
Cable systems of Falcon/Capital Cable
Partners, L.P............................. 4/00 60 27,000 11,555
Cable systems of Farmington Cablevision
Company................................... 4/00 15 6,000 1,968
------------ --------- ----------
Total..................................... $ 14,131 3,786,000 $1,695,881
============ ========= ==========
</TABLE>
- - - ---------------
(a) As part of the transaction with 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 Indiana cable system, with customers totaling 30,000,
was transferred in March 2000 after receipt of the necessary regulatory
approvals.
(b) Includes revenues for all swapped InterMedia systems, except the retained
Indiana system, for the nine months ended September 30, 1999, the date of
the transfer of these systems, and includes revenues for the Indiana system
for the year ended December 31, 1999.
5
<PAGE> 9
(c) Includes approximately 5,400 customers served by cable systems that we
acquired from certain former affiliates of Avalon in February 2000. The $845
million purchase price for Avalon includes the purchase price for these
systems of approximately $13 million.
(d) Includes revenues of approximately $1.6 million related to cable systems
acquired from certain former affiliates of Avalon.
(e) Includes approximately 19,400 customers served by cable systems acquired by
Bresnan since December 31, 1999.
(f) Includes revenues of approximately $7.1 million related to the cable systems
acquired by Bresnan since December 31, 1999.
PENDING KALAMAZOO TRANSACTION
In March 2000, Charter Communications, Inc. 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 Communications,
Inc. After the merger, Charter Communications, Inc. will contribute 100% of the
equity interests of the direct owner of the Kalamazoo cable system to Charter
Communications Holding Company, which in turn will contribute such interests to
Charter Holdings. Information regarding the Kalamazoo transaction is as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1999
-----------------------------
ANTICIPATED PURCHASE PRICE REVENUES
PENDING TRANSACTION CLOSING DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS)
- - - ------------------- ---------------- -------------- ---------- ---------------
<S> <C> <C> <C> <C>
Kalamazoo........................... 3rd Quarter 2000 $172.5 49,000 $20,259
</TABLE>
PENDING SWAP TRANSACTION
On December 1, 1999, Charter Communications, Inc. entered into a
non-binding letter of intent with AT&T Broadband & Internet Services to exchange
certain of our cable systems. This exchange of cable systems is referred to in
this prospectus as the "Swap Transaction". The Swap Transaction would involve
cable systems owned by AT&T located in municipalities in Alabama, Georgia,
Illinois and Missouri serving approximately 705,000 customers and certain of our
cable systems located in municipalities in California, Connecticut,
Massachusetts, Texas and other states serving approximately 631,000 customers.
As part of the Swap Transaction, we would pay AT&T approximately $108 million in
cash, which represents the difference in the agreed values of the systems being
exchanged. The Swap Transaction is subject to the negotiation and execution of a
definitive exchange agreement, regulatory approvals and other conditions typical
in transactions of this type. We cannot assure you that the Swap Transaction
will be completed.
INITIAL PUBLIC OFFERING OF COMMON STOCK OF CHARTER COMMUNICATIONS, INC., OUR
MANAGER
In November 1999, Charter Communications, Inc. completed an initial public
offering of 195,500,000 shares of its Class A common stock for total net
proceeds of $3.57 billion. At that time, Paul G. Allen purchased 50,000 shares
of high vote Class B common stock of Charter Communications, Inc. at the initial
public offering price. In addition, at the closing of the initial public
offering, Mr. Allen through Vulcan Cable III Inc. invested $750 million in cash
to purchase membership units from Charter Communications Holding Company at the
initial public offering price, net of underwriters' discounts. These membership
units are exchangeable at any time for shares of Class A common stock of Charter
Communications, Inc. All of the proceeds from Charter Communications, Inc.'s
public offering were used to purchase membership units in Charter Communications
Holding Company, which used a portion of the funds received from Charter
6
<PAGE> 10
Communications, Inc. along with the funds received from Vulcan Cable III Inc. to
pay a portion of the purchase prices of the Fanch, Falcon, Avalon and Bresnan
acquisitions.
APRIL 1999 MERGER WITH MARCUS HOLDINGS
On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting
economic interests in Marcus Cable Company, L.L.C., and agreed to acquire the
remaining interests in Marcus Cable. The total purchase price was approximately
$3.2 billion, including $1.8 billion in assumed liabilities. On February 22,
1999, Marcus Holdings was formed, and all of Mr. Allen's interests in Marcus
Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999,
Mr. Allen completed the acquisition of all remaining interests of Marcus Cable.
On April 7, 1999, Mr. Allen merged Marcus Holdings into Charter Holdings, with
Charter Holdings surviving the merger. The operating subsidiaries of Marcus
Holdings became subsidiaries of our subsidiary, Charter Communications
Operating, LLC.
MARCH 1999 CHARTER HOLDINGS NOTES
On March 17, 1999, Charter Holdings and Charter Capital issued $3.6 billion
principal amount of senior notes, referred to in this prospectus as the "March
1999 Charter Holdings notes," consisting of $600 million in aggregate principal
amount of 8.250% senior notes due 2007, referred to in this prospectus as the
"March 1999 8.250% Charter Holdings notes," $1.5 billion in aggregate principal
amount of 8.625% senior notes due 2009, referred to in this prospectus as the
"March 1999 8.625% Charter Holdings notes," and $1.475 billion in aggregate
principal amount at maturity of 9.920% senior discount notes due 2011, referred
to in this prospectus as the "March 1999 9.920% Charter Holdings notes." The net
proceeds of approximately $2.99 billion, combined with borrowings under our
credit facilities, were used to consummate tender offers for publicly held debt
of several of our subsidiaries, to refinance borrowings under our previous
credit facilities, for working capital purposes and to finance a number of
acquisitions.
7
<PAGE> 11
THE EXCHANGE OFFER
Resales Without Further
Registration............. We believe that the new notes issued pursuant to
the exchange offer may be offered for resale,
resold or otherwise transferred by you without
compliance with the registration and prospectus
delivery provisions of the Securities Act of 1933,
as amended, provided that:
- you are acquiring the new notes issued in the
exchange offer in the ordinary course of your
business;
- you have not engaged in, do not intend to
engage in, and have no arrangement or
understanding with any person to participate
in, the distribution of the new notes issued to
you in the exchange offer, and;
- you are not our "affiliate," as defined under
Rule 405 of the Securities Act.
Each of the participating broker-dealers that
receives new notes for its own account in exchange
for original notes that were acquired by such
broker or dealer as a result of market-making or
other activities must acknowledge that it will
deliver a prospectus in connection with the resale
of the new notes.
Expiration Date............ 5:00 p.m., New York City time, on May , 2000
unless we extend the exchange offer.
Exchange and Registration
Rights Agreements........ You have the right to exchange the original notes
that you hold for new notes with substantially
identical terms. This exchange offer is intended to
satisfy these rights. Once the exchange offer is
complete, you will no longer be entitled to any
exchange or registration rights with respect to
your original notes.
Accrued Interest on the New
Notes and Original
Notes.................... The new notes will bear interest from January 12,
2000. Holders of original notes which are accepted
for exchange will be deemed to have waived the
right to receive any payment in respect of interest
on such original notes accrued to the date of
issuance of the new notes.
Conditions to the Exchange
Offer.................... The exchange offer is conditioned upon certain
customary conditions which we may waive and upon
compliance with securities laws.
Procedures for Tendering
Original Notes........... Each holder of original notes wishing to accept the
exchange offer must:
- complete, sign and date the letter of
transmittal, or a facsimile of the letter of
transmittal; or
8
<PAGE> 12
- arrange for the Depository Trust Company to
transmit certain required information to the
exchange agent in connection with a book-entry
transfer.
You must mail or otherwise deliver such
documentation together with the original notes to
the exchange agent.
Special Procedures for
Beneficial Holders....... If you beneficially own original notes registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to
tender your original notes in the exchange offer,
you should contact such registered holder promptly
and instruct them to tender on your behalf. If you
wish to tender on your own behalf, you must, before
completing and executing the letter of transmittal
for the exchange offer and delivering your original
notes, either arrange to have your original notes
registered in your name or obtain a properly
completed bond power from the registered holder.
The transfer of registered ownership may take
considerable time.
Guaranteed Delivery
Procedures............... You must comply with the applicable procedures for
tendering if you wish to tender your original notes
and:
- time will not permit your required documents to
reach the exchange agent by the expiration date
of the exchange offer; or
- you cannot complete the procedure for
book-entry transfer on time; or
- your original notes are not immediately
available.
Withdrawal Rights.......... You may withdraw your tender of original notes at
any time prior to 5:00 p.m., New York City time, on
the date the exchange offer expires.
Failure to Exchange Will
Affect You Adversely..... If you are eligible to participate in the exchange
offer and you do not tender your original notes,
you will not have further exchange or registration
rights and your original notes will continue to be
subject to some restrictions on transfer.
Accordingly, the liquidity of the original notes
will be adversely affected.
Material United States
Federal Income Tax
Consideration............ The disclosure in this prospectus represents our
legal counsel's opinion as to the material United
States Federal income tax consequences of
participating in the exchange offer and in
connection with the ownership and disposition of
the new notes. The exchange of original notes for
new notes pursuant to the exchange offer will not
result in a taxable event. Accordingly, it is our
legal counsel's opinion that:
- no gain or loss will be realized by a U.S.
holder upon receipt of a new note;
9
<PAGE> 13
- a holder's holding period for new notes will
include the holding period for original notes;
and
- the adjusted tax basis of the new notes will be
the same as the adjusted tax basis of the
original notes exchanged at the time of such
exchange.
Paul, Hastings, Janofsky & Walker LLP has rendered
the above-referenced opinion in connection with the
exchange offer. See "Material United States Federal
Income Tax Considerations."
Exchange Agent............. Harris Trust and Savings Bank is serving as
exchange agent.
Use of Proceeds............ We will not receive any proceeds from the exchange
offer.
10
<PAGE> 14
SUMMARY TERMS OF NEW NOTES
Issuers....................... Charter Communications Holdings, LLC and
Charter Communications Holdings Capital
Corporation.
Notes Offered................. $675.0 million in principal amount of 10.00%
senior notes due 2009.
$325.0 million in principal amount of 10.25%
senior notes due 2010.
$532.3 million in principal amount at maturity
of 11.75% senior discount notes due 2010.
The form and terms of the new notes will be the
same as the form and terms of the outstanding
notes except that:
- the new notes will bear a different CUSIP
number from the original notes;
- the new notes will have been registered under
the Securities Act of 1933 and, therefore,
will not bear legends restricting their
transfer; and
- you will not be entitled to any exchange or
registration rights with respect to the new
notes.
The new notes will evidence the same debt as
the original notes. They will be entitled to
the benefits of the indentures governing the
original notes and will be treated under the
indentures as a single class with the original
notes.
<TABLE>
<CAPTION>
MATURITY
DATE ISSUE PRICE INTEREST
---------------- --------------------------- ---------------------------
<S> <C> <C> <C>
10.00% Notes..... April 1, 2009 100.00% plus accrued 10.00% per annum, payable
interest, if any, from every six months on April 1
January 12, 2000 and October 1, beginning
April 1, 2000
10.25% Notes..... January 15, 2010 100.00%, plus accrued 10.25% per annum, payable
interest, if any, from every six months on January
January 12, 2000 15 and July 15, beginning
July 15, 2000
11.75% Notes..... January 15, 2010 56.448%, with original Interest to accrete at a
issue discount to accrete rate of 11.75% per annum to
from January 12, 2000 an aggregate amount of
$532.0 million by January
15, 2005; thereafter, cash
interest will be payable
every six months on January
15 and July 15 at a rate of
11.75% per annum, beginning
July 15, 2005
</TABLE>
Ranking.................... The new notes will be senior debts. They will rank
equally with the current and future unsecured and
unsubordinated debt of Charter Holdings, including
the March 1999 Charter Holdings notes and trade
payables, which are accounts payable to vendors,
suppliers and service
11
<PAGE> 15
providers. Charter Holdings is a holding company
and conducts all of its operations through its
direct and indirect subsidiaries. If it defaults,
your right to payment under the new notes will rank
below all existing and future liabilities,
including trade payables, of the subsidiaries of
Charter Holdings. As of December 31, 1999, all of
our outstanding debt, other than the March 1999
Charter Holdings notes and the original notes, but
including our credit facilities, was incurred by
our subsidiaries. As of that date, as adjusted to
give effect to the sale of the original notes,
acquisitions completed since that date, the recent
transfer to us of the Fanch, Falcon and Avalon
cable systems and the repurchase of certain of the
Falcon, Avalon and Bresnan notes and debentures and
the Kalamazoo transaction as if such transactions
had occurred on that date, our debt would have
totaled approximately $11.2 billion, $6.4 billion
of which would have ranked senior to the new notes.
Optional Redemption........ We will not have the right to redeem the 10.00%
notes prior to their maturity date on April 1,
2009.
On or after January 15, 2005, we may redeem some or
all of the 10.25% notes and the 11.75% discount
notes at any time at the redemption prices listed
in the "Description of Notes" section under the
heading "Optional Redemption."
Before January 15, 2003, we may redeem up to 35% of
the 10.25% notes and the 11.75% discount notes with
the proceeds of certain offerings of equity
securities at the prices listed in the "Description
of Notes" section under the heading "Optional
Redemption."
Mandatory Offer to
Repurchase................. If Charter Holdings, Charter Communications Holding
Company or Charter Communications, Inc. experiences
certain changes of control, we must offer to
repurchase any then-outstanding new notes at 101%
of their principal amount plus accrued and unpaid
interest or accreted value, as applicable.
Basic Covenants of
Indentures The indentures governing the notes will, among
other things, restrict our ability and the ability
of certain of our subsidiaries to:
- pay dividends on stock or repurchase stock;
- make investments;
- borrow money;
- create certain liens;
- sell all or substantially all of our assets or
merge with or into other companies;
- sell assets;
- in the case of our restricted subsidiaries,
create or permit to exist dividend or payment
restrictions with respect to us; and
- engage in certain transactions with affiliates.
These covenants are subject to important
exceptions. See "Description of Notes -- Certain
Covenants."
RISK FACTORS
You should carefully consider all of the information in this prospectus. In
particular, you should evaluate the specific risk factors under "Risk Factors"
for a discussion of risks associated with an investment in the new notes.
12
<PAGE> 16
UNAUDITED SUMMARY PRO FORMA DATA
You should read the following unaudited summary pro forma financial data of
Charter Holdings in conjunction with the historical financial statements and
other financial information appearing elsewhere in this prospectus, including
"Capitalization," "Unaudited Pro Forma Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------------
CHARTER ACQUISITIONS AND KALAMAZOO OFFERING
HOLDINGS RECENT TRANSFERS SUBTOTAL TRANSACTION ADJUSTMENTS TOTAL
----------- ---------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues................................ $ 1,451,010 $ 1,479,616 $ 2,930,626 $ 20,259 $ -- $ 2,950,885
----------- ----------- ----------- -------- -------- -----------
Operating expenses:
Operating, general and
administrative...................... 752,630 747,972 1,500,602 12,006 -- 1,512,608
Depreciation and amortization......... 739,453 944,010 1,683,463 13,104 -- 1,696,567
Option compensation expense........... 79,979 -- 79,979 -- -- 79,979
Corporate expense charges(a).......... 48,158 61,656 109,814 816 -- 110,630
Management fees....................... -- 16,224 16,224 -- -- 16,224
----------- ----------- ----------- -------- -------- -----------
Total operating expenses............ 1,620,220 1,769,862 3,390,082 25,926 -- 3,416,008
----------- ----------- ----------- -------- -------- -----------
Loss from operations.................... (169,210) (290,246) (459,456) (5,667) (465,123)
Interest expense........................ (456,895) (530,528) (987,423) -- (34,187) (1,021,610)
Interest income......................... 3,956 1,335 5,291 -- -- 5,291
Other expense........................... (375) (481) (856) (189) -- (1,045)
----------- ----------- ----------- -------- -------- -----------
Loss before income taxes, minority
interest and extraordinary item....... (622,524) (819,920) (1,442,444) (5,856) (34,187) (1,482,487)
Income tax expense...................... -- (3,747) (3,747) -- -- (3,747)
Minority interest....................... -- (12,589) (12,589) -- -- (12,589)
----------- ----------- ----------- -------- -------- -----------
Loss before extraordinary item.......... $ (622,524) $ (836,256) $(1,458,780) $ (5,856) $(34,187) $(1,498,823)
=========== =========== =========== ======== ======== ===========
OTHER FINANCIAL DATA:
EBITDA(b)............................... $ 569,868 $ 653,283 $ 1,223,151 $ 7,248 $ 1,230,399
EBITDA margin(c)........................ 39.3% 44.2% 41.7% 35.8% 41.7%
Adjusted EBITDA(d)...................... $ 698,380 $ 731,644 $ 1,430,024 $ 8,253 $ 1,438,277
Cash flows from operating activities.... 409,166 474,383 883,549 11,368 894,917
Cash flows used in investing
activities............................ (3,544,087) (635,471) (4,179,558) (6,253) (4,185,811)
Cash flows from financing activities.... 3,218,309 243,024 3,461,333 -- 3,461,333
Cash interest expense................... 847,958
Capital expenditures.................... 766,788 539,069 1,305,857 6,253 1,312,110
Total debt to EBITDA.................... 9.1x
Total debt to adjusted EBITDA........... 7.8
EBITDA to cash interest expense......... 1.5
EBITDA to interest expense.............. 1.2
Deficiency of earnings to cover fixed
charges(e)............................ $ 1,498,823
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................ $12,005,197 $10,080,965 $22,086,162 $176,510 $ 50,282 $22,312,954
Total debt.............................. 6,971,612 4,116,852 11,088,464 -- 66,422 11,154,886
Minority interest(f).................... -- 629,488 629,488 -- -- 629,488
Member's equity......................... 4,344,262 5,144,868 9,489,130 172,500 -- 9,661,630
OPERATING DATA (AT END OF PERIOD, EXCEPT
FOR AVERAGE):
Homes passed(g)......................... 4,040,000 5,874,000 9,914,000 60,000 9,974,000
Basic customers(h)...................... 2,274,000 3,897,000 6,171,000 49,000 6,220,000
Basic penetration(i).................... 56.3% 66.3% 62.2% 81.7% 62.4%
Premium units(j)........................ 1,445,000 1,712,000 3,157,000 30,000 3,187,000
Premium penetration(k).................. 63.5% 43.9% 51.2% 61.2% 51.2%
Average monthly revenue per basic
customer(l)........................... $ 39.53
</TABLE>
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<PAGE> 17
(a) From January 1, 1999 through November 9, 1999, the date of the initial
public offering of Charter Communications, Inc., Charter Investment, Inc.
provided management services to subsidiaries of Charter Operating. From and
after the initial public offering of Charter Communications Inc., such
management services were provided by Charter Communications, Inc. See
"Certain Relationships and Related Transactions."
(b) EBITDA represents earnings (loss) before extraordinary item 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. Management's discretionary use of funds depicted by
EBITDA may be limited by working capital, debt service and capital
expenditure requirements and by restrictions related to legal requirements,
commitments and uncertainties.
(c) EBITDA margin represents EBITDA as a percentage of revenues.
(d) Adjusted EBITDA means EBITDA before option compensation expense, corporate
expense charges, management fees and other 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.
(e) Earnings include net income (loss) plus fixed charges. Fixed charges consist
of interest expense and an estimated interest component of rent expense.
(f) Represents preferred membership units in an indirect subsidiary of Charter
Holdings issued to certain Bresnan sellers, which are exchangeable on a
one-for-one basis for shares of Class A common stock of Charter
Communications, Inc.
(g) Homes passed are the number of living units, such as single residence homes,
apartments and condominium units, passed by the cable television
distribution network in a given cable system service area.
(h) Basic customers are customers who receive basic cable service.
(i) Basic penetration represents basic customers as a percentage of homes
passed.
(j) Premium units represent the total number of subscriptions to premium
channels.
(k) Premium penetration represents premium units as a percentage of basic
customers.
(l) Average monthly revenue per basic customer represents revenues divided by
twelve divided by the number of basic customers at December 31, 1999.
14
<PAGE> 18
RISK FACTORS
The new notes, like the original notes, entail the following risks. You
should carefully consider these risk factors, as well as the other information
in this prospectus, before exchanging the original notes for new notes.
OUR BUSINESS
WE HAVE SUBSTANTIAL EXISTING DEBT AND WILL INCUR SUBSTANTIAL ADDITIONAL DEBT,
WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND OUR ABILITY TO OBTAIN
FINANCING IN THE FUTURE AND REACT TO CHANGES IN OUR BUSINESS.
We have a significant amount of debt. As of December 31, 1999, pro forma
for the sale of the original notes, acquisitions completed since that date, the
recent transfer to us of the Fanch, Falcon, and Avalon cable systems, the
repurchase of certain of the Falcon, Avalon and Bresnan notes and debentures and
the Kalamazoo transaction, our total debt would have been approximately $11.2
billion, our total member's equity would have been approximately $9.7 billion
and the deficiency of our earnings available to cover fixed charges would have
been approximately $1.5 billion.
Our significant amount of debt could have important consequences to you.
For example, it could:
- make it more difficult for us to satisfy our obligations to you under the
notes, to our lenders under our credit facilities and to our other public
noteholders;
- increase our vulnerability to general adverse economic and cable industry
conditions, including interest rate fluctuations, because much of our
borrowings are and will continue to be at variable rates of interest;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, which will reduce our funds available
for working capital, capital expenditures, acquisitions of additional
systems and other general corporate expenses;
- limit our flexibility in planning for, or reacting to, changes in our
business and the cable industry generally;
- place us at a disadvantage compared to our competitors that have
proportionately less debt; and
- limit our ability to borrow additional funds in the future, if we need
them, due to applicable financial and restrictive covenants in our debt.
The agreements and instruments governing our debt do not prohibit us from
incurring additional debt, although they do place certain limitations on such
additional debt. Further, the agreements and instruments governing our debt
allow for the incurrence of debt by our subsidiaries, all of which would rank
senior to the notes. We anticipate incurring significant additional debt in the
future to fund the expansion, maintenance and upgrade of our cable systems. We
have received a commitment for bridge loan facility and we may incur debt to
finance additional acquisitions in the future. If new debt is added to our
current debt levels, the related risks that we and you now face could intensify.
15
<PAGE> 19
THE AGREEMENTS AND INSTRUMENTS GOVERNING OUR DEBT CONTAIN RESTRICTIONS AND
LIMITATIONS WHICH COULD SIGNIFICANTLY IMPACT THE HOLDERS OF THE NOTES AND OUR
ABILITY TO OPERATE OUR BUSINESS.
Our credit facilities and the indentures governing the notes and our other
public debt contain a number of significant covenants that could adversely
impact the holders of the notes and our business. These covenants, among other
things, restrict our ability and the ability of our subsidiaries to:
- pay dividends or make other distributions;
- make certain investments or acquisitions;
- dispose of assets or merge;
- incur additional debt;
- issue equity;
- repurchase or redeem equity interests and debt;
- create liens; and
- 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 place us in default under the
indentures governing the notes.
OUR ABILITY TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO REPAY THE
NOTES, SERVICE OUR OTHER DEBT AND GROW OUR BUSINESS DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.
Our ability to make payments on the notes and our other 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 to 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. If our business does not generate sufficient cash flow from operations,
and sufficient future borrowings are not available to us under our credit
facilities or from other sources of financing, we may not be able to repay the
notes or our other debt, to grow our business or to fund our other liquidity
needs.
IF WE DEFAULT UNDER OUR CREDIT FACILITIES, WE MAY NOT HAVE THE ABILITY TO MAKE
PAYMENTS ON THE NOTES, WHICH WOULD PLACE US IN DEFAULT UNDER THE INDENTURES
GOVERNING THE NOTES.
In the event of a default under our credit facilities, lenders could elect
to declare all amounts borrowed, together with accrued and unpaid interest and
other fees, to be due and payable. In any event, when a default exists under our
subsidiaries' credit facilities, funds may not be distributed by our
subsidiaries to Charter Holdings to pay interest or principal on the notes. If
the amounts outstanding under such credit facilities are accelerated, thereby
causing an acceleration of amounts outstanding under the notes, we may not be
able to repay such amounts or the notes. Any default under any of our credit
facilities or our debt instruments may adversely affect the holders of the notes
and our growth, financial condition and results of operations.
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<PAGE> 20
CHARTER HOLDINGS IS A HOLDING COMPANY WHICH HAS NO OPERATIONS AND WILL DEPEND ON
ITS OPERATING SUBSIDIARIES FOR CASH. OUR SUBSIDIARIES MAY BE LIMITED IN THEIR
ABILITY TO MAKE FUNDS AVAILABLE FOR THE PAYMENT OF THE NOTES AND OUR OTHER
OBLIGATIONS.
As a holding company, Charter Holdings will depend entirely on its
operating subsidiaries for the cash necessary to satisfy its obligations to you
as a holder of the notes. These operating subsidiaries may not be able to make
funds available to Charter Holdings.
Charter Holdings will not hold any significant assets other than its direct
and indirect interests in its subsidiaries which conduct all of its operations.
Charter Holdings' cash flow will depend upon the cash flow of its operating
subsidiaries and the payment of funds by these operating subsidiaries to Charter
Holdings. This may adversely affect the ability of Charter Holdings to meet its
obligations to the holders of the notes.
Our operating subsidiaries are not obligated to make funds available for
payment of these obligations in the form of loans, distributions or otherwise.
In addition, our operating subsidiaries' ability to make any such loans,
distributions or other payments to Charter Holdings will depend on their
earnings, business and tax considerations and legal restrictions. Covenants in
the indentures and credit agreements governing the debt of Charter Holdings'
subsidiaries restrict their ability to make loans, distributions or other
payments to Charter Holdings. This could adversely impact our ability to pay
interest and principal due on the notes. See "Description of Certain
Indebtedness."
BECAUSE OF OUR HOLDING COMPANY STRUCTURE, THE NOTES WILL BE SUBORDINATED TO ALL
LIABILITIES OF OUR SUBSIDIARIES.
The borrowers and guarantors under the Charter Operating credit facilities,
the Falcon credit facilities, the Fanch credit facilities, the Avalon credit
facilities and the Bresnan credit facilities are direct or indirect subsidiaries
of Charter Holdings. A number of Charter Holdings' subsidiaries are also
obligors under other debt instruments. As of December 31, 1999, as adjusted to
give effect to the sale of the original notes, acquisitions completed since that
date, the recent transfers to us of the Fanch, Falcon and Avalon cable systems,
and the repurchase of certain of the Falcon, Avalon and Bresnan notes and
debentures and the Kalamazoo transaction, as if such transactions had occurred
on that date, indebtedness of Charter Holdings and its subsidiaries would have
totaled approximately $11.2 billion, $6.4 billion of which would have ranked
senior to the notes. The lenders under all of these credit facilities and the
holders of the other debt instruments will have the right to be paid before
Charter Holdings from any of our subsidiaries' assets. In the event of
bankruptcy, liquidation or dissolution of a subsidiary, following payment by
such subsidiary of its liabilities, such subsidiary may not have sufficient
assets remaining to make payments to Charter Holdings as a shareholder or
otherwise. This will adversely affect our ability to make payments to you as a
holder of the notes.
WE HAVE GROWN RAPIDLY AND HAVE A LIMITED HISTORY OF OPERATING OUR CURRENT
SYSTEMS. THIS MAKES IT DIFFICULT FOR YOU TO COMPLETELY EVALUATE OUR PERFORMANCE.
We commenced active operations in 1994 and have grown rapidly since then
through acquisitions of cable systems. As of December 31, 1999, after giving
effect to acquisitions completed since that date, the recent transfer to us of
the Fanch, Falcon and Avalon cable systems to us, our systems served
approximately 392% more customers than were served as of December 31, 1998. As a
result, historical financial information about us may not be indicative of the
future or of results that we can achieve with the cable systems which will be
under our control. Our recent growth in revenue over our short operating history
is not necessarily indicative of future performance.
17
<PAGE> 21
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO EXPERIENCE NET LOSSES.
CONSEQUENTLY, WE MAY NOT HAVE THE ABILITY TO FINANCE FUTURE OPERATIONS.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. We expect our net losses to increase as a
result of acquisitions completed in 1999 and 2000, the recent transfer to us of
the Fanch, Falcon and Avalon cable systems and the Kalamazoo transaction. We
reported net losses from continuing operations before extraordinary items of $5
million for 1997, $23 million for 1998 and $578 million for 1999. On a pro forma
basis, giving effect to the merger of Charter Holdings and Marcus Holdings,
acquisitions completed in 1999 and 2000, the recent transfer to us of the Fanch,
Falcon and Avalon cable systems and the Kalamazoo transaction, we had net losses
from continuing operations before extraordinary item of $1.5 billion for 1999.
We cannot predict what impact, if any, continued losses will have on our ability
to finance our operations in the future.
IF WE ARE UNSUCCESSFUL IN IMPLEMENTING OUR GROWTH STRATEGY, OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
If we are unable to grow our cash flow sufficiently, we may be unable to
repay the notes or our other debt, to grow our business or to fund our other
liquidity needs. We expect that a substantial portion of our future growth will
be achieved through revenues from new products and services and the acquisition
of additional cable systems. We may not be able to offer these new products and
services successfully to our customers and these new products and services may
not generate adequate revenues.
In addition, we cannot predict the success of our acquisition strategy. In
the past year, the cable television industry has undergone dramatic
consolidation which has reduced the number of future acquisition prospects. This
consolidation may increase the purchase price of future acquisitions, and we may
not be successful in identifying attractive acquisition targets in the future.
Additionally, those acquisitions we do complete are not likely to have a
positive net impact on our operating results in the near future. If we are
unable to grow our cash flow sufficiently, we may be unable to fulfill our
obligations to you under the notes or obtain alternative financing.
OUR PROGRAMMING COSTS ARE INCREASING. WE MAY NOT HAVE THE ABILITY TO PASS THESE
INCREASES ON TO OUR CUSTOMERS, WHICH WOULD ADVERSELY AFFECT OUR CASH FLOW AND
OPERATING MARGINS.
Programming has been, and is expected to continue to be, our largest single
expense item. In recent years, the cable industry has experienced a rapid
escalation in the cost of programming, particularly sports programming. This
escalation may continue, and we may not be able to pass programming cost
increases on to our customers. The inability to pass these programming cost
increases on to our customers would have an adverse impact on our cash flow and
operating margins. In addition, as we upgrade the channel capacity of our
systems, add programming to our basic and expanded basic programming tiers and
reposition premium services to the basic tier, we may face additional market
constraints on our ability to pass programming costs on to our customers. Basic
programming includes a variety of entertainment and local programming. Expanded
basic programming offers more services than basic programming. Premium service
includes unedited, commercial-free movies, sports and other special event
entertainment programming.
18
<PAGE> 22
WE MAY NOT BE ABLE TO OBTAIN CAPITAL SUFFICIENT TO FUND OUR PLANNED UPGRADES AND
OTHER CAPITAL EXPENDITURES. THIS COULD ADVERSELY AFFECT OUR ABILITY TO OFFER NEW
PRODUCTS AND SERVICES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
We intend to upgrade a significant portion of our cable systems over the
coming years and make other capital investments. For the three years ending
December 31, 2002, we plan to spend approximately $6.0 billion for capital
expenditures, approximately $3.5 billion of which will be used to upgrade and
rebuild our systems to bandwidth capacity of 550 megahertz or greater and add
two-way capability so that we may offer advanced services. The remaining $2.5
billion will be used for extensions of systems, development of new products and
services, purchases of converters and system maintenance.
We cannot assure you that these amounts will be sufficient to accomplish
our planned system upgrades, maintenance and expansion. If we cannot obtain the
necessary funds from increases in our operating cash flow, additional borrowings
or other sources, we may not be able to fund our planned upgrades and expansion
and offer new products and services on a timely basis. Consequently, our growth,
financial condition and results of operations could suffer materially.
THE COMMITMENT WE HAVE RECEIVED FOR A BRIDGE LOAN FACILITY IS SUBJECT TO A
NUMBER OF CONDITIONS. IF THESE CONDITIONS ARE NOT MET, THESE FUNDS WILL NOT BE
AVAILABLE TO US. AS A RESULT, WE MAY BE UNABLE TO FUND OUR PROJECTED CAPITAL
EXPENDITURES.
The bridge loan facility will not close unless specified closing conditions
are satisfied. Some of these closing conditions are not under our control, and
we cannot assure you that all closing conditions will be satisfied. For example,
the closing conditions for the bridge loan facility include:
- the absence of various types of material adverse changes, including
adverse changes in the financial and capital markets; and
- receipt of required approvals from third parties.
See "Description of Certain Indebtedness" for a description of the material
closing conditions for this facility. If we are not able to obtain financing
under this facility, we will need to arrange other sources of financing to meet
our projected capital expenditures budget. We cannot assure you that alternate
financing sources will be available to us. As a result we may be unable to fund
our capital expenditures as projected in this prospectus.
WE MAY NOT BE ABLE TO FUND THE CAPITAL EXPENDITURES NECESSARY TO KEEP PACE WITH
TECHNOLOGICAL DEVELOPMENTS OR OUR CUSTOMERS' DEMAND FOR NEW PRODUCTS AND
SERVICES. THIS COULD LIMIT OUR ABILITY TO COMPETE EFFECTIVELY. CONSEQUENTLY, OUR
GROWTH, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD SUFFER MATERIALLY.
The cable business is characterized by rapid technological change and the
introduction of new products and services. We cannot assure you that we will be
able to fund the capital expenditures necessary to keep pace with technological
developments, or that we will successfully anticipate the demand of our
customers for products and services requiring new technology. This type of rapid
technological change could adversely affect our plans to upgrade or expand our
systems and respond to competitive pressures. Our inability to upgrade, maintain
and expand our systems and provide enhanced services in a timely manner, or to
anticipate the demands of the market place, could adversely affect our ability
to compete. Consequently, our growth, financial condition and results of
operations could suffer materially.
19
<PAGE> 23
WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT WHICH CAN ADVERSELY AFFECT
OUR BUSINESS AND OPERATIONS.
The industry in which we operate is highly competitive. In some instances,
we compete against companies with fewer regulatory burdens, easier access to
financing, greater personnel resources, greater brand name recognition and
long-standing relationships with regulatory authorities. Mergers, joint ventures
and alliances among any of the following businesses could result in providers
capable of offering cable television, Internet and other telecommunications
services in direct competition with us:
- cable television operators;
- regional telephone companies;
- long distance telephone service providers;
- electric utilities;
- local exchange carriers, which are local phone companies that provide
local area telephone services and access to long distance services to
customers;
- providers of cellular and other wireless communications services; and
- Internet service providers.
We face competition within the subscription television industry, which
includes providers of paid television service employing technologies other than
cable, such as direct broadcast satellite or DBS, and excludes broadcast
companies that transmit their signal to customers without assessing a
subscription fee. We also face competition from broadcast companies distributing
television broadcast signals without assessing a subscription fee and from other
communications and entertainment media, including conventional off-air
television and radio broadcasting services, newspapers, movie theaters, the
Internet, live sports events and home video products.
We cannot assure you that upgrading our cable systems will allow us to
compete effectively. Additionally, as we expand and introduce new and enhanced
services, including Internet and telecommunications services, we will be subject
to competition from telecommunications providers and Internet service providers.
We cannot predict the extent to which competition may affect our business and
operations in the future. See "Business -- Competition."
WE MAY BE UNABLE TO NEGOTIATE CONSTRUCTION CONTRACTS ON FAVORABLE TERMS AND OUR
CONSTRUCTION COSTS MAY INCREASE SIGNIFICANTLY. THIS COULD ADVERSELY AFFECT OUR
GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The expansion and upgrade of our existing systems and the systems we plan
to acquire will require us to hire contractors and enter into a number of
construction agreements. We may have difficulty hiring civil contractors, and
the contractors we hire may encounter cost overruns or delays in construction.
Our construction costs may increase significantly over the next few years as
existing contracts expire and as demand for cable construction services
continues to grow. We cannot assure you that we will be able to construct new
systems or expand or upgrade existing or acquired systems in a timely manner or
at a reasonable cost. This may adversely affect our growth, financial condition
and results of operations.
THERE SHOULD BE NO EXPECTATION THAT MR. ALLEN WILL FUND OUR OPERATIONS OR
OBLIGATIONS IN THE FUTURE.
In the past, Mr. Allen and his affiliates have contributed funds to Charter
Holdings, Charter Communications, Inc. and Charter Communications Holding
Company. There should be no expectation that Mr. Allen or his affiliates will
contribute funds to Charter Holdings, Charter
20
<PAGE> 24
Communications, Inc., Charter Communications Holding Company or to our
subsidiaries in the future.
A SALE BY MR. ALLEN OF HIS DIRECT OR INDIRECT EQUITY INTERESTS COULD ADVERSELY
AFFECT OUR ABILITY TO MANAGE OUR BUSINESS.
Mr. Allen is not prohibited by any agreement from selling the shares of
Class B common stock he holds in Charter Communications, Inc. or causing Charter
Investment, Inc. or Vulcan Cable III Inc. to sell their membership units in
Charter Communications Holding Company after the last day of the 180-day lock-up
period following Charter Communications, Inc.'s November 1999 initial public
offering. We cannot assure you that Mr. Allen or any of his affiliates will
maintain all or any portion of his direct or indirect ownership interests in
Charter Communications, Inc. or Charter Communications Holding Company. In the
event he sells all or any portion of his direct or indirect ownership interest
in Charter Communications, Inc. or Charter Communications Holding Company, we
cannot assure you that he would continue as Chairman of Charter Communications,
Inc.'s board of directors or otherwise participate in our management. The
disposition by Mr. Allen or any of his affiliates of these equity interests or
the loss of his services by Charter Communications, Inc. and/or Charter
Communications Holding Company could adversely affect our growth, financial
condition and results of operations.
THE LOSS OF KEY EXECUTIVES COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE OUR
BUSINESS.
Our success is substantially dependent upon the retention and the continued
performance of Mr. Allen, Chairman of Charter Communications, Inc.'s board of
directors, and Jerald L. Kent, Charter Communications, Inc.'s President and
Chief Executive Officer. The loss of the services of Mr. Allen or Mr. Kent could
adversely affect our growth, financial condition and results of operations.
CHARTER'S STRUCTURE
MR. ALLEN MAY HAVE INTERESTS THAT CONFLICT WITH YOUR INTERESTS.
Mr. Allen controls approximately 93.6% of the voting power of Charter
Communications, Inc. Charter Communications, Inc., in turn, controls Charter
Communications Holding Company, our 100% parent. Accordingly, Mr. Allen has the
ability to control fundamental corporate transactions, including, but not
limited to, approval of merger transactions involving us and the sale of all or
substantially all of our assets. Mr. Allen's control over our management and
affairs could create conflicts of interest if he is faced with decisions that
could have implications both for him and for us and the holders of the notes.
Further, Mr. Allen could cause us to enter into contracts with another entity in
which he owns an interest or cause us to decline a transaction that he or an
entity in which he owns an interest ultimately enters into.
Mr. Allen may engage in other businesses involving the operation of cable
television systems, video programming, high-speed Internet access, telephony or
electronic commerce, which is business and financial transactions conducted
through broadband interactivity and Internet services. Mr. Allen may also engage
in other businesses that compete or may in the future compete with us. In
addition, Mr. Allen currently engages and may engage in the future in businesses
that are complementary to our cable television business.
Accordingly, conflicts could arise with respect to the allocation of
corporate opportunities between us and Mr. Allen. Current or future agreements
between us and Mr. Allen or his affiliates may not be the result of arm's-length
negotiations. Consequently, such agreements may be less favorable to us than
agreements that we could otherwise have entered into with unaffiliated third
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<PAGE> 25
parties. Further, many past and future transactions with Mr. Allen or his
affiliates are informal in nature. As a result, there will be some discretion
left to the parties, who are subject to the potentially conflicting interests
described above. We cannot assure you that the interests of either Mr. Allen or
his affiliates will not conflict with the interests of the holders of the notes.
We have not instituted any formal plans to address conflicts of interest that
may arise.
WE ARE NOT PERMITTED TO ENGAGE IN ANY BUSINESS ACTIVITY OTHER THAN THE CABLE
TRANSMISSION OF VIDEO, AUDIO AND DATA UNLESS MR. ALLEN AUTHORIZES US TO PURSUE
THAT PARTICULAR BUSINESS ACTIVITY. THIS COULD ADVERSELY AFFECT OUR ABILITY TO
OFFER NEW PRODUCTS AND SERVICES OUTSIDE OF THE CABLE TRANSMISSION BUSINESS AND
ENTER INTO NEW BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Charter Communications, Inc.'s certificate of incorporation and Charter
Communications Holding Company's limited liability company agreement provide
that Charter Communications, Inc. and Charter Communications Holding Company and
their subsidiaries, including Charter Holdings and its subsidiaries, cannot
engage in any business activity outside the cable transmission business except
for the joint venture through Broadband Partners, Inc. and incidental businesses
engaged in as of the closing of Charter Communications, Inc.'s initial public
offering in November 1999. This will be the case unless the opportunity to
pursue the particular business activity is first offered to Mr. Allen, he
decides not to pursue it and he consents to our engaging in the business
activity. The cable transmission business means the business of transmitting
video, audio, including telephone services, and data over cable television
systems owned, operated or managed by us from time to time. These provisions may
limit our ability to take advantage of attractive business opportunities.
Consequently, our ability to offer new products and services outside of the
cable transmission business and enter into new businesses could be adversely
affected, resulting in an adverse effect on our growth, financial condition and
results of operations. See "Certain Relationships and Related
Transactions -- Allocation of Business Opportunities with Mr. Allen."
OUR MANAGEMENT MAY BE RESPONSIBLE FOR MANAGING OTHER CABLE OPERATIONS AND MAY
NOT DEVOTE THEIR FULL TIME TO OUR OPERATIONS. THIS COULD GIVE RISE TO CONFLICTS
OF INTEREST AND IMPAIR OUR OPERATING RESULTS.
Mr. Allen and certain other of our affiliates may from time to time in the
future acquire cable systems in addition to those owned by us or to be acquired
by us in the Kalamazoo transaction. We cannot assure you that Charter
Communications, Inc., Charter Communications Holding Company or any of their
affiliates will contribute any future acquisitions to Charter Holdings or to any
of its subsidiaries.
Charter Communications, Inc., as well as some of the officers of Charter
Communications, Inc. who currently manage our cable systems, may have a
substantial role in managing outside cable systems that may be acquired in the
future. As a result, the time they devote to managing our systems may be
correspondingly reduced. This could adversely affect our growth, financial
condition and results of operations. Moreover, allocating managers' time and
other resources of Charter Communications, Inc. and Charter Communications
Holding Company between our systems and outside systems that may be held by our
affiliates could give rise to conflicts of interest. Charter Communications,
Inc. and Charter Communications Holding Company do not have or plan to create
formal procedures for determining whether and to what extent outside cable
television systems acquired in the future will receive priority with respect to
personnel requirements.
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<PAGE> 26
ACQUISITIONS
WE MAY NOT HAVE THE ABILITY TO INTEGRATE THE NEW CABLE SYSTEMS THAT WE ACQUIRE
AND THE CUSTOMERS THEY SERVE WITH OUR EXISTING CABLE SYSTEMS. THIS COULD
ADVERSELY AFFECT OUR OPERATING RESULTS AND GROWTH STRATEGY.
We have grown rapidly through acquisitions of cable systems, and now own
and operate cable systems serving approximately 6.2 million customers. We will
acquire additional cable systems if the Swap Transaction and the Kalamazoo
transaction are completed and we may acquire more cable systems in the future,
through direct acquisition, system swaps or otherwise. The integration of the
cable systems we have recently acquired and plan to acquire poses a number of
significant risks, including:
- our acquisitions may not have a positive impact on our cash flows from
operations;
- the integration of these new systems and customers will place significant
demands on our management and our operations, information services, and
financial, legal and marketing resources. Our current operating and
financial systems and controls and information services may not be
adequate, and any steps taken to improve these systems and controls may
not be sufficient;
- our current information systems may be incompatible with the information
systems we have acquired or plan to acquire. We may be unable to
integrate these information systems at a reasonable cost or in a timely
manner;
- acquired businesses sometimes result in unexpected liabilities and
contingencies which could be significant; and
- our continued growth will also increase our need for qualified personnel.
We may not be able to hire such additional qualified personnel.
We cannot assure you that we will successfully integrate any acquired
systems into our operations.
THE FAILURE TO OBTAIN NECESSARY REGULATORY APPROVALS, OR TO SATISFY OTHER
CLOSING CONDITIONS, COULD IMPEDE THE CONSUMMATION OF A PENDING TRANSACTION. THIS
WOULD PREVENT OR DELAY OUR STRATEGY TO EXPAND OUR BUSINESS AND INCREASE
REVENUES.
The Swap Transaction and the Kalamazoo transaction are subject to federal,
state and local regulatory approvals. We cannot assure you that we will be able
to obtain any necessary approvals. These transactions are also subject to a
number of other closing conditions. We cannot assure you as to when, or if, each
such transaction will be consummated. Any delay, prohibition or modification
could adversely affect the terms of such transactions or could require us to
abandon an otherwise attractive opportunity and possibly forfeit earnest money.
IF CHARTER COMMUNICATIONS, INC. AND CHARTER COMMUNICATIONS HOLDING COMPANY DO
NOT HAVE SUFFICIENT CAPITAL TO FUND POSSIBLE RESCISSION LIABILITIES, THEY COULD
SEEK FUNDS FROM CHARTER HOLDINGS AND ITS SUBSIDIARIES.
The Rifkin, Falcon and Bresnan sellers who acquired Charter Communications
Holding Company membership units or, in the case of Bresnan, additional equity
interests in one of our subsidiaries, in connection with the respective Rifkin,
Falcon and Bresnan acquisitions, and the Helicon sellers who acquired shares of
Class A common stock in Charter Communications, Inc.'s initial public offering
may have rescission rights against Charter Communications, Inc. and Charter
Communications Holding Company arising out of possible violations of Section 5
of the Securities
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<PAGE> 27
Act. If all of these equity holders successfully exercise their possible
rescission rights, Charter Communications, Inc. or Charter Communications
Holding Company would become obligated to repurchase all such equity interests
and the total repurchase obligation would be up to approximately $1.8 billion.
We cannot assure you that Charter Communications, Inc. and Charter
Communications Holding Company would be able to obtain capital sufficient to
fund any required repurchases. If Charter Communications, Inc. and Charter
Communications Holding Company fail to obtain capital sufficient to fund any
required repurchases, they could seek such funds from us and our subsidiaries.
This could adversely affect our financial condition and results of operations.
REGULATORY AND LEGISLATIVE MATTERS
OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND REGULATION.
THE APPLICABLE LEGISLATION AND REGULATIONS, AND CHANGES TO THEM, COULD ADVERSELY
AFFECT OUR BUSINESS BY INCREASING OUR EXPENSES.
Regulation of the cable industry has increased the administrative and
operational expenses and limited the revenues of cable systems. Cable operators
are subject to, among other things:
- limited rate regulation;
- requirements that, under specified circumstances, a cable system carry a
local broadcast station or obtain consent to carry a local or distant
broadcast station;
- rules for franchise renewals and transfers; and
- other requirements covering a variety of operational areas such as equal
employment opportunity, technical standards and customer service
requirements.
Additionally, many aspects of these regulations are currently the subject
of judicial proceedings and administrative or legislative proposals. There are
also ongoing efforts to amend or expand the state and local regulation of some
of our cable systems, which may compound the regulatory risks we already face.
Certain states and localities, led by Florida, are considering new
telecommunications taxes that could increase operating expenses. We cannot
predict whether in response to these efforts any of the states or localities in
which we now operate will expand regulation of our cable systems in the future
or how they will do so.
WE MAY BE REQUIRED TO PROVIDE ACCESS TO OUR NETWORKS TO OTHER INTERNET SERVICE
PROVIDERS. THIS COULD SIGNIFICANTLY INCREASE OUR COMPETITION AND ADVERSELY
AFFECT THE UPGRADE OF OUR SYSTEMS OR OUR ABILITY TO PROVIDE NEW PRODUCTS AND
SERVICES.
Recently, a number of companies, including telephone companies and Internet
service providers, have requested local authorities and the Federal
Communications Commission to require cable operators to provide access to
cable's broadband infrastructure, which allows cable to deliver a multitude of
channels and/or services, so that these companies may deliver Internet services
directly to customers over cable facilities. Certain local franchising
authorities are considering or have already approved such "open access"
requirements. A federal district court in Portland, Oregon has upheld the
legality of an open access requirement, but that case has been appealed to the
Ninth Circuit.
We believe that allocating a portion of our bandwidth capacity to other
Internet service providers:
- would impair our ability to use our bandwidth in ways that would generate
maximum revenues;
- would strengthen our Internet service provider competitors; and
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<PAGE> 28
- may cause us to decide not to upgrade our systems which would prevent us
from introducing our planned new products and services.
In addition, we cannot assure you that if we were required to provide
access in this manner, it would not have a significant adverse impact on our
profitability. This could impact us in many ways, including by:
- increasing competition;
- increasing the expenses we incur to maintain our systems; and/or
- increasing the expense of upgrading and/or expanding our systems.
OUR CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES WHICH ARE SUBJECT TO NON-RENEWAL
OR TERMINATION. THE FAILURE TO RENEW A FRANCHISE COULD ADVERSELY AFFECT OUR
BUSINESS IN A KEY MARKET.
Our cable systems generally operate pursuant to franchises, permits or
licenses typically granted by a municipality or other state or local government
controlling the public rights-of-way. Many franchises establish comprehensive
facilities and service requirements, as well as specific customer service
standards and establish monetary penalties for non-compliance. In many cases,
franchises are terminable if the franchisee fails to comply with material
provisions set forth in the franchise agreement governing system operations.
Franchises are generally granted for fixed terms and must be periodically
renewed. Local franchising authorities may resist granting a renewal if either
past performance or the prospective operating proposal is considered inadequate.
Franchise authorities often demand concessions or other commitments as a
condition to renewal, which have been and may continue to be costly to us. In
some instances, franchises have not been renewed at expiration, and we have
operated under either temporary operating agreements or without a license while
negotiating renewal terms with the local franchising authorities.
We cannot assure you that we will be able to comply with all material
provisions of our franchise agreements or that we will be able to renew our
franchises in the future. A termination of and/or a sustained failure to renew a
franchise could adversely affect our business in the affected geographic area.
WE OPERATE OUR CABLE SYSTEMS UNDER FRANCHISES WHICH ARE NON-EXCLUSIVE. LOCAL
FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE COMPETITION
IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY.
Our cable systems are operated under franchises granted by local
franchising authorities. These franchises are non-exclusive. Consequently, such
local franchising authorities can grant additional franchises to competitors in
the same geographic area. As a result, competing operators may build systems in
areas in which we hold franchises. In some cases municipal utilities may legally
compete with us without obtaining a franchise from the local franchising
authority. The existence of more than one cable system operating in the same
territory is referred to as an overbuild. These overbuilds could adversely
affect our growth, financial condition and results of operations by increasing
competition or creating competition where none existed previously. As of
December 31, 1999, pro forma for the recent transfers to us of the Fanch, Falcon
and Avalon cable systems and the Bresnan acquisition, we are aware of overbuild
situations impacting 115,000 of our customers and potential overbuild situations
in areas servicing another 134,000 basic customers, together representing a
total of 249,000 customers. Additional overbuild situations may occur in other
systems.
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<PAGE> 29
LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL REGULATORY
CONSTRAINTS ON OUR BUSINESS. THIS CAN FURTHER INCREASE OUR EXPENSES.
In addition to the franchise document, cable authorities have also adopted
in some jurisdictions cable regulatory ordinances that further regulate the
operation of cable systems. This additional regulation increases our expenses in
operating our business. We cannot assure you that the local franchising
authorities will not impose new and more restrictive requirements.
Local franchising authorities also have the power to reduce rates and order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. Basic service tier
rates are the prices charged for basic programming services. As of December 31,
1999, we have refunded a total of approximately $835,000 since our inception. We
may be required to refund additional amounts in the future.
DESPITE RECENT DEREGULATION OF EXPANDED BASIC CABLE PROGRAMMING PACKAGES, WE ARE
CONCERNED THAT CABLE RATE INCREASES COULD GIVE RISE TO FURTHER REGULATION. THIS
COULD CAUSE US TO DELAY OR CANCEL SERVICE OR PROGRAMMING ENHANCEMENTS OR IMPAIR
OUR ABILITY TO RAISE RATES TO COVER OUR INCREASING COSTS.
On March 31, 1999, the pricing of expanded basic cable programming packages
was deregulated, permitting cable operators to set their own rates. This
deregulation was not applicable to basic services. However, the Federal
Communications Commission and the United States Congress continue to be
concerned that cable rate increases are exceeding inflation. It is possible that
either the Federal Communications Commission or the United States Congress will
again restrict the ability of cable television operators to implement rate
increases. Should this occur, it would impede our ability to raise our rates. If
we are unable to raise our rates in response to increasing costs, our financial
condition and results of operations could be materially adversely affected.
IF WE OFFER TELECOMMUNICATIONS SERVICES, WE MAY BE SUBJECT TO ADDITIONAL
REGULATORY BURDENS CAUSING US TO INCUR ADDITIONAL COSTS.
If we enter the business of offering telecommunications services, we may be
required to obtain federal, state and local licenses or other authorizations to
offer these services. We may not be able to obtain such authorizations in a
timely manner, or at all, and conditions could be imposed upon such licenses or
authorizations that may not be favorable to us. Furthermore, telecommunications
companies, including Internet protocol telephony companies, generally are
subject to significant regulation as well as higher fees for pole attachments.
Internet protocol telephony companies are companies that have the ability to
offer telephone services over the Internet. Pole attachments are cable wires
that are attached to poles.
In particular, cable operators who provide telecommunications services and
cannot reach agreement with local utilities over pole attachment rates in states
that do not regulate pole attachment rates will be subject to a methodology
prescribed by the Federal Communications Commission for determining the rates.
These rates may be higher than those paid by cable operators who do not provide
telecommunications services. The rate increases are to be phased in over a five-
year period beginning on February 8, 2001. If we become subject to
telecommunications regulation or higher pole attachment rates, we may incur
additional costs which may be material to our business. A recent court decision
suggests that the provision of Internet service may subject cable systems to
higher pole attachment rates.
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<PAGE> 30
THE EXCHANGE OFFER
THERE IS NO MARKET FOR THE NOTES. AN ACTIVE TRADING MARKET MAY NOT DEVELOP
CAUSING DIFFICULTIES FOR YOU IF YOU TRY TO RESELL THE NOTES.
The new notes will be new securities for which there is currently no public
market. We do not intend to list the new notes on any national exchange or
quotation system. There can be no assurance as to the development of any market
or liquidity of any market that may develop for the new notes. If a trading
market does not develop or is not maintained, you may experience difficulty in
reselling new notes or you may be unable to sell them at all.
IF YOU FAIL TO EXCHANGE YOUR ORIGINAL NOTES FOR NEW NOTES, SUCH ORIGINAL NOTES
WILL REMAIN SUBJECT TO RESTRICTIONS ON TRANSFER. ACCORDINGLY, THE LIQUIDITY OF
THE MARKET FOR THE ORIGINAL NOTES COULD BE ADVERSELY AFFECTED.
Holders of original notes who do not exchange their original notes for new
notes pursuant to the exchange offer will continue to be subject to the
restrictions on transfer of the original notes set forth in the legend on the
original notes. This is a consequence of the issuance of the original notes
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act. In general, original notes may
not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. If we complete the exchange
offer, we will not be required to register the original notes, and we do not
anticipate that we will register the original notes, under the Securities Act.
Additionally, to the extent that original notes are tendered and accepted in the
exchange offer, the aggregate principal amount of original notes outstanding
will decrease, with a resulting decrease in the liquidity of the market for the
original notes.
WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FULFILL OUR
OBLIGATIONS UNDER THE NOTES FOLLOWING A CHANGE OF CONTROL. THIS WOULD PLACE US
IN DEFAULT UNDER THE INDENTURES GOVERNING THE NOTES.
Under the indentures governing the notes, upon the occurrence of specified
change of control events, we will be required to offer to repurchase all
outstanding notes. However, we may not have sufficient funds at the time of the
change of control event to make the required repurchase of the notes. In
addition, a change of control would require the repayment of borrowings under
our other publicly held debt and our credit facilities. Because our credit
facilities and other publicly held debt, other than the existing senior notes
and senior discount notes of Charter Holdings, are obligations of subsidiaries
of Charter Holdings, the credit facilities and such debt would have to be repaid
by our subsidiaries before their assets could be available to Charter Holdings
to repurchase the notes. Our failure to make or complete an offer to repurchase
the notes would place us in default under the indentures governing the notes.
You should also be aware that a number of important corporate events, such as
leveraged recapitalizations that would increase the level of our indebtedness,
would not constitute a change of control under the indentures governing the
notes.
IF WE DO NOT FULFILL OUR OBLIGATIONS TO YOU UNDER THE NOTES, YOU WILL NOT HAVE
ANY RECOURSE AGAINST CHARTER COMMUNICATIONS, INC., CHARTER COMMUNICATIONS
HOLDING COMPANY, MR. ALLEN OR THEIR EQUITY HOLDERS OR THEIR AFFILIATES.
The notes will be issued solely by Charter Holdings and Charter Capital.
None of our equity holders, directors, officers, employees or affiliates,
including Charter Communications, Inc., Charter Communications Holding Company
and Mr. Allen, will be an obligor or guarantor under the notes. Furthermore, the
indentures governing the notes expressly provide that these parties will not
have any
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<PAGE> 31
liability for our obligations under the notes or the indentures governing the
notes. By accepting the notes, you waive and release all such liability as
consideration for issuance of the notes. Consequently, if the issuers of the
notes do not fulfill their obligations to you under the notes, you will have no
recourse against any of these parties.
Additionally, our equity holders, including Charter Communications, Inc.,
Charter Communications Holding Company and Mr. Allen, will be free to manage
other entities, including other cable companies. If we do not fulfill our
obligations to you under the notes, you will have no recourse against those
other entities or their assets.
THE 11.75% DISCOUNT NOTES WILL BE ISSUED WITH ORIGINAL ISSUE DISCOUNT.
CONSEQUENTLY, HOLDERS OF THE 11.75% DISCOUNT NOTES WILL GENERALLY BE REQUIRED TO
INCLUDE AMOUNTS IN GROSS INCOME FOR FEDERAL INCOME TAX PURPOSES IN ADVANCE OF
RECEIVING CASH.
The 11.75% discount notes will be issued at a substantial discount from
their stated principal amount. As a result, purchasers of the 11.75% discount
notes generally will be required to include the accrued portion of this discount
in gross income, as interest, for United States federal income tax purposes in
advance of the receipt of cash payments of this interest.
IF A BANKRUPTCY PETITION WERE FILED BY OR AGAINST US, YOU MAY RECEIVE A LESSER
AMOUNT FOR YOUR CLAIM THAN YOU WOULD BE ENTITLED TO RECEIVE UNDER THE INDENTURE
GOVERNING THE 11.75% DISCOUNT NOTES, AND YOU MAY REALIZE TAXABLE GAIN OR LOSS
UPON PAYMENT OF YOUR CLAIM.
If a bankruptcy petition were filed by or against us under the U.S.
Bankruptcy Code after the issuance of the 11.75% discount notes, the claim by a
holder of the 11.75% discount notes for the principal amount of the 11.75%
discount notes may be limited to an amount equal to the sum of:
(1) the initial offering price for the 11.75% discount notes; and
(2) that portion of the original issue discount that does not
constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code.
Any original issue discount that was not amortized as of the date of the
bankruptcy filing would constitute unmatured interest. Accordingly, holders of
11.75% discount notes under these circumstances may receive a lesser amount than
they would be entitled to receive under the terms of the indenture governing the
11.75% discount notes, even if sufficient funds are available. In addition, to
the extent that the U.S. Bankruptcy Code differs from the Internal Revenue Code
in determining the method of amortization of original issue discount, a holder
of 11.75% discount notes may realize taxable gain or loss upon payment of that
holder's claim in bankruptcy.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements regarding, among other
things, our plans, strategies and prospects, both business and financial.
Although we believe that our plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, we cannot assure
you that we will achieve or realize these plans, intentions or expectations.
Forward-looking statements are inherently subject to risks, uncertainties and
assumptions. Many of the forward-looking statements contained in this prospectus
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 prospectus are set forth in
this prospectus and in other reports or documents that we file from time to time
with the SEC and include, but are not limited to:
- Our plans to achieve growth by offering new products and services and
through acquisitions and swaps;
- Our anticipated capital expenditures for our planned upgrades and the
ability to fund these expenditures;
- Our beliefs regarding the effects of governmental regulation on our
business; and
- 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.
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<PAGE> 33
USE OF PROCEEDS
This exchange offer is intended to satisfy certain of our obligations under
the exchange and registration rights agreements entered into in connection with
the offering of the original notes. We will not receive any proceeds from the
exchange offer. In consideration for issuing the new notes, we will receive
original notes with the same original principal amount at maturity. The form and
terms of the original notes are the same as the form and terms of the new notes,
except as otherwise described in this prospectus. The original notes surrendered
in exchange for new notes will be retired and canceled and cannot be reissued.
Accordingly, the issuance of the new notes will not result in any increase in
our outstanding debt.
We received proceeds totaling approximately $1.3 billion from the private
placement of the original notes. These proceeds were used to finance the Avalon,
Falcon and Bresnan change of control offers, including accrued and unpaid
interest.
The break-down of the uses of proceeds is as follows (in millions):
<TABLE>
<S> <C>
Change of control offers:
Falcon
8.375% senior debentures due 2010...................... $ 388.0
9.285% senior discount debentures due 2010............. 328.1
Avalon
9.375% senior subordinated notes due 2008.............. 153.7
11.875% senior discount notes due 2008................. 10.5
Bresnan
8.0% senior notes due 2005............................. 173.7
9.25% senior discount notes due 2009................... 196.0
Discounts and commissions................................... 26.8
Expenses.................................................... 23.5
--------
Total....................................................... $1,300.3
========
</TABLE>
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CAPITALIZATION
The following table sets forth as of December 31, 1999 on a consolidated
basis:
- the actual capitalization of Charter Holdings;
- the pro forma capitalization of Charter Holdings, assuming that as of
December 31, 1999:
(1) all acquisitions closed since December 31, 1999 had been completed
(including the transfer of an Indiana cable system in the InterMedia
acquisition);
(2) the recent transfer to Charter Holdings of the Fanch, Falcon and
Avalon cable systems had occurred and the Kalamazoo transaction had
been completed; and
- the pro forma as adjusted capitalization of Charter Holdings to reflect:
(1) the issuance and sale of the original notes; and
(2) the repurchase of a portion of the Avalon 11.875% senior discount
notes and all the Avalon 9.375% senior subordinated notes, all of
the Falcon debentures and all of the Bresnan notes pursuant to the
Avalon, Falcon and Bresnan change of control offers at prices equal
to 101% of their aggregate principal amounts, plus accrued and
unpaid interest, or their accreted value, as applicable.
This table should be read in conjunction with the "Unaudited Pro Forma
Financial Statements" and the accompanying notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
Credit facilities:
Charter Operating(a)................................. $ 2,906,000 $ 3,862,096 $ 3,862,096
CC V -- Avalon....................................... -- 170,000 170,000
CC VI -- Fanch....................................... -- 850,000 850,000
CC VII -- Falcon..................................... -- 1,038,500 1,038,500
CC VIII Operating -- Bresnan(b)...................... -- 631,200 631,200
8.250% senior notes due 2007........................... 598,557 598,557 598,557
8.625% senior notes due 2009........................... 1,495,787 1,495,787 1,495,787
9.920% senior discount notes due 2011.................. 977,807 977,807 977,807
10.00% senior notes due 2009........................... -- -- 675,000
10.25% senior notes due 2010........................... -- -- 325,000
11.75% senior discount notes due 2010.................. -- -- 300,303
9.375% senior subordinated notes -- Avalon............. -- 151,500 --
11.875% senior discount notes -- Avalon(c)............. -- 129,212 118,675
8.375% senior debentures -- Falcon..................... -- 378,750 --
9.285% senior discount debentures -- Falcon............ -- 325,381 --
8.0% senior notes -- Bresnan........................... -- 171,700 --
9.25% senior discount notes -- Bresnan................. -- 196,013 --
Other notes(d)......................................... 87,461 87,961 87,961
Loans payable to parent companies -- related
parties(e)........................................... 906,000 24,000 24,000
----------- ----------- -----------
Total long-term debt................................. 6,971,612 11,088,464 11,154,886
----------- ----------- -----------
Minority interest(f)..................................... -- 629,488 629,488
Member's equity(g)....................................... 4,344,262 9,661,630 9,661,630
----------- ----------- -----------
Total capitalization................................. $11,315,874 $21,379,582 $21,446,004
=========== =========== ===========
</TABLE>
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- - - -------------------------
(a) The increase in the Charter Operating credit facilities is related to
additional borrowings to finance the purchase prices of the Capital Cable
and Farmington acquisitions and to repay loans payable to parent
companies -- related parties.
(b) The Bresnan credit facilities in place on December 31, 1999 were amended and
the borrowing availability thereunder was increased in February 2000. The
Pro Forma and Pro Forma As Adjusted represent $534.2 million in outstanding
borrowings under the Bresnan credit facilities on December 31, 1999 and
$97.0 million in additional borrowings under these credit facilities used to
fund a portion of the Bresnan acquisition purchase price. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Financing Activities" and "Description of Certain
Indebtedness."
(c) A portion of the Avalon 11.875% senior discount notes were repurchased
through a change of control offer using a portion of the proceeds from the
sale of the original notes.
(d) Primarily represents outstanding notes of our Renaissance subsidiary. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Financing Activities" and "Description of Certain
Indebtedness."
(e) Represents loans payable to Charter Communications Holding Company and
Charter Communications, Inc., the direct and indirect parent companies of
Charter Holdings.
(f) Represents preferred membership units in an indirect subsidiary of Charter
Holdings issued to certain Bresnan sellers, which are exchangeable on a
one-for-one basis for shares of Class A common stock in Charter
Communications, Inc.
(g) The increase in member's equity is primarily a result of the transfers to
Charter Holdings of the Fanch, Falcon and Avalon cable systems; the
acquisition of a portion of Bresnan by Charter Communications Holding
Company and subsequent contribution to Charter Holdings; and the acquisition
of the Kalamazoo cable system by Charter Communications, Inc. and subsequent
contribution to Charter Holdings.
32
<PAGE> 36
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Pro Forma Financial Statements are based on the
historical financial statements of Charter Holdings. Since January 1, 1999,
Charter Holdings has closed numerous acquisitions. In addition, Charter Holdings
merged with Marcus Holdings in April 1999. Our financial statements, on a
consolidated basis, are adjusted on a pro forma basis to illustrate the
estimated effects of acquisitions closed since December 31, 1999, the recent
transfers to Charter Holdings of the Fanch, Falcon and Avalon cable systems, the
repurchase of certain of the Falcon, Avalon and Bresnan notes and debentures,
the Kalamazoo transaction and the issuance and sale of the original notes as if
such transactions had occurred on December 31, 1999 for the Unaudited Pro Forma
Balance Sheet and to illustrate the estimated effects of the following
transactions as if they had occurred on January 1, 1999 for the Unaudited Pro
Forma Statement of Operations:
(1) the acquisition of Marcus Cable by Mr. Allen and Marcus Holdings'
merger with and into Charter Holdings effective March 31, 1999;
(2) the acquisitions by Charter Holdings and its subsidiaries completed
since January 1, 1999, including the Bresnan acquisition;
(3) the completion of the Fanch, Falcon and Avalon acquisitions and recent
transfers;
(4) the refinancing of the previous credit facilities of the Charter
Companies and certain subsidiaries acquired by us or transferred to us
in 1999 and 2000; and
(5) the sale of the March 1999 Charter Holdings notes and the original
notes, and the repurchase of certain of the Falcon, Avalon and Bresnan
notes and debentures.
The Unaudited Pro Forma Financial Statements reflect the application of the
principles of purchase accounting to the transactions listed in items (1) and
(2) above. The Unaudited Pro Forma Balance Sheet reflects the historical balance
sheets of the entities listed in item (3) to which the principles of purchase
accounting were applied upon their respective acquisitions by Charter
Communications Holding Company. The allocation of certain purchase prices 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 these adjustments will
not have a material impact on our results of operations or financial position.
The Unaudited Pro Forma Financial Statements of Charter Holdings do not
purport to be indicative of what our financial position or results of operations
would actually have been had the transactions described above been completed on
the dates indicated or to project our results of operations for any future date.
33
<PAGE> 37
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA DATA
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------------
CHARTER ACQUISITIONS AND KALAMAZOO OFFERING
HOLDINGS RECENT TRANSFERS TRANSACTION ADJUSTMENTS
(NOTE A) (NOTE B) SUBTOTAL (NOTE B) (NOTE C) TOTAL
----------- ---------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues................................. $ 1,451,010 $ 1,479,616 $ 2,930,626 $ 20,259 $ -- $ 2,950,885
----------- ----------- ----------- -------- -------- -----------
Operating expenses:
Operating, general and
administrative....................... 752,630 747,972 1,500,602 12,006 -- 1,512,608
Depreciation and amortization.......... 739,453 944,010 1,683,463 13,104 -- 1,696,567
Option compensation expense............ 79,979 -- 79,979 -- -- 79,979
Corporate expense charges (Note D)..... 48,158 61,656 109,814 816 -- 110,630
Management fees........................ -- 16,224 16,224 -- -- 16,224
----------- ----------- ----------- -------- -------- -----------
Total operating expenses............. 1,620,220 1,769,862 3,390,082 25,926 -- 3,416,008
----------- ----------- ----------- -------- -------- -----------
Loss from operations..................... (169,210) (290,246) (459,456) (5,667) -- (465,123)
Interest expense......................... (456,895) (530,528) (987,423) -- (34,187) (1,021,610)
Interest income.......................... 3,956 1,335 5,291 -- -- 5,291
Other expense............................ (375) (481) (856) (189) -- (1,045)
----------- ----------- ----------- -------- -------- -----------
Loss before income taxes, minority
interest and extraordinary item........ (622,524) (819,920) (1,442,444) (5,856) (34,187) (1,482,487)
Income tax expense....................... -- (3,747) (3,747) -- -- (3,747)
Minority interest (Note E)............... -- (12,589) (12,589) -- -- (12,589)
----------- ----------- ----------- -------- -------- -----------
Loss before extraordinary item........... $ (622,524) $ (836,256) $(1,458,780) $ (5,856) $(34,187) $(1,498,823)
=========== =========== =========== ======== ======== ===========
OTHER FINANCIAL DATA:
EBITDA (Note F).......................... $ 569,868 $ 653,283 $ 1,223,151 $ 7,248 $ 1,230,399
EBITDA margin (Note G)................... 39.3% 44.2% 41.7% 35.8% 41.7%
Adjusted EBITDA (Note H)................. $ 698,380 $ 731,644 $ 1,430,024 $ 8,253 $ 1,438,277
Cash flows from operating activities..... 409,166 474,383 883,549 11,368 894,917
Cash flows used in investing
activities............................. (3,544,087) (635,471) (4,179,558) (6,253) (4,185,811)
Cash flows from financing activities..... 3,218,309 243,024 3,461,333 -- 3,461,333
Cash interest expense.................... 847,958
Capital expenditures..................... 766,788 539,069 1,305,857 6,253 1,312,110
Total debt to EBITDA..................... 9.1x
Total debt to adjusted EBITDA............ 7.8
EBITDA to cash interest expense.......... 1.5
EBITDA to interest expense............... 1.2
Deficiency of earnings to cover fixed
charges (Note I)....................... $ 1,498,823
OPERATING DATA (AT END OF PERIOD, EXCEPT
FOR AVERAGE):
Homes passed (Note J).................... 4,040,000 5,874,000 9,914,000 60,000 9,974,000
Basic customers (Note K)................. 2,274,000 3,897,000 6,171,000 49,000 6,220,000
Basic penetration (Note L)............... 56.3% 66.3% 62.2% 81.7% 62.4%
Premium units (Note M)................... 1,445,000 1,712,000 3,157,000 30,000 3,187,000
Premium penetration (Note N)............. 63.5% 43.9% 51.2% 61.2% 51.2%
Average monthly revenue per basic
customer (Note O)...................... $ 39.53
</TABLE>
34
<PAGE> 38
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NOTE A: Pro forma operating results for Charter Holdings consist of the
following (dollars in thousands):
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------
1/1/99
YEAR ENDED THROUGH
12/31/99 3/31/99
CHARTER MARCUS PRO FORMA
HOLDINGS HOLDINGS(a) ADJUSTMENTS TOTAL
-------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues................................................. $1,325,830 $125,180 $ -- $1,451,010
---------- -------- -------- ----------
Operating expenses:
Operating, general and administrative.................. 683,646 68,984 -- 752,630
Depreciation and amortization.......................... 675,786 51,688 11,979(b) 739,453
Option compensation expense............................ 79,979 -- -- 79,979
Corporate expense charges.............................. 48,158 -- -- 48,158
Management fees........................................ -- 4,381 (4,381)(c) --
---------- -------- -------- ----------
Total operating expenses............................. 1,487,569 125,053 7,598 1,620,220
---------- -------- -------- ----------
Income (loss) from operations............................ (161,739) 127 (7,598) (169,210)
Interest expense......................................... (434,995) (27,067) 5,167(d) (456,895)
Interest income.......................................... 18,821 104 (14,969)(e) 3,956
Other expense............................................ (217) (158) -- (375)
---------- -------- -------- ----------
Loss before extraordinary item........................... $ (578,130) $(26,994) $(17,400) $ (622,524)
========== ======== ======== ==========
</TABLE>
- - - -------------------------
(a) Marcus Holdings represents the results of operations of Marcus Holdings
through March 31, 1999, the date of its merger with Charter Holdings.
(b) As a result of Mr. Allen acquiring a controlling interest in Marcus Cable, a
large portion of the purchase price was recorded as franchises ($2.5
billion) that are amortized over 15 years. This resulted in additional
amortization for the period from January 1, 1999 through March 31, 1999. The
adjustment to depreciation and amortization expense consists of the
following (dollars in millions):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
USEFUL LIFE DEPRECIATION/
FAIR VALUE (IN YEARS) AMORTIZATION
---------- ---------------- -------------
<S> <C> <C> <C>
Franchises.................................................. $2,500.0 15 $ 40.8
Cable distribution systems.................................. 720.0 8 21.2
Land, buildings and improvements............................ 28.3 10 0.7
Vehicles and equipment...................................... 13.6 3 1.0
------
Total depreciation and amortization....................... 63.7
Less -- historical depreciation and amortization of Marcus
Cable................................................... (51.7)
------
Adjustment.............................................. $ 12.0
======
</TABLE>
(c) Reflects the elimination of management fees.
(d) As a result of the acquisition of Marcus Cable by Mr. Allen, the carrying
value of outstanding debt was recorded at estimated fair value, resulting in
a debt premium that is to be amortized as an offset to interest expense over
the term of the debt. This resulted in a reduction of interest expense.
Interest expense was further reduced by the effects of the extinguishment of
substantially all of our long-term debt in March 1999, excluding borrowings
under our previous credit facilities, and the refinancing of all previous
credit facilities.
(e) Reflects the elimination of interest income on excess cash since we assumed
substantially all such cash was used to finance a portion of the
acquisitions completed in 1999.
35
<PAGE> 39
NOTE B: Pro forma operating results for our acquisitions completed in 1999
and 2000, recent transfers and the Kalamazoo transaction consist of the
following (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
ACQUISITIONS -- HISTORICAL
-------------------------------------------------------------------
GREATER
AMERICAN MEDIA
RENAISSANCE(a) CABLE(a) SYSTEMS(a) HELICON(a) RIFKIN(a)
-------------- -------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenues...................................... $20,396 $12,311 $42,348 $ 49,564 $152,364
------- ------- ------- -------- --------
Operating expenses:
Operating, general and administrative........ 9,382 6,465 26,067 31,563 95,077
Depreciation and amortization................ 8,912 5,537 5,195 16,617 77,985
Management fees.............................. -- 369 -- 2,511 2,513
------- ------- ------- -------- --------
Total operating expenses................... 18,294 12,371 31,262 50,691 175,575
------- ------- ------- -------- --------
Income (loss) from operations................. 2,102 (60) 11,086 (1,127) (23,211)
Interest expense.............................. (6,321) (3,218) (565) (20,682) (34,926)
Interest income............................... 122 32 -- 124 --
Other income (expense)........................ -- 2 (398) -- (12,742)
------- ------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item........................... (4,097) (3,244) 10,123 (21,685) (70,879)
Income tax expense (benefit).................. (65) 5 4,535 -- (1,975)
------- ------- ------- -------- --------
Income (loss) before extraordinary item....... $(4,032) $(3,249) $ 5,588 $(21,685) $(68,904)
======= ======= ======= ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
ACQUISITIONS -- HISTORICAL
----------------------------------
INTERMEDIA
SYSTEMS(a) BRESNAN OTHER(b)
---------- -------- --------
<S> <C> <C> <C>
Revenues...................................... $152,789 $283,574 $24,826
-------- -------- -------
Operating expenses:
Operating, general and administrative........ 84,174 176,611 14,232
Depreciation and amortization................ 79,325 59,752 6,792
Management fees.............................. 2,356 -- 910
-------- -------- -------
Total operating expenses................... 165,855 236,363 21,934
-------- -------- -------
Income (loss) from operations................. (13,066) 47,211 2,892
Interest expense.............................. (17,636) (67,291) (6,180)
Interest income............................... 187 -- (20)
Other income (expense)........................ (2,719) (344) (30)
-------- -------- -------
Income (loss) before income taxes and
extraordinary item........................... (33,234) (20,424) (3,338)
Income tax expense (benefit).................. (2,681) -- --
-------- -------- -------
Income (loss) before extraordinary item....... $(30,553) $(20,424) $(3,338)
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
RECENT TRANSFERS -- HISTORICAL
---------------------------------------------------------------------
FALCON FANCH
--------------------------------- ---------------------------------
BEFORE AFTER BEFORE AFTER
ACQUISITION BY ACQUISITION BY ACQUISITION BY ACQUISITION BY
CHARTER CHARTER CHARTER CHARTER
COMMUNICATIONS COMMUNICATIONS COMMUNICATIONS COMMUNICATIONS
HOLDING COMPANY HOLDING COMPANY HOLDING COMPANY HOLDING COMPANY
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues.......................... $ 371,617 $ 56,051 $185,917 $ 32,281
--------- -------- -------- --------
Operating expenses:
Operating, general and
administrative................. 220,108 29,548 85,577 16,569
Depreciation and amortization.... 196,260 37,550 62,097 24,141
Equity-based deferred
compensation................... 44,600 -- -- --
Corporate expense charges........ -- 1,704 -- 979
Management fees.................. -- -- 6,162 --
--------- -------- -------- --------
Total operating expenses....... 460,968 68,802 153,836 41,689
--------- -------- -------- --------
Income (loss) from operations..... (89,351) (12,751) 32,081 (9,408)
Interest expense.................. (114,993) (19,106) -- (10,252)
Interest income................... -- -- -- --
Other income (expense)............ 8,021 -- (7,796) (26)
--------- -------- -------- --------
Income loss before income taxes
and extraordinary item........... (196,323) (31,857) 24,285 (19,686)
--------- -------- -------- --------
Income tax expense (benefit)...... 2,509 84 197 946
--------- -------- -------- --------
Income (loss) before extraordinary
item............................. $(198,832) $(31,941) $ 24,088 $(20,632)
========= ======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
RECENT TRANSFERS -- HISTORICAL
----------------------------------------------
AVALON
---------------------------------
BEFORE AFTER
ACQUISITION BY ACQUISITION BY
CHARTER CHARTER
COMMUNICATIONS COMMUNICATIONS
HOLDING COMPANY HOLDING COMPANY TOTAL
--------------- --------------- ----------
<S> <C> <C> <C>
Revenues.......................... $ 94,383 $ 13,930 $1,492,351
-------- -------- ----------
Operating expenses:
Operating, general and
administrative................. 53,089 8,281 856,743
Depreciation and amortization.... 39,943 7,838 627,944
Equity-based deferred
compensation................... -- -- 44,600
Corporate expense charges........ -- 501 3,184
Management fees.................. -- -- 14,821
-------- -------- ----------
Total operating expenses....... 93,032 16,620 1,547,292
-------- -------- ----------
Income (loss) from operations..... 1,351 (2,690) (54,941)
Interest expense.................. (40,162) (7,523) (348,855)
Interest income................... 764 -- 1,209
Other income (expense)............ 4,499 2 (11,531)
-------- -------- ----------
Income loss before income taxes
and extraordinary item........... (33,548) (10,211) (414,118)
-------- -------- ----------
Income tax expense (benefit)...... (13,936) -- (10,381)
-------- -------- ----------
Income (loss) before extraordinary
item............................. $(19,612) $(10,211) $ (403,737)
======== ======== ==========
</TABLE>
36
<PAGE> 40
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------
ACQUISITIONS AND RECENT TRANSFERS
--------------------------------------------------------------------------
PRO FORMA
-------------------------------------------------------------
HISTORICAL ACQUISITIONS(c) DISPOSITIONS(d) ADJUSTMENTS TOTAL
---------- --------------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues........................... $1,492,351 $43,861 $(53,626) $ (2,970)(e) $1,479,616
---------- ------- -------- --------- ----------
Operating expenses:
Operating, general and
administrative.................. 856,743 25,370 (25,493) (108,648)(f) 747,972
Depreciation and amortization..... 627,944 11,165 (22,850) 327,751(g) 944,010
Equity-based deferred
compensation.................... 44,600 -- -- (44,600)(h) --
Corporate expense charges......... 3,184 1,279 -- 57,193(f) 61,656
Management fees................... 14,821 1,403 -- -- 16,224
---------- ------- -------- --------- ----------
Total operating expenses.......... 1,547,292 39,217 (48,343) 231,696 1,769,862
---------- ------- -------- --------- ----------
Income (loss) from operations...... (54,941) 4,644 (5,283) (234,666) (290,246)
Interest expense................... (348,855) (2,402) 37 (179,308)(j) (530,528)
Interest income.................... 1,209 126 -- -- 1,335
Other income (expense)............. (11,531) 49,024 (2,576) (35,398)(1) (481)
---------- ------- -------- --------- ----------
Income (loss) before income taxes,
minority interest and
extraordinary item................ (414,118) 51,392 (7,822) (449,372) (819,920)
Income tax expense (benefit)....... (10,381) (47) -- 14,175(m) 3,747
Minority interest.................. -- -- -- (12,589)(n) (12,589)
---------- ------- -------- --------- ----------
Income (loss) before extraordinary
item.............................. $ (403,737) $51,439 $ (7,822) $(476,136) $ (836,256)
========== ======= ======== ========= ==========
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
------------------------------------
KALAMAZOO TRANSACTION
------------------------------------
PRO FORMA
----------------------
HISTORICAL ADJUSTMENTS TOTAL
----------- ----------- -------
<S> <C> <C> <C>
Revenues........................... $ 20,259 $ -- $20,259
--------- --------- -------
Operating expenses:
Operating, general and
administrative.................. 12,321 (315)(f) 12,006
Depreciation and amortization..... 3,534 9,570(g) 13,104
Equity-based deferred
compensation.................... 1,868 (1,868)(i) --
Corporate expense charges......... 501 315(f) 816
Management fees................... -- -- --
--------- --------- -------
Total operating expenses.......... 18,224 7,702 25,926
--------- --------- -------
Income (loss) from operations...... 2,035 (7,702) (5,667)
Interest expense................... -- -- --
Interest income.................... 4,120 (4,120)(k) --
Other income (expense)............. (189) -- (189)
--------- --------- -------
Income (loss) before income taxes,
minority interest and
extraordinary item................ 5,966 (11,822) (5,856)
Income tax expense (benefit)....... -- -- --
Minority interest.................. -- -- --
--------- --------- -------
Income (loss) before extraordinary
item.............................. $ 5,966 $ (11,822) $(5,856)
========= ========= =======
</TABLE>
- - - -------------------------
(a) Renaissance represents the results of operations of Renaissance through
April 30, 1999, the date of acquisition by Charter Holdings. American Cable
represents the results of operations of American Cable through May 7, 1999,
the date of acquisition by Charter Holdings. Greater Media Systems
represents the results of operations of Greater Media Systems through June
30, 1999, the date of acquisition by Charter Holdings. Helicon represents
the results of operations of Helicon through July 30, 1999, the date of
acquisition by the Charter Holdings. InterMedia represents the results of
operations of InterMedia through October 1, 1999, the date of acquisition by
Charter Holdings. Rifkin includes the results of operations of Rifkin
Acquisition Partners, L.L.L.P., Rifkin Cable Income Partners L.P., Indiana
Cable Associates, Ltd. and R/N South Florida Cable Management Limited
Partnership, all under common ownership through September 13, 1999, the date
of acquisition by Charter Holdings, as follows (dollars in thousands):
<TABLE>
<CAPTION>
RIFKIN RIFKIN INDIANA SOUTH
ACQUISITION CABLE INCOME CABLE FLORIDA OTHER TOTAL
----------- ------------ ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 68,829 $3,807 $ 6,034 $ 17,516 $ 56,178 $152,364
Income (loss) from operations........ (6,954) 146 (3,714) (14,844) 2,155 (23,211)
Loss before extraordinary item....... (21,571) (391) (4,336) (15,605) (27,001) (68,904)
</TABLE>
(b) Represents the results of operations of Vista through July 30, 1999, the
date of acquisition by Charter Holdings, Cable Satellite through August 4,
1999, the date of acquisition by Charter Holdings, Capital Cable for the
year ended December 31, 1999 and Farmington for the year ended December 31,
1999.
(c) Represents the historical results of operations for the period from January
1, 1999 through the date of purchase for acquisitions completed by Rifkin,
Fanch and Bresnan and for the year ended December 31, 1999 for the systems
acquired by Bresnan after December 31, 1999.
37
<PAGE> 41
These acquisitions were accounted for using the purchase method of
accounting. The purchase price in millions and closing dates for significant
acquisitions are as follows:
<TABLE>
<CAPTION>
RIFKIN FANCH BRESNAN
ACQUISITIONS ACQUISITIONS ACQUISITIONS
------------- ------------- ------------
<S> <C> <C> <C>
Purchase price................................. $165.0 $42.2 $40.0
Closing date................................... February 1999 February 1999 January 1999
Purchase price................................. $53.8 $248.0 $27.0
Closing date................................... July 1999 February 1999 March 1999
Purchase price................................. $70.5
Closing date................................... March 1999
Purchase price................................. $50.0
Closing date................................... June 1999
</TABLE>
(d) Represents the elimination of the operating results related to the cable
systems transferred to InterMedia as part of a swap of cable systems in
October 1999. The agreed value of our systems transferred to InterMedia was
$420.0 million. This number includes 30,000 customers served by an Indiana
cable system that we did not transfer at the time of the InterMedia closing
because some of the necessary regulatory approvals were still pending. This
system was transferred in March 2000. No material gain or loss occurred on
the disposition as these systems were recently acquired and recorded at fair
value at that time. Also represents the elimination of the operating results
related to the sale of a Bresnan cable system sold in January 1999.
(e) Reflects the elimination of historical revenues and expenses associated with
an entity not included in the purchase by Charter.
(f) Reflects a reclassification of expenses representing corporate expenses
that would have occurred at Charter Investment, Inc. totaling $57.5
million. The remaining adjustment primarily relates to the elimination of
severance payments of $32.2 million and the write-off of debt issuance
costs of $7.4 million that were included in operating, general and
administrative expense.
(g) Represents additional depreciation and amortization as a result of our
acquisitions completed in 1999 and 2000 and the recent transfers. A large
portion of the purchase price was allocated to franchises ($12.6 billion)
that are amortized over 15 years. The adjustment to depreciation and
amortization expense consists of the following (dollars in millions):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE DEPRECIATION/
FAIR VALUE USEFUL LIFE AMORTIZATION
---------- ---------------- -------------
<S> <C> <C> <C>
Franchises............................................... $12,583.4 15 $ 735.1
Cable distribution systems............................... 1,754.9 8 194.3
Land, buildings and improvements......................... 54.7 10 4.5
Vehicles and equipment................................... 90.4 3 23.2
-------
Total depreciation and amortization................................................. 957.1
Less-historical depreciation and amortization....................................... (619.8)
-------
Adjustment..................................................................... $ 337.3
=======
</TABLE>
(h) Reflects the elimination of approximately $44.6 million of change in control
payments under the terms of Falcon's equity-based compensation plans that
were triggered by the acquisition of Falcon by Charter Communications
Holding Company. These plans were terminated and the employees will
participate in the option plan of Charter Communications Holding Company. As
such, these costs will not recur.
(i) Reflects the elimination of approximately $1.9 million of change in control
payments under the terms of Cablevision's stock appreciation rights plan
that were triggered by the acquisition of Kalamazoo by Charter
38
<PAGE> 42
Communications, Inc. These employees will participate in the option plan of
Charter Communications Holding Company. As such, these costs will not
recur.
(j) Reflects additional interest expense on borrowings, which were used to
finance the acquisitions as follows (dollars in millions):
<TABLE>
<S> <C>
$170.0 million of credit facilities at a composite current
rate of 8.6% -- Avalon.................................... $ 14.7
$150.0 million 9.375% senior subordinated notes -- Avalon... 14.1
$196.0 million 11.875% senior discount notes -- Avalon...... 14.8
$850.0 million of credit facilities at a composite current
rate of 8.5% -- Fanch..................................... 72.2
$1.0 billion of credit facilities at a composite current
rate of 8.0% -- Falcon.................................... 82.8
$375.0 million 8.375% senior debentures -- Falcon........... 31.4
$435.3 million 9.285% senior discount
debentures -- Falcon...................................... 30.0
$631.2 million of credit facilities at a composite current
rate of 8.4% -- Bresnan................................... 52.9
$170.0 million 8.0% senior notes -- Bresnan................. 13.6
$275.0 million 9.25% senior discount notes -- Bresnan....... 17.7
Interest expense on additional borrowings used to finance
acquisitions at a composite current rate of 8.8%.......... 186.3
-------
Total pro forma interest expense....................... 530.5
Less-historical interest expense from acquired
companies............................................. (351.2)
-------
Adjustment........................................... $ 179.3
=======
</TABLE>
An increase in the interest rate of 0.125% on all variable rate debt would
result in an increase in interest expense of $8.2 million.
(k) Represents interest income on a historical related party receivable, which
will be retained by the seller.
(l) Represents the elimination of gain (loss) on sale of cable television
systems whose results of operations have been eliminated in (d) above.
(m) Reflects the elimination of income tax expense (benefit) as a result of
being acquired by a limited liability company.
(n) Represents 2% accretion of the preferred membership units of an indirect
subsidiary of Charter Holdings issued to certain Bresnan sellers.
NOTE C: The offering adjustment of approximately $34.2 million in higher
interest expense consists of the following (dollars in millions):
<TABLE>
<CAPTION>
INTEREST
DESCRIPTION EXPENSE
----------- --------
<S> <C>
$675.0 million of 10.00% senior notes....................... $ 67.5
$325.0 million of 10.25% senior notes....................... 33.3
$532.0 million of 11.75% senior discount notes.............. 36.3
Amortization of debt issuance costs......................... 5.0
-------
Total pro forma interest expense.......................... 142.1
Less-historical interest expense.......................... (107.9)
-------
Adjustment............................................. $ 34.2
=======
</TABLE>
NOTE D: From January 1, 1999 through November 9, 1999, the date of the
initial public offering of Charter Communications, Inc., Charter Investment,
Inc. provided management services to subsidiaries of Charter Operating. From and
after the initial public offering of Charter Communications Inc., such
management services were provided by Charter Communications, Inc. See "Certain
Relationships and Related Transactions."
39
<PAGE> 43
NOTE E: Represents the 2% accretion of the preferred membership units in
an indirect subsidiary of Charter Holdings issued to certain Bresnan sellers,
which are exchangeable on a one-for-one basis for shares of Class A common stock
of Charter Communications, Inc.
NOTE F: EBITDA represents earnings (loss) before extraordinary item
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.
NOTE G: EBITDA margin represents EBITDA as a percentage of revenues.
NOTE H: 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 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.
NOTE I: Earnings include net income (loss) plus fixed charges. Fixed
charges consist of interest expense and an estimated interest component of rent
expense.
NOTE J: Homes passed are the number of living units, such as single
residence homes, apartments and condominium units, passed by the cable
television distribution network in a given cable system service area.
NOTE K: Basic customers are customers who receive basic cable service.
NOTE L: Basic penetration represents basic customers as a percentage of
homes passed.
NOTE M: Premium units represent the total number of subscriptions to
premium channels.
NOTE N: Premium penetration represents premium units as a percentage of
basic customers.
NOTE O: Average monthly revenue per basic customer represents revenues
divided by twelve divided by the number of basic customers at December 31, 1999.
40
<PAGE> 44
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1999
--------------------------------------------------------------------------------------
ACQUISITIONS AND KALAMAZOO OFFERING
CHARTER RECENT TRANSFERS TRANSACTION ADJUSTMENTS
HOLDINGS (NOTE A) SUBTOTAL (NOTE A) (NOTE B) TOTAL
----------- ---------------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents........ $ 84,305 $ 23,592 $ 107,897 $ 168 $ -- $ 108,065
Accounts receivable, net......... 68,522 34,412 102,934 607 -- 103,541
Receivable from related party.... 14,500 -- 14,500 -- -- 14,500
Prepaid expenses and other....... 15,082 19,567 34,649 211 -- 34,860
----------- ----------- ----------- --------- -------- -----------
Total current assets........ 182,409 77,571 259,980 986 -- 260,966
Property, plant and equipment.... 2,525,854 1,330,779 3,856,633 18,402 -- 3,875,035
Franchises....................... 9,162,331 8,584,619 17,746,950 157,122 -- 17,904,072
Other assets..................... 134,603 87,996 222,599 -- 50,282 272,881
----------- ----------- ----------- --------- -------- -----------
Total assets................ $12,005,197 $10,080,965 $22,086,162 $ 176,510 $ 50,282 $22,312,954
=========== =========== =========== ========= ======== ===========
LIABILITIES AND MEMBER'S EQUITY
Accounts payable and accrued
expenses....................... $ 553,174 $ 128,319 $ 681,493 $ 4,010 $(16,140) $ 669,363
Payables to manager of cable
systems -- related parties..... 6,713 14,735 21,448 -- -- 21,448
----------- ----------- ----------- --------- -------- -----------
Total current liabilities... 559,887 143,054 702,941 4,010 (16,140) 690,811
Long-term debt................... 6,065,612 4,998,852 11,064,464 -- 66,422 11,130,886
Loans payable to parent
companies -- related parties... 906,000 (882,000) 24,000 -- -- 24,000
Deferred management
fees -- related parties........ 19,831 1,791 21,622 -- -- 21,622
Other long-term liabilities...... 109,605 44,912 154,517 -- -- 154,517
Minority interest................ -- 629,488 629,488 -- -- 629,488
Member's equity.................. 4,344,262 5,144,868 9,489,130 172,500 -- 9,661,630
----------- ----------- ----------- --------- -------- -----------
Total liabilities and
member's equity........... $12,005,197 $10,080,965 $22,086,162 $ 176,510 $ 50,282 $22,312,954
=========== =========== =========== ========= ======== ===========
</TABLE>
41
<PAGE> 45
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
NOTE A: Pro forma balance sheets for the recent transfers, the Bresnan
acquisition and the Kalamazoo transaction consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------------------------------------------
ACQUISITIONS AND RECENT TRANSFERS -- HISTORICAL
---------------------------------------------------------
FALCON FANCH AVALON BRESNAN OTHER TOTAL
---------- ---------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents........................... $ 10,556 $ 12,428 $ 6,806 $ 6,285 $ 220 $ 36,295
Accounts receivable, net............................ 21,110 2,191 1,920 9,006 197 34,424
Prepaid expenses and other.......................... 17,982 785 663 -- 84 19,514
---------- ---------- -------- --------- -------- ----------
Total current assets.............................. 49,648 15,404 9,389 15,291 501 90,233
Property, plant and equipment....................... 580,838 262,595 121,285 375,106 8,590 1,348,414
Franchises.......................................... 2,957,655 2,139,750 721,744 328,068 1,098 6,148,315
Other assets........................................ 76,679 7,494 1,983 19,038 504 105,698
---------- ---------- -------- --------- -------- ----------
Total assets...................................... $3,664,820 $2,425,243 $854,401 $ 737,503 $ 10,693 7,692,660
========== ========== ======== ========= ======== ==========
Accounts payable and accrued expenses............... $ 86,634 $ 35,482 $ 25,132 $ 66,261 $ 4,758 $ 218,267
Payables to manager of cable systems -- related
parties........................................... 9,740 3,362 1,557 -- 76 14,735
---------- ---------- -------- --------- -------- ----------
Total current liabilities......................... 96,374 38,844 26,689 66,261 4,834 233,002
Long-term debt...................................... 1,569,631 850,000 451,212 895,607 39,617 3,806,067
Loans payable to parent companies -- related
parties........................................... 173,000 -- -- -- 540 173,540
Deferred management fees -- related parties......... 982 547 262 -- -- 1,791
Other long-term liabilities......................... 31,425 53 3,414 10,020 -- 44,912
Equity (deficit).................................... 1,793,408 1,535,799 372,824 (234,385) (34,298) 3,433,348
---------- ---------- -------- --------- -------- ----------
Total liabilities and equity (deficit)............ $3,664,820 $2,425,243 $854,401 $ 737,503 $ 10,693 $7,692,660
========== ========== ======== ========= ======== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------------------------------------------
ACQUISITIONS AND RECENT TRANSFERS
-----------------------------------------------------------------------------
PRO FORMA
----------------------------------------------------------------
HISTORICAL ACQUISITIONS(a) DISPOSITIONS(b) ADJUSTMENTS TOTAL
---------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 36,295 $ 441 $ (144) $ (13,000)(c) $ 23,592
Accounts receivable, net........... 34,424 168 (180) -- 34,412
Receivable from related party...... -- 125 -- (125)(d) --
Prepaid expenses and other......... 19,514 119 (66) -- 19,567
---------- ------ -------- ---------- -----------
Total current assets.............. 90,233 853 (390) (13,125) 77,571
Property, plant and equipment...... 1,348,414 4,572 (22,207) -- 1,330,779
Franchises......................... 6,148,315 -- (67,832) 2,504,136(e) 8,584,619
Other assets....................... 105,698 819 (72) (18,449)(f) 87,996
---------- ------ -------- ---------- -----------
Total assets...................... $7,692,660 $6,244 $(90,501) $2,472,562 $10,080,965
========== ====== ======== ========== ===========
Accounts payable and accrued
expenses.......................... 218,267 553 (90,501) -- 128,319
Payables to manager of cable
systems -- related parties........ 14,735 -- -- -- 14,735
---------- ------ -------- ---------- -----------
Total current liabilities......... 233,002 553 (90,501) -- 143,054
Long-term debt..................... 3,806,067 2,702 -- 1,190,083(g) 4,998,852
Loans payable to parent
companies -- related parties...... 173,540 -- -- (1,055,540)(g) (882,000)
Deferred management fees -- related
parties........................... 1,791 -- -- -- 1,791
Other long-term liabilities........ 44,912 -- -- -- 44,912
Minority interest.................. -- -- -- 629,488(h) 629,488
Equity (deficit)................... 3,433,348 2,989 -- 1,708,531(i) 5,144,868
---------- ------ -------- ---------- -----------
Total liabilities and equity
(deficit)....................... $7,692,660 $6,244 $(90,501) $2,472,562 $10,080,965
========== ====== ======== ========== ===========
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------------
KALAMAZOO TRANSACTION
--------------------------------------
PRO FORMA
-------------------------
HISTORICAL ADJUSTMENTS TOTAL
---------- ----------- --------
<S> <C> <C> <C>
Cash and cash equivalents.......... $ 168 $ -- $ 168
Accounts receivable, net........... 607 -- 607
Receivable from related party...... 59,112 (59,112)(d) --
Prepaid expenses and other......... 211 -- 211
------- -------- --------
Total current assets.............. 60,098 (59,112) 986
Property, plant and equipment...... 18,402 -- 18,402
Franchises......................... -- 157,122(e) 157,122
Other assets....................... 253 (253)(f) --
------- -------- --------
Total assets...................... $78,753 $ 97,757 $176,510
======= ======== ========
Accounts payable and accrued
expenses.......................... 4,010 -- 4,010
Payables to manager of cable
systems -- related parties........ -- -- --
------- -------- --------
Total current liabilities......... 4,010 -- 4,010
Long-term debt..................... -- -- --
Loans payable to parent
companies -- related parties...... -- -- --
Deferred management fees -- related
parties........................... -- -- --
Other long-term liabilities........ -- -- --
Minority interest.................. -- -- --
Equity (deficit)................... 74,743 97,757(j) 172,500
------- -------- --------
Total liabilities and equity
(deficit)....................... $78,753 $ 97,757 $176,510
======= ======== ========
</TABLE>
42
<PAGE> 46
- - - -------------------------
(a) Represents the historical balance sheets as of December 31, 1999 for
acquisitions completed subsequent to December 31, 1999.
(b) Represents the historical assets and liabilities as of December 31, 1999 of
an Indiana cable system transferred in March 2000 to InterMedia as part of a
swap of cable systems. The cable system swapped was accounted for at fair
value. No gain or loss was recorded in conjunction with the swap. See
"Business -- Acquisitions Completed in 1999 and 2000 -- InterMedia Systems."
(c) Represents Charter Holdings' historical cash used to finance a portion of an
acquisition that occurred after December 31, 1999.
(d) Reflects assets retained by the seller.
(e) Substantial amounts of the purchase prices have been allocated to franchises
based on estimated fair values. The allocation of these purchase prices are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
BRESNAN OTHER KALAMAZOO
---------- -------- ---------
<S> <C> <C> <C>
Working capital....................................... $ (50,894) $ (4,257) $ (3,024)
Property, plant and equipment......................... 376,541 8,590 18,402
Franchises............................................ 2,753,699 69,839 157,122
Other................................................. 1,697 -- --
---------- -------- --------
$3,081,043 $ 74,172 $172,500
========== ======== ========
</TABLE>
The Bresnan acquisition was financed through the issuance of $1.0 billion
of equity to the Bresnan sellers, $964.4 million in debt assumed and
additional borrowings under the CC VIII Operating -- Bresnan credit
facilities. The other acquisitions were financed through additional
borrowings under the Charter Operating credit facilities. The Kalamazoo
transaction will be financed through the issuance of $172.5 million of
Class A common stock in Charter Communications, Inc. to the Kalamazoo
sellers.
(f) Represents the elimination of the unamortized historical cost of goodwill
and deferred financing costs based on the allocation of the purchase price
(see (e) above).
(g) Represents the following (dollars in millions):
<TABLE>
<S> <C>
Total pro forma debt not assumed............................ $ (938.5)
Repayment of loans payable to parent companies -- related
parties................................................... (882.0)
Long-term debt:
8.0% senior notes -- Bresnan........................... 171.7
9.25% senior discount notes -- Bresnan................. 196.0
Credit facilities:
Charter Operating.................................... 956.1
CC VIII Operating -- Bresnan......................... 631.2
--------
Total long-term debt................................... 1,955.0
--------
Adjustment............................................. $ 134.5
========
</TABLE>
(h) Represents the preferred membership interests in an indirect subsidiary of
Charter Holdings issued to certain Bresnan sellers, which are exchangable on
a one-for-one basis for shares of Class A common stock in Charter
Communications, Inc.
(i) Represents the elimination of the historical deficits of $268.7 million
related to the Bresnan, Capital Cable and Farmington cable systems and an
additional contribution of $1.4 billion made to us related to the Bresnan
acquisition.
(j) Represents the elimination of the historical equity of Kalamazoo and the
contribution of the Kalamazoo system to Charter Holdings.
43
<PAGE> 47
NOTE B: Offering adjustments represent additional long-term debt of $1.3
billion from the issuance and sale of the original notes, the use of the
proceeds from the original notes to repurchase the Avalon 9.375% senior
subordinated notes, Falcon debentures and Bresnan notes including accrued and
unpaid interest, pursuant to the Avalon, Falcon and Bresnan change of control
offers, and the addition to other assets of the expenses paid in connection with
the issuance and sale of the original notes which were capitalized and will be
amortized over the term of the related debt.
44
<PAGE> 48
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data below for the period from October 1,
1995 through December 31, 1995, for the years ended December 31, 1996 and 1997,
for the periods from January 1, 1998 through December 23, 1998 and from December
24, 1998 through December 31, 1998, and the year ended December 31, 1999 are
derived from the consolidated financial statements of Charter Holdings. The
consolidated financial statements of Charter Holdings for the year ended
December 31, 1997, for the periods from January 1, 1998 through December 23,
1998 and from December 24, 1998 through December 31, 1998 and for the year ended
December 31, 1999 have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this prospectus. The consolidated
financial statements of Charter Holdings for the period from October 1, 1995
through December 31, 1995 and the year ended December 31, 1996, have been
audited by Arthur Andersen LLP, independent public accountants, and are not
included elsewhere in this prospectus. The selected historical financial data
for the period from January 1, 1995 through September 30, 1995 are derived from
the unaudited financial statements of Charter Holdings' predecessor business and
are not included elsewhere in this prospectus. The information presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements of Charter Holdings and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
PREDECESSOR OF
CHARTER HOLDINGS CHARTER HOLDINGS
---------------- --------------------------------------------------------------------------
YEAR ENDED
1/1/95 10/1/95 DECEMBER 31, 1/1/98 12/24/98 YEAR ENDED
THROUGH THROUGH ----------------- THROUGH THROUGH DECEMBER 31,
9/30/95 12/31/95 1996 1997 12/23/98 12/31/98 1999
---------------- -------- ------- ------- -------- ---------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues...................... $ 5,324 $ 1,788 $14,881 $18,867 $ 49,731 $ 13,713 $ 1,325,830
------- ------- ------- ------- -------- ---------- -----------
Operating expenses:
Operating, general and
administrative............ 2,581 931 8,123 11,767 25,952 7,134 683,646
Depreciation and
amortization.............. 2,137 648 4,593 6,103 16,864 8,318 675,786
Option compensation
expense................... -- -- -- -- -- 845 79,979
Management fees/corporate
expense charges........... 224 54 446 566 6,176 473 48,158
------- ------- ------- ------- -------- ---------- -----------
Total operating
expenses................ 4,942 1,633 13,162 18,436 48,992 16,770 1,487,569
------- ------- ------- ------- -------- ---------- -----------
Income (loss) from
operations.................. 382 155 1,719 431 739 (3,057) (161,739)
Interest expense.............. -- (691) (4,415) (5,120) (17,277) (2,353) (434,995)
Interest income............... -- 5 20 41 44 133 18,821
Other income (expense)........ 38 -- (47) 25 (728) -- (217)
------- ------- ------- ------- -------- ---------- -----------
Income (loss) before
extraordinary item.......... 420 (531) (2,723) (4,623) (17,222) (5,277) (578,130)
Extraordinary item -- loss
from early extinguishment of
debt........................ -- -- -- -- -- -- (7,794)
------- ------- ------- ------- -------- ---------- -----------
Net income (loss)............. $ 420 $ (531) $(2,723) $(4,623) $(17,222) $ (5,277) $ (585,924)
======= ======= ======= ======= ======== ========== ===========
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets.................. $26,342 $31,572 $67,994 $55,811 $281,969 $4,335,527 $12,005,197
Total debt.................... 10,480 28,847 59,222 41,500 274,698 2,002,206 6,971,612
Member's equity (deficit)..... 15,311 971 2,648 (1,975) (8,397) 2,147,379 4,344,262
</TABLE>
45
<PAGE> 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
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.
We do not believe that our historical financial condition and results of
operations are accurate indicators of future results because of certain past
significant events, including:
(1) the acquisition by Mr. Allen of CCA Group, Charter Communications
Properties Holdings, LLC (CCPH) and CharterComm Holdings, LLC,
referred to together with their subsidiaries as the Charter companies;
(2) the merger of Marcus Holdings with and into Charter Holdings;
(3) our acquisitions completed since January 1, 1999, the recent
transfers, the Bresnan acquisition and the Kalamazoo transaction;
(4) the refinancing or replacement of the previous credit facilities of
the Charter companies and certain of our subsidiaries acquired in 1999
acquisitions, the recent transfers and the Bresnan acquisition; and
(5) the purchase of publicly held notes that had been issued by several of
the direct and indirect subsidiaries of Charter Holdings.
Provided below is a discussion of our organizational history consisting of:
(1) the operations and development of the Charter companies prior to the
acquisition by Mr. Allen, together with the acquisition of the Charter
companies by Mr. Allen;
(2) the merger of Marcus Holdings with and into Charter Holdings; and
(3) our 1999 acquisitions, the recent transfers, the Bresnan acquisition
and the Kalamazoo transaction.
ORGANIZATIONAL HISTORY
Prior to the acquisition of the Charter companies by Mr. Allen on December
23, 1998 and the merger of Marcus Holdings with and into Charter Holdings
effective April 7, 1999, the cable systems of the Charter and Marcus companies
were operated under four groups of companies. Three of these groups were
comprised of companies that were managed by Charter Investment prior to the
acquisition of the Charter companies by Mr. Allen and the fourth group was
comprised of companies that were subsidiaries of Marcus Holdings. Charter's
management began managing Marcus Holdings in October 1998.
The following is an explanation of how:
(1) CCPH, the operating companies that formerly comprised CCA Group and
CharterComm Holdings, and the Marcus companies became wholly owned
subsidiaries of Charter Operating;
(2) Charter Operating became a wholly owned subsidiary of Charter
Holdings;
(3) Charter Holdings became a wholly owned subsidiary of Charter
Communications Holding Company; and
46
<PAGE> 50
(4) Charter Communications Holding Company became a wholly owned
subsidiary of Charter Investment and, later, of Charter Communications,
Inc.
THE CHARTER COMPANIES
Prior to Charter Investment acquiring the remaining interests that it did
not previously own in two of the three groups of Charter companies, namely CCA
Group and CharterComm Holdings, as described below, the operating subsidiaries
of the three groups of Charter companies were parties to separate management
agreements with Charter Investment pursuant to which Charter Investment provided
management and consulting services. Prior to our acquisition by Mr. Allen, the
Charter companies were as follows:
(1) CCPH
CCPH was a wholly owned subsidiary of Charter Investment. The primary
subsidiary of CCPH, which owned the cable systems, was Charter
Communications Properties, LLC. In connection with Mr. Allen's acquisition
on December 23, 1998, CCPH was merged out of existence and Charter
Communications Properties became a direct, wholly owned subsidiary of
Charter Investment. On May 20, 1998, CCPH acquired certain cable systems
from Sonic Communications, Inc. for a total purchase price, net of cash
acquired, of $228.4 million, including $60.9 million of assumed debt.
(2) CCA Group
The controlling interests in CCA Group were held by affiliates of Kelso &
Co. Charter Investment had only a minority interest. Effective December 23,
1998, prior to Mr. Allen's acquisition, Charter Investment acquired from
the Kelso affiliates the interests the Kelso affiliates held in CCA Group.
Consequently, the companies comprising CCA Group became wholly owned
subsidiaries of Charter Investment.
CCA Group consisted of the following three sister companies:
(a) CCT Holdings, LLC;
(b) CCA Holdings, LLC; and
(c) Charter Communications Long Beach, LLC.
The cable systems were owned by the various subsidiaries of these three
sister companies. The financial statements for these three sister companies
historically were combined and the term "CCA Group" was assigned to these
combined entities. In connection with Mr. Allen's acquisition on December
23, 1998, the three sister companies and some of the non-operating
subsidiaries were merged out of existence, leaving certain of the operating
subsidiaries owning all of the cable systems under this former group. These
operating subsidiaries became indirect, wholly owned subsidiaries of
Charter Investment.
(3) CharterComm Holdings, LLC
The controlling interests in CharterComm Holdings were held by affiliates
of Charterhouse Group International Inc. Charter Investment had only a
minority interest. Effective December 23, 1998, prior to Mr. Allen's
acquisition Charter Investment acquired from the Charterhouse Group
affiliates the interests the Charterhouse Group affiliates held in
CharterComm Holdings. Consequently, CharterComm Holdings became a wholly
owned subsidiary of Charter Investment.
The cable systems were owned by the various subsidiaries of CharterComm
Holdings. In connection with Mr. Allen's acquisition on December 23, 1998, some
of the non-operating subsidiaries were merged out of existence, leaving certain
of the operating subsidiaries owning all of
47
<PAGE> 51
the cable systems under this former group. CharterComm Holdings was merged out
of existence. Charter Communications, LLC became a direct, wholly owned
subsidiary of Charter Investment.
Our acquisition by Mr. Allen became effective on December 23, 1998, through
a series of transactions in which Mr. Allen acquired approximately 94% of the
equity interests of Charter Investment for an aggregate purchase price of $2.2
billion, excluding $2.0 billion in assumed debt. Charter Communications
Properties and the operating companies that formerly comprised CCA Group and
CharterComm Holdings were contributed to Charter Operating subsequent to Mr.
Allen's acquisition. CCPH is deemed to be our predecessor. Consequently, the
contribution of Charter Communications Properties was accounted for as a
reorganization under common control. Accordingly, Charter Holdings results of
operations for periods prior to and including December 23, 1998 include the
accounts of CCPH. The contributions of the operating companies that formerly
comprised CCA Group and CharterComm Holdings were accounted for in accordance
with purchase accounting. Accordingly, Charter Holdings results of operations
for periods after December 23, 1998 include the accounts of Charter
Communications Properties, CCA Group and CharterComm Holdings.
In February 1999, Charter Holdings was formed as a wholly owned subsidiary
of Charter Investment and Charter Operating was formed as a wholly owned
subsidiary of Charter Holdings. All of Charter Investment's direct interests in
the entities described above were transferred to Charter Operating. All of the
prior management agreements were terminated and a new management agreement was
entered into between Charter Investment and Charter Operating.
In May 1999, Charter Holdco was formed as a wholly owned subsidiary of
Charter Investment. All of Charter Investment's interests in Charter Holdings
were transferred to Charter Communications Holding Company.
In July 1999, Charter Communications, Inc. was formed as a wholly owned
subsidiary of Charter Investment. Also in November 1999, Charter Communications
Holding Company sold membership units to Vulcan Cable III. In the initial public
offering of Charter Communications, Inc., substantially all of its equity
interests were sold to the public and less than 1% of its equity interests were
sold to Mr. Allen. Charter Communications, Inc. contributed substantially all of
the proceeds of the initial public offering to Charter Communications Holding
Company which issued membership units to Charter Communications, Inc. In
November 1999, the management agreement between Charter Investment and Charter
Operating was amended and assigned from Charter Investment to Charter
Communications, Inc.
THE MARCUS COMPANIES
In April 1998, Mr. Allen acquired approximately 99% of the non-voting
economic interests in Marcus Cable, and agreed to acquire the remaining
interests. The owner of the remaining partnership interests retained voting
control of Marcus Cable. In October 1998, Marcus Cable entered into a management
consulting agreement with Charter Investment, pursuant to which Charter
Investment provided management and consulting services to Marcus Cable and its
subsidiaries which own cable systems. This agreement placed the Marcus cable
systems under common management with the cable systems of the Charter companies
acquired by Mr. Allen in December 1998.
In March 1999, all of Mr. Allen's interests in Marcus Cable were
transferred to Marcus Holdings, a then newly formed company. Later in March
1999, Mr. Allen acquired the remaining interests in Marcus Cable, including
voting control, which interests were transferred to Marcus Holdings. In April
1999, Mr. Allen merged Marcus Holdings into Charter Holdings, and the operating
subsidiaries of Marcus Holdings and all of the cable systems they owned came
under the ownership of Charter Holdings and, in turn, Charter Operating. For
financial reporting purposes, the
48
<PAGE> 52
merger of Marcus Holdings with and into Charter Holdings was accounted for as an
acquisition of Marcus Holdings effective March 31, 1999, and accordingly, the
results of operations of Marcus Holdings have been included in the consolidated
financial statements of Charter Communications Holding Company since that date.
ACQUISITIONS
Since the beginning of 1999, our direct or indirect subsidiaries completed
the Renaissance, American Cable, Greater Media, Helicon, Vista, Cable Satellite,
Rifkin (including InterLink) and InterMedia acquisitions for an aggregate
purchase price of approximately $4.2 billion including assumed debt of $354
million. These acquisitions were funded through excess cash from the issuance by
Charter Holdings of the March 1999 Charter Holdings notes, borrowings under the
Charter Operating credit facilities, capital contributions to Charter Holdings
by Mr. Allen through Vulcan Cable III and the assumption of the outstanding
Renaissance, Helicon and Rifkin notes.
In addition to these acquisitions, in November 1999, Charter Communications
Holding Company acquired the Fanch, Falcon and Avalon cable systems. In February
2000, we and Charter Communications Holding Company acquired equity interests in
the entity that owned the Bresnan cable systems. The aggregate purchase price
for the Fanch, Falcon, Avalon and Bresnan acquisitions was $9.8 billion
including assumed debt of $3.0 billion. The purchase prices for these
acquisitions were paid with the net proceeds of the initial public offering of
the common stock of Charter Communications, Inc., an equity contribution to
Charter Communications Holding Company by Mr. Allen through Vulcan Cable III,
borrowings under credit facilities, the assumption of outstanding notes issued
by Falcon, Avalon and Bresnan, equity issued to specific sellers in the Falcon
and Bresnan acquisitions and the assumption of Falcon and Bresnan notes and
debentures.
On January 1, 2000, as a result of transfers from Charter Communications
Holding Company, Charter Holdings became the indirect owner of the Fanch, Falcon
and Avalon cable systems. On February 14, 2000, as a result of the transfer to
us by Charter Communications Holding Company of the equity interests it had
purchased in the Bresnan systems, we became the indirect owner of the Bresnan
cable systems.
In April 2000, one of our subsidiaries acquired cable systems from Capital
Cable and Farmington for an aggregate purchase of approximately $75 million.
These acquisitions were funded with borrowings under the Charter Operating
credit facilities.
In the Falcon acquisition, certain of the Falcon sellers received a total
of $550 million of the Falcon purchase price in the form of membership units in
Charter Communications Holding Company. In the Bresnan acquisition, the Bresnan
sellers received $1.0 billion of the Bresnan purchase price in the form of
common membership units in Charter Communications Holding Company and preferred
membership units in an indirect subsidiary of Charter Holdings. In addition,
certain Rifkin sellers received a total of $133.3 million of the Rifkin purchase
price in the form of preferred membership units in Charter Communications
Holding Company. Under the Helicon purchase agreement, $25 million of the
purchase price was paid in the form of preferred limited liability company
interests of Charter-Helicon, LLC, our indirect subsidiary.
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The following table sets forth additional information on our acquisitions
since the beginning of 1999 and the recent transfers:
<TABLE>
<CAPTION>
AS OF AND FOR
THE YEAR ENDED
PURCHASE PRICE DECEMBER 31, 1999
ACQUISITION (INCLUDING -----------------------------
OR TRANSFER ASSUMED DEBT) REVENUES
DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS)
----------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Renaissance........................ 4/99 $ 459 134,000 $ 62,428
American Cable..................... 5/99 240 69,000 37,216
Greater Media systems.............. 6/99 500 176,000 85,933
Helicon............................ 7/99 550 171,000 85,224
Vista.............................. 7/99 126 26,000 14,112
Cable Satellite.................... 8/99 22 9,000 4,859
Rifkin............................. 9/99 1,460 463,000 219,878
InterMedia systems................. 10/99 873+ 420,000 179,259
systems swap (142,000)(a) (53,056)(b)
--------- ----------
278,000 126,203
Fanch.............................. 1/00 2,400 528,000 218,197
Falcon............................. 1/00 3,481 955,000 427,668
Avalon............................. 1/00 845(c) 258,000(c) 109,943(d)
Bresnan............................ 2/00 3,100 686,000(e) 290,697(f)
Capital Cable...................... 4/00 60 27,000 11,555
Farmington......................... 4/00 15 6,000 1,968
------------ --------- ----------
Total.............................. $ 14,131 3,786,000 $1,695,881
============ ========= ==========
</TABLE>
- - - ---------------
(a) As part of the transaction with 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 Indiana cable system, with customers totaling 30,000,
was transferred in March 2000 after receipt of the necessary regulatory
approvals.
(b) Includes revenues for all swapped InterMedia systems, except for the
retained Indiana system, for the nine months ended September 30, 1999, the
date of the transfer of these systems, and includes revenues for the Indiana
system for the year ended December 31, 1999.
(c) Includes approximately 5,400 customers served by cable systems that we
acquired from certain former affiliates of Avalon in February 2000. The $845
million purchase price for Avalon includes the purchase price for these
systems of approximately $13 million.
(d) Includes revenues of approximately $1.6 million related to the cable systems
acquired from certain former affiliates of Avalon.
(e) Includes approximately 19,400 customers served by cable systems acquired by
Bresnan since December 31, 1999.
(f) Includes revenues of approximately $7.1 million related to the cable systems
acquired by Bresnan since December 31, 1999.
PENDING KALAMAZOO TRANSACTION
In March 2000, Charter Communications, Inc. 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 Communications,
Inc. As a result of the merger, Charter Communications, Inc. will become the
indirect owner of the Kalamazoo system. The merger
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<PAGE> 54
consideration of approximately $172.5 million will be paid in Class A common
stock of Charter Communications, Inc. After the merger, Charter Communications,
Inc. will contribute 100% of the equity interests of the direct owner of the
Kalamazoo system to Charter Communications Holding Company in exchange for
membership units. Charter Communications Holding Company will in turn contribute
100% of the assets and 100% of equity interests to us. The Kalamazoo cable
system has approximately 49,000 customers and had revenue of approximately $20.3
million for the year ended December 31, 1999. We anticipate that this
acquisition will close in the third quarter of 2000.
POSSIBLE SWAP TRANSACTION On December 1, 1999, Charter Communications, Inc. and
AT&T entered into a non-binding letter of intent to exchange certain of our
cable systems for cable systems owned by AT&T. As part of the Swap Transaction,
we will be required to pay to AT&T approximately $108 million in cash, which
represents the difference in the agreed values of the systems to be exchanged.
The Swap Transaction is subject to the negotiation and execution of a definitive
exchange agreement, regulatory approvals and other conditions typical in
transactions of this type. We cannot assure that these conditions will be
satisfied.
In addition, we have had discussions with several other cable operators
about the possibility of "swapping" cable systems that would further complement
our regional operating clusters.
OVERVIEW
Approximately 87% of our historical revenues for the year ended December
31, 1999 are attributable to monthly subscription fees charged to customers for
our basic, expanded basic and premium cable television programming services,
equipment rental and ancillary services provided by our cable television
systems. In addition, we derive other revenues from installation and
reconnection fees charged to customers to commence or reinstate service,
pay-per-view programming, where users are charged a fee for individual programs
requested, advertising revenues and commissions related to the sale of
merchandise by home shopping services. We have generated increased revenues in
each of the past three fiscal years, primarily through internal customer growth,
basic and expanded tier rate increases, acquisitions and innovative marketing.
We are beginning to offer our customers several other services, which are
expected to significantly contribute to our revenues. 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. Our television-based Internet access allows us to offer the services
provided by WorldGate Communications, Inc., which provides users with TV-based
e-mail and other Internet access.
Our expenses primarily consist of operating costs, general and
administrative expenses, depreciation and amortization expense and management
fees/corporate expense charges. Operating costs primarily include programming
costs, cable service related expenses, marketing and advertising costs,
franchise fees and expenses related to customer billings. Programming costs
accounted for approximately 44% of our operating, general and administrative
expenses for the year ended December 31, 1999. Programming costs have increased
in recent years and are expected to continue to increase due to additional
programming being provided to customers, increased cost to produce or purchase
cable programming, inflation and other factors affecting the cable television
industry. In each year we have operated, our costs to acquire programming have
exceeded customary inflationary increases. 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
provides members with volume discounts from programming networks. We believe our
membership kept increases in our programming costs below what the increases
would otherwise have been. We have been able to negotiate favorable terms with
premium networks in conjunction with the premium packages we offer, which
minimized the
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impact on margins and provided substantial volume incentives to grow the premium
category. Although we believe that we will be able to pass future increases in
programming costs through to customers, there can be no assurance that we will
be able to do so.
General and administrative expenses primarily include accounting and
administrative personnel and professional fees. Depreciation and amortization
expense relates to the depreciation of our tangible assets and the amortization
of our franchise costs. Management fees/corporate expense charges are fees paid
or charges for management services. Charter Holdings records actual expense
charges incurred by Charter Communications, Inc. on behalf of Charter Holdings.
Prior to the acquisition of us by Mr. Allen, the CCA Group and CharterComm
Holdings recorded management fees payable to Charter Investment, Inc. equal to
3.0% to 5.0% of gross revenues plus certain expenses. In October 1998, Charter
Investment, Inc. began managing the cable operations of Marcus Holdings under a
management agreement, which was terminated in February 1999 and replaced by a
master management fee arrangement.
In connection with Charter Communications, Inc.'s initial public offering
of common stock in November 1999, the management agreement between Charter
Investment, Inc. and Charter Operating was assigned to Charter Communications,
Inc. and Charter Communications, Inc. entered into a new management agreement
with Charter Communications Holding Company. These management agreements are
substantially similar to the previous management agreement with Charter
Operating except that Charter Communications, Inc. is only entitled to receive
reimbursement of its expenses as consideration for its providing management
services. In addition, the Falcon, Fanch, Avalon and Bresnan cable systems are
managed pursuant to agreements that entitle Charter Communications, Inc. to
receive reimbursement of its expenses as consideration for its provision of
management services. Our credit facilities limit the amount of such
reimbursements to 3.5% of gross revenues.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. The principal reasons for our prior and
anticipated net losses include depreciation and amortization expenses associated
with our acquisitions, capital expenditures related to construction and
upgrading of our systems, and interest costs on borrowed money. We cannot
predict what impact, if any, continued losses will have on our ability to
finance our operations in the future.
RESULTS OF OPERATIONS
The following discusses the results of operations for:
(1) Charter Holdings, for the year ended December 31, 1997, and for the
period from January 1, 1998 through December 23, 1998;
(2) Charter Holdings, comprised of CCPH, CCA Group and CharterComm
Holdings, for the period from December 24, 1998 through December 31,
1998; and
(3) Charter Holdings, comprised of the following for the year ended
December 31, 1999:
- CCPH, CCA Group and CharterComm Holdings for the entire period;
- Marcus Holdings for the period from March 31, 1999, the date Mr.
Allen acquired voting control, through December 31, 1999;
- Renaissance Media Group LLC for the period from April 30, 1999, the
acquisition date, through December 31, 1999;
- American Cable Entertainment, LLC for the period from May 7, 1999,
the acquisition date, through December 31, 1999;
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<PAGE> 56
- Cable systems of Greater Media Cablevision, Inc. for the period from
June 30, 1999, the acquisition date, through December 31, 1999;
- Helicon Partners I, L.P. and affiliates for the period from July 30,
1999, the acquisition date, through December 31, 1999;
- Vista Broadband Communications, L.L.C. for the period from July 30,
1999, the acquisition date, through December 31, 1999;
- Cable system of Cable Satellite of South Miami, Inc. for the period
from August 4, 1999, the acquisition date, through December 31, 1999;
- Rifkin Acquisition Partners, L.L.L.P. and InterLink Communications
Partners, LLLP for the period from September 13, 1999, the
acquisition date, through December 31, 1999;
- Cable systems of InterMedia Capital Partners IV, L.P., InterMedia
Partners and affiliates for the period from October 1, 1999, "swap"
transaction date, through December 31, 1999;
No operating results are included for the Fanch, Falcon, Avalon, Bresnan,
Capital Cable and Farmington cable systems transferred to or acquired by us
after December 31, 1999.
On January 1, 2000, Charter Communications Holding Company and Charter
Holdings effected a number of transactions in which cable systems acquired by
Charter Communications Holding Company in November 1999 were contributed to
Charter Holdings. 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 pooling of interests. Charter Holdings
revised its financial statements as of and for the year ended December 31, 1999
to reflect this reorganization. The accounts of the transferred systems have
been included in Charter Holdings' financial statements from the date the
transferred systems were acquired by Charter Communications Holding Company.
This revision has been reflected in Charter Holdings' supplemental financial
statements contained in this prospectus.
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>
YEAR ENDED 1/1/98 12/24/98 YEAR ENDED
DECEMBER 31, THROUGH THROUGH DECEMBER 31,
1997 12/23/98 12/31/98 1999
---------------- ----------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues..................................... $18,867 100.0% $ 49,731 100.0% $13,713 100.0% $1,325,830 100.0%
------- ------ -------- ------ ------- ------ ---------- ------
Operating expenses:
Operating costs............................ 9,157 48.5% 18,751 37.7% 4,757 34.7% 461,363 34.8%
General and administrative costs........... 2,610 13.8% 7,201 14.5% 2,377 17.3% 222,283 16.8%
Depreciation and amortization.............. 6,103 32.3% 16,864 33.9% 8,318 60.7% 675,786 51.0%
Option compensation expense................ -- -- -- -- 845 6.2% 79,979 6.0%
Management fees/corporate expense
charges.................................. 566 3.0% 6,176 12.4% 473 3.4% 48,158 3.6%
------- ------ -------- ------ ------- ------ ---------- ------
Total operating expenses..................... 18,436 97.7% 48,992 98.5% 16,770 122.3% 1,487,569 112.2%
------- ------ -------- ------ ------- ------ ---------- ------
Income (loss) from operations................ 431 2.3% 739 1.5% (3,057) (22.3%) (161,739) (12.2%)
Interest income.............................. 41 0.2% 44 0.1% 133 1.0% 18,821 1.4%
Interest expense............................. (5,120) (27.1%) (17,277) (34.7%) (2,353) (17.2%) (434,995) (32.8%)
Other income (expense)....................... 25 0.1% (728) (1.5%) -- -- (217) --
------- ------ -------- ------ ------- ------ ---------- ------
Loss before extraordinary item............... (4,623) (24.5%) (17,222) (34.6%) (5,277) (38.5%) (578,130) (43.6%)
Extraordinary item -- loss from early
extinguishment of debt..................... -- -- -- -- -- -- (7,794) (0.6%)
------- ------ -------- ------ ------- ------ ---------- ------
Net loss..................................... $(4,623) (24.5%) $(17,222) (34.6%) $(5,277) (38.5%) $ (585,924) (44.2%)
======= ====== ======== ====== ======= ====== ========== ======
</TABLE>
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FISCAL 1999 COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998
REVENUES. Revenues increased by $1,276.1 million, from $49.7 million for
the period from January 1, 1998 through December 23, 1998 to $1,325.8 million in
1999. The increase in revenues primarily resulted from the acquisitions of CCA
Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
Additional revenues from these entities included for the year ended December 31,
1999 were $618.8 million, $386.7 million and $247.8 million, respectively.
OPERATING, GENERAL AND ADMINISTRATIVE COSTS. Operating, general and
administrative costs increased by $657.7 million, from $26.0 million for the
period from January 1, 1998 through December 23, 1998 to $683.6 million in 1999.
This increase was due primarily to the acquisition of the CCA Group and
CharterComm Holdings, Marcus Holdings and 1999 acquisitions. Additional
operating, general and administrative expenses from these entities included for
the year ended December 31, 1999 were $338.5 million, $209.3 million and $104.4
million, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $658.9 million, from $16.9 million, for the period from January 1,
1998 through December 23, 1998 to $675.8 million in 1999. There was a
significant increase in amortization expense resulting from the acquisitions of
the CCA Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
Additional depreciation and amortization expense from these entities included
for the year ended December 31, 1999 were $346.3 million, $203.5 million and
$125.6 million, respectively. The increases were offset by the elimination of
depreciation and amortization expense related to dispositions of cable systems.
OPTION COMPENSATION EXPENSE. Option compensation expense in 1999 was $80.0
million due to the granting of options to employees in December 1998, February
1999 and April 1999. The exercise prices of the options on the date of grant
were deemed to be less than the estimated fair values of the underlying
membership units, resulting in compensation expense accrued over the vesting
period of each grant that varies from four to five years.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $42.0 million, from $6.2 million, for the period
from January 1, 1998 through December 23, 1998 to $48.2 million in 1999. The
increase in 1998 compared to 1999 was the result of the acquisitions of CCA
Group and CharterComm Holdings, Marcus Holdings and 1999 acquisitions.
INTEREST INCOME. Interest income increased by $18.8 million, from $44,000
for the period from January 1, 1998 through December 23, 1998 to $18.8 million
in 1999 and the sale of the March 1999 Charter Holdings notes. The increase was
primarily due to investing excess cash that resulted from required credit
facilities drawdowns and the sale of the March 1999 Charter Holdings notes.
INTEREST EXPENSE. Interest expense increased by $417.7 million, from $17.3
million for the period from January 1, 1998 through December 23, 1998 to $435.0
million in 1999. This increase resulted primarily from interest on the notes and
credit facilities used to finance the acquisitions of CCA Group and CharterComm
Holdings, Marcus Holdings and 1999 acquisitions.
NET LOSS. Net loss increased by $568.7 million, from $17.2 million for the
period from January 1, 1998 through December 23, 1998 to $585.9 million in 1999.
The increase in revenues that resulted from the acquisitions of CCA Group,
CharterComm Holdings and Marcus Holdings was not sufficient to offset the
operating expenses associated with the acquired systems.
PERIOD FROM DECEMBER 24, 1998 THROUGH DECEMBER 31, 1998
This period is not comparable to any other period presented. The financial
statements represent eight days of operations. This period not only contains the
results of operations of CCPH, but also
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the results of operations of those entities purchased in the acquisition of the
Charter companies by Mr. Allen. As a result, no comparison of the operating
results for this eight-day period is presented.
PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998 COMPARED TO 1997
REVENUES. Revenues increased by $30.9 million, or 163.6%, from $18.9
million in 1997 to $49.7 million for the period from January 1, 1998 through
December 23, 1998. The increase in revenues primarily resulted from the
acquisition of Sonic, which had revenues for that period of $29.8 million.
OPERATING COSTS. Operating costs increased by $9.6 million, or 104.8%,
from $9.2 million in 1997 to $18.8 million for the period from January 1, 1998
through December 23, 1998. This increase was due primarily to the acquisition of
Sonic, which had operating costs for that period of $9.4 million, partially
offset by the loss of $1.4 million on the sale of a cable system in 1997.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs
increased by $4.6 million, or 175.9%, from $2.6 million in 1997 to $7.2 million
for the period from January 1, 1998 through December 23, 1998. This increase was
due primarily to the acquisition of Sonic, which had general and administrative
costs for that period of $6.0 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $10.8 million, or 176.3%, from $6.1 million in 1997 to $16.9
million for the period from January 1, 1998 through December 23, 1998. There was
a significant increase in amortization resulting from the acquisition of Sonic.
Incremental depreciation and amortization expenses of the acquisition of Sonic
were $9.9 million.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges
increased by $5.6 million, or 991.2% from $0.6 million in 1997 to $6.2 million
for the period from January 1, 1998 through December 23, 1998. The increase from
1997 compared to the period from January 1, 1998 through December 23, 1998 was
the result of additional Charter Investment, Inc. charges related to equity
appreciation rights plans of $3.8 million for the period from January 1, 1998
through December 23, 1998 and an increase of $0.9 million in management services
provided by Charter Investment, Inc. as a result of the acquisition of Sonic.
INTEREST EXPENSE. Interest expense increased by $12.2 million, or 237.4%,
from $5.1 million in 1997 to $17.3 million for the period from January 1, 1998
through December 23, 1998. This increase resulted primarily from the
indebtedness of $220.6 million, including a note payable for $60.9 million,
incurred in connection with the acquisition of Sonic resulting in additional
interest expense.
NET LOSS. Net loss increased by $12.6 million, or 272.5%, from $4.6
million in 1997 to $17.2 million for the period from January 1, 1998 through
December 23, 1998. The increase in revenues that resulted from cable television
customer growth was not sufficient to offset the operating expenses related to
the acquisition of Sonic.
OUTLOOK
Our business strategy emphasizes the increase of our operating cash flow by
increasing our customer base and the amount of cash flow per customer. We
believe that there are significant advantages in increasing the size and scope
of our operations, including:
- improved economies of scale in management, marketing, customer service,
billing and other administrative functions;
- reduced costs for our cable systems and our infrastructure in general;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
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We seek to "cluster" cable systems in suburban and ex-urban areas
surrounding selected metropolitan markets. We believe that such "clustering"
offers significant opportunities to increase operating efficiencies and to
improve operating margins and cash flow by spreading fixed costs over an
expanding subscriber base. In addition, we believe that by concentrating
"clusters" in markets, we will be able to generate higher growth in revenues and
operating cash flow. Through strategic acquisitions and "swaps" of cable
systems, we seek to enlarge the coverage of our current areas of operations,
and, if feasible, develop "clusters" in new geographic areas within existing
regions. Swapping of cable systems allows us to trade systems that do not
coincide with our operating strategy while gaining systems that meet our
objectives. Several significant swaps have been announced. These swaps have
demonstrated the industry's trend to cluster operations. To date, we have
participated in one swap in connection with the transaction with InterMedia. In
addition, Charter Communications, Inc. has entered into a non-binding letter of
intent providing for the exchange of certain of our cable systems for systems
owned by AT&T.
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 in 1998 were $30.2
million, and in 1999 were $382.2 million. Pro forma for our merger with Marcus
Holdings, the sale of the original notes, acquisitions completed since January
1, 1999, the Fanch, Falcon and Avalon transfers and the Kalamazoo transaction,
our cash flows from operating activities for 1999 were $894.9 million.
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.
Capital expenditures for 1999, pro forma for acquisitions completed since
January 1, 1999, the recent transfers and the Kalamazoo transaction were
approximately $1.3 billion. In 1999, we made capital expenditures, excluding
cable systems acquired in 1999 and in our merger with Marcus Holdings, of $709.7
million. The majority of the capital expenditures related to rebuilding existing
cable systems. Those expenditures 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 $6.0 billion for capital expenditures, approximately $3.5 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 $2.5 billion will be used for extensions of
systems, development 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 $3.3 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 for which we have
received a commitment.
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<PAGE> 60
We cannot assure you that these amounts will be sufficient to accomplish our
planned system upgrade, expansion and maintenance. 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.
FINANCING ACTIVITIES
As of December 31, 1999, pro forma for the sale of the original notes, the
recent transfers, acquisitions completed since this date, the repurchase of
certain of the Falcon, Avalon and Bresnan notes and debentures, our debt would
have been approximately $11.2 billion, and the deficiency of earnings available
to cover fixed charges would have been approximately $1.5 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.
MARCH 1999 CHARTER HOLDINGS NOTES. On March 17, 1999, Charter Holdings and
Charter Capital issued $3.6 billion principal amount of senior notes. The March
1999 Charter Holdings notes consisted of $600 million in aggregate principal
amount of 8.250% senior notes due 2007, $1.5 billion in aggregate principal
amount of 8.625% senior notes due 2009, and $1.475 billion in aggregate
principal amount at maturity of 9.920% senior discount notes due 2011. The net
proceeds of approximately $3.0 billion, combined with the borrowings under our
credit facilities, were used to consummate tender offers for publicly held debt
of several of our subsidiaries, as described below, to refinance borrowings
under our previous credit facilities, for working capital purposes and to
finance a number of acquisitions.
As of December 31, 1999, a total of $2.1 billion was outstanding under the
8.250% notes and the 8.625% notes, and the accreted value of the outstanding
9.920% notes was $977.8 million.
NOTES OF THE CHARTER COMPANIES AND THE MARCUS COMPANIES. In February and
March 1999, we commenced cash tender offers to purchase the 14% senior discount
notes issued by Charter Communications Southeast Holdings, LLC, the 11.25%
senior notes issued by Charter Communications Southeast, LLC, the 13.50% senior
subordinated discount notes issued by Marcus Cable Operating Company, L.L.C.,
and the 14.25% senior discount notes issued by Marcus Cable. All such notes,
except for $1.1 million in principal amount, were repaid in full for an
aggregate amount of $1.0 billion. The remaining $1.1 million of such notes were
repaid in September 1999.
CHARTER OPERATING CREDIT FACILITIES. The Charter Operating credit
facilities provide for two term facilities, one with a principal amount of $1.0
billion that matures in September 2007 (Term A), and the other with a principal
amount of $2.45 billion that matures in March 2008 (Term B). The Charter
Operating credit facilities also provide for a $1.25 billion revolving credit
facility with a maturity date in September 2007 and, at the option of the
lenders, supplemental credit facilities in the amount of $1.0 billion available
until March 18, 2002. Amounts under the Charter Operating credit facilities bear
interest at the Base Rate or the Eurodollar rate, as defined, plus a margin of
up to 2.75% (8.22% to 9.25% as of December 31, 1999). A quarterly commitment fee
of between 0.25% and 0.375% per annum is payable on the unborrowed balance of
Term A and the revolving credit facility. As of December 31, 1999, outstanding
borrowings were approximately $2.9 billion and the unused availability was $1.2
billion. In March 2000, $600.0 million of the supplemental credit facility was
drawn down. The maturity date for this drawdown is September 18, 2008.
CHARTER HOLDINGS COMMITTED SENIOR BRIDGE LOAN FACILITY. Morgan Stanley
Senior Funding, Inc. has committed to provide Charter Holdings and Charter
Capital with senior increasing rate
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bridge loans in an aggregate principal amount of up to $1.0 billion. The
commitment to provide the bridge loans expires on October 14, 2000. Each bridge
loan must be in a principal amount not less than $400.0 million and the bridge
loans mature one year from the date of the initial loan.
The first loan will initially bear interest at an annual rate equal to the
yield corresponding to the bid price on our 10.25% notes less 0.25%, calculated
as of the initial date of funding of the loan. If the first loan is not repaid
within 90 days following its initial date of funding, 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. The second loan
will initially bear interest at an annual rate equal to the greater of: (a) the
interest rate on the first loan in effect on the date of funding of the second
loan; or (b) the yield corresponding to the bid price on our 10.25% notes as of
the date of funding of the second loan. If the second loan is not repaid in
whole by the last day of each 90-day period following its funding, the interest
rate on the loan will increase on the last day of each 90-day period by an
amount equal to the increase in interest rate on the first loan on such day.
Unless additional default interest is assessed, the interest rate on the bridge
loans will be between 9% and 15% annually.
The bridge loan facility will not close unless specified closing conditions
are satisfied. We cannot assure you that all closing conditions will be
satisfied. For additional information on the closing conditions and other terms
of this facility, see "Description of Certain Indebtedness."
RENAISSANCE NOTES. When we acquired Renaissance in April 1999, Renaissance
had outstanding $163.2 million principal amount at maturity of 10% senior
discount notes due 2008. The Renaissance 10% notes do not require the payment of
interest until April 15, 2003. From and after April 15, 2003, the Renaissance
10% notes bear interest, payable semi-annually in cash, on April 15 and October
15, commencing on October 15, 2003. The Renaissance 10% notes are due on April
15, 2008. In May 1999, $48.8 million aggregate face amount of the Renaissance
Notes were repurchased at 101% of their accreted value plus accrued and unpaid
interest. As of December 31, 1999, the accreted value of the Renaissance 10%
notes that remained outstanding was approximately $83.0 million.
HELICON NOTES. We acquired Helicon in July 1999 and assumed Helicon's
$115.0 million in principal amount of 11% senior secured notes due 2003. On
November 1, 1999, we redeemed all of the Helicon 11% notes at a purchase price
equal to 103% of their principal amount, plus accrued and unpaid interest, for
$124.8 million.
RIFKIN NOTES. We acquired Rifkin in September 1999 and assumed Rifkin's
outstanding $125.0 million in principal amount of 11.125% senior subordinated
notes due 2006. In October 1999, we repurchased an individually held $3.0
million Rifkin promissory note for $3.4 million and publicly held notes with a
total outstanding principal amount of $124.1 million for a total of $140.6
million, including a consent fee of $30 per $1,000 to note holders who delivered
timely consents to amend the indenture governing those notes to eliminate
substantially all of the restrictive covenants. As of December 31, 1999, there
was $0.9 million in principal amount outstanding of Rifkin notes. In February
2000, we repurchased $0.5 million in principal amount of these notes.
FALCON DEBENTURES. When Falcon was acquired by Charter Communications
Holding Company in November 1999, it had outstanding $375 million in principal
amount of 8.375% senior debentures due 2010 and 9.285% senior discount
debentures due 2010 with an accreted value of approximately $319.1 million.
Falcon's 11.56% subordinated notes due 2001 were paid off for a total of $16.3
million, including principal, accrued and unpaid interest and a premium at the
closing of the Falcon acquisition. As of December 31, 1999, $375.0 million total
principal amount of the Falcon 8.375% debentures were outstanding and the
accreted value of the Falcon 9.285% debentures was approximately $323.0 million.
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On December 10, 1999, change of control offers were commenced to repurchase
the Falcon debentures at purchase prices of 101% of principal amount, plus
accrued and unpaid interest, or accreted value, as applicable. Pursuant to the
change of control offers and in purchases in the "open market," all of the
8.375% senior debentures were repurchased for $388.0 million and all of the
9.285% senior discount debentures were repurchased for $328.1 million in
February 2000.
FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, the
previous Falcon credit facilities were amended to provide for two term
facilities, one with a principal amount of $198.0 million as of December 31,
1999 that matures June 2007 (Term B), and the other with the principal amount of
$297.0 million as of December 31, 1999 that matures December 2007 (Term C). The
Falcon credit facilities also provide for a $646.0 million revolving credit
facility with a maturity date of December 2006 and, at the option of the
lenders, supplemental credit facilities in the amounts of $700.0 million with a
maturity date in December 2007. At December 31, 1999, $110.0 million was
outstanding under the supplemental credit facilities. Amounts under the Falcon
credit facilities bear interest at the Base Rate or the Eurodollar rate, as
defined, plus a margin of up to 2.5% (7.57% to 9.25% as of December 31, 1999). A
quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the
unborrowed balance. As of December 31, 1999, outstanding borrowings were $865.5
million and unused availability was $385.5 million. However, debt covenants
limited the amount that could be borrowed to $342.0 million at December 31,
1999.
AVALON NOTES. When Avalon was acquired by Charter Communications Holding
Company in November 1999, it had outstanding $150 million in principal amount of
11.875% senior discount notes due 2008 and 9.375% senior subordinated notes due
2008 with an accreted value of $123.3 million. As of December 31, 1999, the
accreted value of the Avalon 11.875% notes was $124.8 and $150.0 million in
principal of the Avalon 9.375% notes remained outstanding. After December 1,
2003, cash interest on the Avalon 11.875% notes will be payable semi-annually on
June 1 and December 1 of each year, commencing June 1, 2004.
In January 2000, we completed change of control offers in which we
repurchased $16.3 million aggregate principal amount of the 11.875% discount
notes at a purchase price of 101% of accreted value as of January 28, 2000 for
$10.5 million. As of February 29, 2000, Avalon 11.875% notes with an aggregate
principal amount of $179.8 million at maturity remained outstanding with an
accreted value of $116.4 million.
In January 2000, we also completed a change of control offer in which we
repurchased $134.0 million aggregate principal amount of the Avalon 9.375% notes
at 101% of their principal amount, plus accrued and unpaid interest thereon
through January 28, 2000 for $137.4 million. These repurchases were funded with
equity contributions from Charter Holdings which made the cash available from
the proceeds of the sale of the original notes.
In addition to the above change of control repurchase, we repurchased the
remaining Avalon 9.375% notes, including accrued and unpaid interest, in the
"open market" for $16.3 million.
AVALON CREDIT FACILITIES. The Avalon credit facilities have maximum
borrowings of $300.0 million, consisting of a revolving facility in the amount
of $175.0 million that matures May 15, 2008, and a Term B loan in the amount of
$125.0 million that matures on November 15, 2008. The Avalon credit facilities
also provide, at the option of the lenders, for supplemental credit facilities
in amounts of $75 million available until December 31, 2003. Amounts under the
Avalon credit facilities bear interest at the Base Rate or the Eurodollar rate,
as defined, plus a margin up to 2.75% (7.995% to 8.870% as of December 31,
1999). A quarterly commitment fee of between 0.250% and 0.375% per annum is
payable on the unborrowed balance. The Company borrowed $170.0 million under the
Avalon credit facilities to fund a portion of the Avalon purchase price. As of
December 31, 1999, outstanding borrowings were $170.0 million and unused
availability was $130.0 million.
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FANCH CREDIT FACILITIES. The Fanch credit facilities provide for two term
facilities, one with a principal amount of $450 million that matures May 2008
(Term A), and the other with a principal amount of $400 million that matures
November 2008 (Term B). The Fanch credit facilities also provide for a $350
million revolving credit facility with a maturity date in May 2008 and, at the
option of the lenders, supplemental credit facilities in the amount of $300.0
million available until December 31, 2004. Amounts under the Fanch credit
facilities bear interest at the Base Rate or the Eurodollar rate, as defined,
plus a margin of up to 3.0% (8.12% to 8.87% as of December 31, 1999). A
quarterly commitment fee of between 0.250% and 0.375% per annum is payable on
the unborrowed balance. The Company used $850.0 million of the credit facilities
to fund a portion of the Fanch purchase price. As of December 31, 1999,
outstanding borrowings were $850.0 million and unused availability was $350.0
million.
BRESNAN NOTES. We and Charter Communications Holding Company acquired
Bresnan in February 2000 and assumed Bresnan's $170 million in principal amount
of 8% senior notes due 2009 and $275 million in principal amount at maturity of
9.25% senior discount notes due 2009. In March 2000, we repurchased all of the
outstanding Bresnan notes at 101% of the outstanding principal amounts plus
accrued and unpaid interest or accreted value, as applicable, for a total of
$369.7 million.
BRESNAN CREDIT FACILITIES. Upon the closing of the Bresnan acquisition, we
amended and assumed the previous Bresnan credit facilities. The Bresnan
facilities provide for borrowings of up to $900.0 million. The Bresnan credit
facilities provide for two term facilities, one with a principal amount of $403
million (Term A), and the other with a principal amount of $297 million (Term
B). The Bresnan credit facilities also provide for a $200 million revolving
credit facility with a maturity date in June 2007 and, at the option of lenders,
supplemental facilities in the amount of $200 million. 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% (7.57% to 9.00% as of December 31, 1999).
A quarterly commitment fee of between 0.250% and 0.375% is payable on the
unborrowed balance of Term A and the revolving credit facility. At the closing
of the Bresnan acquisition, we borrowed approximately $601.2 million to replace
the borrowings outstanding under the previous credit facilities and an
additional $30.0 million to fund a portion of the Bresnan purchase price. As of
February 29, 2000, $647.9 million was outstanding and $252.1 million was
available for borrowing.
JANUARY 2000 CHARTER HOLDINGS NOTES. On January 12, 2000, Charter Holdings
and Charter Capital issued $1.5 billion principal amount of senior notes. The
January 2000 Charter Holdings notes consisted of $675 million in aggregate
principal amount of 10.00% senior notes due 2009, $325 million in aggregate
principal amount of 10.25% senior notes due 2010, and $532 million in aggregate
principal amount at maturity of 11.75% senior discount notes due 2010. The net
proceeds of approximately $1.3 billion were used to consummate change of control
offers for certain of the Falcon, Avalon and Bresnan notes and debentures.
Semi-annual interest payments with respect to the 10.00% notes and the 10.25%
notes will be approximately $50.4 million. Payments commenced for the 10.00%
notes on April 1, 2000 and will commence July 15, 2000 for the 10.25% notes. No
interest will be payable on the 11.75 notes prior to January 15, 2005.
Thereafter semi-annual interest payments will be approximately $81.7 in the
aggregate commencing on July 15, 2005.
As of February 29, 2000, $1.0 billion of the original 10.00% and 10.25%
senior notes were outstanding, and the accreted value of the original 11.75%
senior discount notes was approximately $304.9 million.
CONTRIBUTIONS BY AFFILIATES. In August 1999, Vulcan Cable III Inc.
contributed to Charter Communications Holding Company $500 million in cash and,
in September 1999, an additional $825 million, of which approximately $644.3
million was in cash and approximately $180.7 million was in the form of equity
interests acquired by Vulcan Cable III Inc. in connection with the Rifkin
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acquisition. Charter Communications Holding Company in turn contributed the cash
and equity interests to Charter Holdings. In November 1999, in connection with
Charter Communications, Inc.'s initial public offering, Vulcan Cable III
contributed to Charter Communications Holding Company $750 million in cash. In
connection with the Rifkin, Falcon and Bresnan acquisitions, Charter
Communications Holding Company issued equity interests totaling approximately
$1.1 billion and certain subsidiaries of Charter Holdings issued preferred
equity interests totaling $629.5 million to sellers in the Bresnan acquisition.
For a description of our acquisitions completed in 1999 and 2000 and the
pending Kalamazoo transaction, see "Business -- Acquisitions."
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and uncertainties,
in addition to those discussed elsewhere in this prospectus that could
materially impact our business, results of operations and financial condition.
SUBSTANTIAL LEVERAGE. As of December 31, 1999, pro forma for the recent
transfers, acquisitions completed since this date, the sale of the original
notes and the Kalamazoo transaction, our total debt was approximately $11.2
billion. We anticipate incurring significant additional debt in the future to
fund the expansion, maintenance and the 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. A significant portion of our debt bears interest
at variable rates that are linked to short-term interest rates. In addition, a
significant portion of our existing debt, assumed debt or 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. See discussion on
"-- Interest Rate Risk."
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 subsidiaries to:
- pay dividends or make other distributions;
- make certain investments or acquisitions;
- dispose of assets or merge;
- incur additional debt;
- issue equity;
- repurchase or redeem equity interests and debt;
- create liens; and
- 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
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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.
IMPORTANCE OF GROWTH STRATEGY AND RELATED RISKS. We expect that a
substantial portion of any of our future growth will be achieved through
revenues from additional services and the acquisition of additional cable
systems. We cannot assure you that we will be able to offer new services
successfully to our customers or that those new services will generate revenues.
In addition, the acquisition of additional cable systems may not have a positive
net impact on our operating results. Acquisitions involve a number of special
risks, including diversion of management's attention, failure to retain key
acquired personnel, risks associated with unanticipated events or liabilities
and difficulties in assimilation of the operations of the acquired companies,
some or all of which could have a material adverse effect on our business,
results of operations and financial condition. If we are unable to grow our cash
flow sufficiently, we may be unable to fulfill our obligations or obtain
alternative financing.
MANAGEMENT OF GROWTH. As a result of the acquisition of the Charter
companies by Mr. Allen, the merger of Charter Holdings with Marcus Holdings, our
acquisitions completed since January 1, 1999, the recent transfers and the
Kalamazoo transaction, we have experienced and will continue to experience rapid
growth that has placed and is expected to continue to place a significant strain
on our management, operations and other resources. Our future success will
depend in part on our ability to successfully integrate the operations acquired
and to be acquired and to attract and retain qualified personnel. Historically,
acquired entities have had minimal employee benefit related costs and all
benefit plans have been terminated with acquired employees transferring to our
401(k) plan. 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.
In connection with our acquisitions over the past year, we maintain
multi-disciplinary teams to formulate plans for establishing customer service
centers, identifying property, plant and equipment requirements and possible
reduction of headends. Headends are the control centers of a cable television
system where incoming signals are amplified, converted, processed and combined
for transmission to customers. These teams also determine market position and
how to attract talented personnel. Our goals include rapid transition in
achieving performance objectives and implementing "best practice" procedures.
REGULATION AND LEGISLATION. Cable systems are extensively regulated at the
federal, state, and local level. These regulations have increased the
administrative and operational expenses of cable television systems and affected
the development of cable competition. Rate regulation of cable systems has been
in place since passage of the Cable Television Consumer Protection and
Competition Act of 1992, although the scope of this regulation recently was
sharply contracted. Since March 31, 1999, rate regulation exists only with
respect to the lowest level of basic cable service and associated equipment.
This change affords cable operators much greater pricing flexibility, although
Congress could revisit this issue if confronted with substantial rate increases.
Cable operators also face significant regulation of their channel capacity.
They currently can be required to devote substantial capacity to the carriage of
programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access users, and
unaffiliated commercial leased access programmers. This carriage burden could
increase in the future, particularly if the Federal Communications Commission
were to require cable systems to carry both the analog and digital versions of
local broadcast signals. The FCC is currently conducting a proceeding in which
it is considering this channel usage possibility. The FCC recently rejected a
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request to allow unaffiliated Internet service providers seeking direct cable
access to invoke commercial leased access rights originally devised for video
programmers.
There is also uncertainty whether local franchising authorities, 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 discourage
system upgrades and the introduction of new products and services.
POSSIBLE RESCISSION LIABILITY. The Rifkin, Falcon and Bresnan sellers who
acquired Charter Communications Holding Company membership units or, in the case
of Bresnan, additional equity interests in one of our subsidiaries, in
connection with the respective Rifkin, Falcon and Bresnan acquisitions, and the
Helicon sellers who acquired shares of Class A common stock in Charter
Communications, Inc.'s initial public offering may have rescission rights
against Charter Communications, Inc. and Charter Communications Holding Company
arising out of possible violations of Section 5 of the Securities Act in
connection with the offers and sales of these equity interests.
If all of these equity holders successfully exercised their possible
rescission rights, Charter Communications, Inc. or Charter Communications
Holding Company would become obligated to repurchase all such equity interests
and the total repurchase obligation would be up to approximately $1.8 billion.
If Charter Communications, Inc. and Charter Communications Holding Company fail
to obtain capital sufficient to fund any required repurchases, they could seek
funds from us and our subsidiaries. This could adversely affect our financial
condition and results of operations. These rescission rights expire one year
from the dates of issuance of these equity interests.
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 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.
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The table set forth below summarizes the fair values and contract terms of
financial instruments subject to interest rate risk maintained by us as of
December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-------------------------------------------------------------------------------- FAIR VALUE AT
2000 2001 2002 2003 2004 THEREAFTER TOTAL DECEMBER 31, 1999
---------- -------- -------- -------- -------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBT
Fixed Rate................. -- -- -- -- -- $3,690,313 $3,690,313 $2,914,820
Average Interest Rate.... -- -- -- -- -- 9.1% 9.1%
Variable Rate.............. $ 88,875 $156,000 $168,500 $2,492,625 $2,906,000 $2,906,000
Average Interest Rate.... 8.8% 8.8% 8.8% 9.6% 9.5%
INTEREST RATE INSTRUMENTS
Variable to Fixed Swaps.... $2,375,000 $660,000 $250,000 $ 30,000 -- -- $3,315,000 $ 17,951
Average Pay Rate......... 8.5% 7.9% 7.8% 8.0% -- -- 8.4%
Average Receive Rate..... 8.3% 9.2 9.2% 9.2% -- -- 8.6%
Collars.................... $ 195,000 $ 45,000 -- -- -- -- $ 240,000 $ (199)
Average Cap Rate......... 8.8% 8.7% -- -- -- -- 8.8%
Average Floor Rate....... 7.8% 7.6% -- -- -- -- 7.7%
</TABLE>
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the costs (proceeds) to settle the outstanding contracts. Interest
rates on variable debt are estimated using the average implied forward London
Interbank Offering Rate (LIBOR) rates for the year of maturity based on the
yield curve in effect at December 31, 1999. While swaps, caps and collars
represent an integral part of our interest rate risk management program, their
incremental effect on interest expense for the years ended December 31, 1999,
1998, and 1997 was not significant.
YEAR 2000 ISSUES
GENERAL. Many existing computer systems and applications, and other
control devices and embedded computer chips use only two digits, rather than
four, to identify a year in the date field, failing to consider the impact of
the change in the century. Computer chips are the physical structure upon which
integrated circuits are fabricated as components of systems, such as telephone
systems, computers and memory systems. As a result, such systems, applications,
devices, and chips could create erroneous results or might fail altogether
unless corrected to properly interpret data related to the year 2000 and beyond.
These errors and failures may result, not only from a date recognition problem
in the particular part of a system failing, but may also result as systems,
applications, devices and chips receive erroneous or improper data from
third-parties suffering from the year 2000 problem. In addition, two interacting
systems, applications, devices or chips, each of which has individually been
fixed so that it will properly handle the year 2000 problem, could nonetheless
result in a failure because their method of dealing with the problem is not
compatible.
We have not experienced significant disruptions or any other problems since
the beginning of 2000. We cannot assure you, however, that such problems will
not arise in connection with customer billing or other periodic information
gathering.
COST. The total cost of our year 2000 remediation programs was
approximately $9.8 million. We do not anticipate significant additional
expenditures.
OPTIONS
In accordance with an employment agreement and a related option agreement
with Jerald L. Kent, our President and Chief Executive Officer, Mr. Kent was
issued an option to purchase 7,044,127 membership units in Charter
Communications Holding Company in December 1998. The option vests over a
four-year period from the date of grant and expires ten years from the date of
grant.
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In February 1999, Charter Holdings adopted an option plan, which was
assumed by Charter Communications Holding Company in May 1999, providing for the
grant of options to employees, consultants and directors of Charter
Communications Holding Company and its affiliates to purchase up to 25,009,798
Charter Communications Holding Company membership units. Options granted under
the plan will be fully vested after five years from the date of grant. Options
not exercised accumulate and are exercisable, in whole or in part, in any
subsequent period, but not later than ten years from the date of grant.
Membership units received upon exercise of the options issued to Mr. Kent
and to optionees under the plan are automatically exchanged for shares of Class
A common stock of Charter Communications, Inc. on a one-for-one basis.
The following chart sets forth the number of options outstanding and the
exercise price of such options as of March 31, 1999.
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
----------------------------- REMAINING -----------
NUMBER OF EXERCISE TOTAL LIFE NUMBER OF
OPTIONS PRICE DOLLARS (IN YEARS) OPTIONS(4)
---------- ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding as of
January 1, 1999 (1)................... 7,044,127 $ 20.00 $140,882,540 10.0(3) 3,081,808(5)
Granted:
February 9, 1999 (2).................. 9,111,681 20.00 182,233,620 130,000
April 5, 1999 (2)..................... 473,000 20.73 9,805,290 --
November 8, 1999 (2).................. 4,781,400 19.00 90,846,600 240,000
February 15, 2000(2).................. 5,566,600 19.47 108,375,022 --
Cancelled............................... (960,600) 19.00-20.73 (19,017,756) --
---------- ------------ ------------ ---- ---------
Outstanding as of
March 31, 1999........................ 26,016,208 $ 19.72(3) $513,125,316 9.1(3) 3,451,808(5)
========== ============ ============ ==== =========
</TABLE>
- - - ---------------
(1) Granted to Jerald L. Kent pursuant to his employment agreement and related
option agreement.
(2) Granted pursuant to the option plan.
(3) Weighted average.
(4) As of March 31, 2000.
(5) The weighted average exercise price for options exercisable was $20.00 and
$19.93 at December 31, 1998 and March 31, 2000, respectively.
The weighted average fair value of options granted was $12.59 and $12.50 at
December 31, 1999 and 1998, respectively.
We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" to account for options issued under the option plan and the
options held by Mr. Kent. We recorded option compensation expense of $845,000
for the period from December 24, 1998 through December 31, 1998 and $80.0
million for the year ended December 31, 1999 in the financial statements since
the exercise prices were less than the estimated fair values of the underlying
membership units on the date of grant. The estimated fair value was determined
using the valuation inherent in Mr. Allen's acquisition of Charter and
valuations of public companies in the cable industry adjusted for factors
specific to us. Compensation expense is accrued over the vesting period of each
grant that varies from four to five years. As of December 31, 1999, deferred
compensation remaining to be recognized in future periods totaled $79.4 million.
ACCOUNTING STANDARD NOT YET IMPLEMENTED
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments
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embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value and that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement No. 133 -- An Amendment of FASB No. 133"
has delayed the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. We have not yet quantified the impacts of adopting SFAS No. 133
on our consolidated financial statements nor have we determined the timing or
method of our adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in earnings (loss).
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
We sold the original notes on January 12, 2000 in a transaction exempt from
the registration requirements of the Securities Act of 1933, as amended. The
initial purchasers of the notes subsequently resold the original notes to
qualified institutional buyers in reliance on Rule 144A and under Regulation S
under the Securities Act.
In connection with the sale of original notes to the initial purchasers
pursuant to the Purchase Agreement, dated January 6, 2000, among us and Goldman,
Sachs & Co., Chase Securities Inc., Credit Suisse First Boston, FleetBoston
Robertson Stephens, Merrill & Co., Morgan Stanley Dean Witter, TD Securities,
First Union Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable
Securities, the holders of the original notes became entitled to the benefits of
the exchange and registration rights agreements dated January 12, 2000, among us
and the initial purchasers.
Under the registration rights agreements, the issuers became obligated to
file a registration statement in connection with an exchange offer within 120
days after January 12, 2000 and to use their reasonable best efforts to have the
exchange offer registration statement declared effective within 180 days after
January 12, 2000. The exchange offer being made by this prospectus, if
consummated within the required time periods, will satisfy our obligations under
the registration rights agreements. This prospectus, together with the letter of
transmittal, is being sent to all beneficial holders of original notes known to
the issuers.
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal, the issuers will accept all
original notes properly tendered and not withdrawn prior to the expiration date.
The issuers will issue $1,000 principal amount of new notes in exchange for each
$1,000 principal amount of outstanding original notes accepted in the exchange
offer. Holders may tender some or all of their original notes pursuant to the
exchange offer.
Based on no-action letters issued by the staff of the Securities and
Exchange Commission to third parties we believe that holders of the new notes
issued in exchange for original notes may offer for resale, resell and otherwise
transfer the new notes, other than any holder that is an affiliate of ours
within the meaning of Rule 405 under the Securities Act, without compliance with
the registration and prospectus delivery provisions of the Securities Act. This
is true as long as the new notes are acquired in the ordinary course of the
holder's business, the holder has no arrangement or understanding with any
person to participate in the distribution of the new notes and neither the
holder nor any other person is engaging in or intends to engage in a
distribution of the new notes. A broker-dealer that acquired original notes
directly from the issuers cannot exchange the original notes in the exchange
offer. Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the new notes cannot rely on the no-action
letters of the staff of the Securities and Exchange Commission and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction.
Each broker-dealer that receives new notes for its own account in exchange
for original notes, where original notes were acquired by such broker-dealer as
a result of market-making or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such new notes. See
"Plan of Distribution" for additional information.
We shall be deemed to have accepted validly tendered original notes when,
as and if we have given oral or written notice of the acceptance of such notes
to the exchange agent. The exchange agent will act as agent for the tendering
holders of original notes for the purposes of receiving the new notes from the
issuers and delivering new notes to such holders.
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If any tendered original notes are not accepted for exchange because of an
invalid tender or the occurrence of the conditions set forth under
"-- Conditions" without waiver by us, certificates for any such unaccepted
original notes will be returned, without expense, to the tendering holder of any
such original notes as promptly as practicable after the expiration date.
Holders of original notes who tender in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
original notes, pursuant to the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes in connection with the exchange
offer. See "-- Fees and Expenses."
SHELF REGISTRATION STATEMENT
Pursuant to the registration rights agreements, if the exchange offer is
not completed prior to the date on which the earliest of any of the following
events occurs:
(a) applicable interpretations of the staff of the Securities and
Exchange Commission do not permit us to effect the exchange offer,
(b) any holder of notes notifies us that either:
(1) such holder is not eligible to participate in the exchange
offer, or
(2) such holder participates in the exchange offer and does not
receive freely transferable new notes in exchange for tendered original
notes, or
(c) the exchange offer is not completed within 210 days after January
12, 2000,
we will, at our cost:
- file a shelf registration statement covering resales of the original
notes,
- use our reasonable best efforts to cause the shelf registration statement
to be declared effective under the Securities Act at the earliest
possible time, but no later than 90 days after the time such obligation
to file arises, and
- use our reasonable best efforts to keep effective the shelf registration
statement until the earlier of two years after the date as of which the
Securities and Exchange Commission declares such shelf registration
statement effective or the shelf registration otherwise becomes
effective, or the time when all of the applicable original notes are no
longer outstanding.
If any of the events described occurs, we will refuse to accept any
original notes and will return all tendered original notes.
We will, if and when we file the shelf registration statement, provide to
each holder of the original notes copies of the prospectus which is a part of
the shelf registration statement, notify each holder when the shelf registration
statement has become effective and take other actions as are required to permit
unrestricted resales of the original notes. A holder that sells original notes
pursuant to the shelf registration statement generally must be named as a
selling security-holder in the related prospectus and must deliver a prospectus
to purchasers, a seller will be subject to civil liability provisions under the
Securities Act in connection with these sales. A seller of the original notes
also will be bound by applicable provisions of the registration rights
agreements, including indemnification obligations. In addition, each holder of
original notes must deliver information to be used in connection with the shelf
registration statement and provide comments on the shelf registration statement
in order to have its original notes included in the shelf registration statement
and benefit from the provisions regarding any liquidated damages in the
registration rights agreement.
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INCREASE IN INTEREST RATE
If:
(1) the registration statement, of which this prospectus is a part, has not
been declared effective by the Securities and Exchange Commission within 180
days of the issuance of the original notes, and we have not used or are not
continuing to use our reasonable best efforts to cause the registration
statement to become effective, or
(2) the exchange offer has not been completed within 30 business days after
the initial effective date of the exchange offer registration statement, or
(3) the exchange offer registration statement is either withdrawn by us or
subject to an effective stop order without being followed immediately by an
additional registration statement filed and declared effective, or
(4) we are required to file the shelf registration statement and either
(a) the shelf registration statement has not become effective or been
declared effective on or before the 90th calendar day following the
date such obligation to file arises, or
(b) the shelf registration statement has been declared effective and
such shelf registration statement ceases to be effective, except as
specifically permitted in the registration rights agreements,
without being succeeded promptly by an additional registration
statement filed and declared effective,
the interest rate borne by the original notes will be increased by 0.25% per
year for the first 90 days of default, 0.50% per year for the second 90 days of
default, 0.75% per year for the third 90 days of default and 1.0% per year for
the remaining period of time in default.
The sole remedy available to the holders of the original notes will be the
immediate increase in the interest rate on the original notes as described
above. Any amounts of additional interest due as described above will be payable
in cash on the same interest payments dates as the original notes.
EXPIRATION DATE; EXTENSIONS; AMENDMENT
We will keep the exchange offer open for not less than 30 days, or longer
if required by applicable law, after the date on which notice of the exchange
offer is mailed to the holders of the old notes. The term "expiration date"
means the expiration date set forth on the cover page of this prospectus, unless
we extend the exchange offer, in which case the term "expiration date" means the
latest date to which the exchange offer is extended.
In order to extend the expiration date, we will notify the exchange agent
of any extension by oral or written notice and will issue a public announcement
of the extension, each prior to 5:00 p.m., New York City time, on the next
business day after the previously scheduled expiration date.
We reserve the right
(a) to delay accepting any original notes, to extend the exchange
offer or to terminate the exchange offer and not accept original notes not
previously accepted if any of the conditions set forth under
"-- Conditions" shall have occurred and shall not have been waived by us,
if permitted to be waived by us, by giving oral or written notice of such
delay, extension or termination to the exchange agent, or
(b) to amend the terms of the exchange offer in any manner deemed by
us to be advantageous to the holders of the original notes.
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Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice. If the exchange
offer is amended in a manner determined by us to constitute a material change,
we promptly will disclose such amendment in a manner reasonably calculated to
inform the holders of the original notes of such amendment. Depending upon the
significance of the amendment, we may extend the exchange offer if it otherwise
would expire during such extension period.
Without limiting the manner in which we may choose to make a public
announcement of any extension, amendment or termination of the exchange offer,
we will not be obligated to publish, advertise, or otherwise communicate any
such announcement, other than by making a timely release to an appropriate news
agency.
PROCEDURES FOR TENDERING
To tender in the exchange offer, a holder must complete, sign and date the
letter of transmittal, or a facsimile of the letter of transmittal, have the
signatures on the letter of transmittal guaranteed if required by instruction 2
of the letter of transmittal, and mail or otherwise deliver such letter of
transmittal or such facsimile or an agent's message in connection with a book
entry transfer, together with the original notes and any other required
documents. To be validly tendered, such documents must reach the exchange agent
before 5:00 p.m., New York City time, on the expiration date. Delivery of the
original notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of such book-entry transfer must be
received by the exchange agent prior to the expiration date.
The term "agent's message" means a message, transmitted by a book-entry
transfer facility to, and received by, the exchange agent, forming a part of a
confirmation of a book-entry transfer, which states that such book-entry
transfer facility has received an express acknowledgment from the participant in
such book-entry transfer facility tendering the original notes that such
participant has received and agrees to be bound by the terms of the letter of
transmittal and that we may enforce such agreement against such participant.
The tender by a holder of original notes will constitute an agreement
between such holder and us in accordance with the terms and subject to the
conditions set forth in this prospectus and in the letter of transmittal.
Delivery of all documents must be made to the exchange agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect such tender for such
holders.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE 5:00 P.M., NEW
YORK CITY TIME, ON THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR ORIGINAL
NOTES SHOULD BE SENT TO US.
Only a holder of original notes may tender original notes in the exchange
offer. The term "holder" with respect to the exchange offer means any person in
whose name original notes are registered on our books or any other person who
has obtained a properly completed bond power from the registered holder.
Any beneficial holder whose original notes are registered in the name of
its broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on its behalf. If such beneficial holder wishes
to tender on its own behalf, such registered holder must, prior to completing
and executing the letter of transmittal and delivering its original notes,
either make appropriate
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arrangements to register ownership of the original notes in such holder's name
or obtain a properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc. or a commercial bank or
trust company having an office or correspondent in the United States referred to
as an "eligible institution", unless the original notes are tendered
(a) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal or
(b) for the account of an eligible institution. In the event that
signatures on a letter of transmittal or a notice of withdrawal, are
required to be guaranteed, such guarantee must be by an eligible
institution.
If the letter of transmittal is signed by a person other than the
registered holder of any original notes listed therein, such original notes must
be endorsed or accompanied by appropriate bond powers and a proxy which
authorizes such person to tender the original notes on behalf of the registered
holder, in each case signed as the name of the registered holder or holders
appears on the original notes.
If the letter of transmittal or any original notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by us,
evidence satisfactory to us of their authority so to act must be submitted with
the letter of transmittal.
All questions as to the validity, form, eligibility, including time of
receipt, and withdrawal of the tendered original notes will be determined by us
in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all original notes not properly
tendered or any original notes our acceptance of which, in the opinion of
counsel for us, would be unlawful. We also reserve the right to waive any
irregularities or conditions of tender as to particular original notes. Our
interpretation of the terms and conditions of the exchange offer, including the
instructions in the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of original notes must be cured within such time as we shall determine. None of
us, the exchange agent or any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of original
notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of original notes will not be deemed to have been made
until such irregularities have been cured or waived. Any original notes received
by the exchange agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost to
such holder by the exchange agent to the tendering holders of original notes,
unless otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
In addition, we reserve the right in our sole discretion to
(a) purchase or make offers for any original notes that remain outstanding
subsequent to the expiration date or, as set forth under
"-- Conditions," to terminate the exchange offer in accordance with the
terms of the registration rights agreements and
(b) to the extent permitted by applicable law, purchase original notes in
the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers may differ from the terms of the
exchange offer.
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By tendering, each holder will represent to us that, among other things,
(a) the new notes acquired pursuant to the exchange offer are being
obtained in the ordinary course of business of such holder or other
person,
(b) neither such holder nor such other person is engaged in or intends to
engage in a distribution of the new notes,
(c) neither such holder or other person has any arrangement or
understanding with any person to participate in the distribution of
such new notes, and
(d) such holder or other person is not our "affiliate," as defined under
Rule 405 of the Securities Act, or, if such holder or other person is
such an affiliate, will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
We understand that the exchange agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the original
notes at the Depository Trust Company for the purpose of facilitating the
exchange offer, and subject to the establishment of such accounts, any financial
institution that is a participant in the Depository Trust Company's system may
make book-entry delivery of original notes by causing the Depository Trust
Company to transfer such original notes into the exchange agent's account with
respect to the original notes in accordance with the Depository Trust Company's
procedures for such transfer. Although delivery of the original notes may be
effected through book-entry transfer into the exchange agent's account at the
Depository Trust Company, an appropriate letter of transmittal properly
completed and duly executed with any required signature guarantee, or an agent's
message in lieu of the letter of transmittal, and all other required documents
must in each case be transmitted to and received or confirmed by the exchange
agent at its address set forth below on or prior to the expiration date, or, if
the guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures. Delivery of documents to Depository
Trust Company does not constitute delivery to the exchange agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their original notes and
(a) whose original notes are not immediately available or
(b) who cannot deliver their original notes, the letter of transmittal
or any other required documents to the exchange agent prior to the
expiration date, may effect a tender if:
(1) the tender is made through an eligible institution;
(2) prior to the expiration date, the exchange agent receives from
such eligible institution a properly completed and duly executed Notice
of Guaranteed Delivery, by facsimile transmission, mail or hand
delivery, setting forth the name and address of the holder of the
original notes, the certificate number or numbers of such original notes
and the principal amount of original notes tendered, stating that the
tender is being made thereby, and guaranteeing that, within three
business days after the expiration date, the letter of transmittal, or
facsimile thereof or agent's message in lieu of the letter of
transmittal, together with the certificate(s) representing the original
notes to be tendered in proper form for transfer and any other documents
required by the letter of transmittal will be deposited by the eligible
institution with the exchange agent; and
(3) such properly completed and executed letter of transmittal (or
facsimile thereof) together with the certificate(s) representing all
tendered original notes in proper form for
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transfer and all other documents required by the letter of transmittal
are received by the exchange agent within three business days after the
expiration date.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, tenders of original notes
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
expiration date. However, where the expiration date has been extended, tenders
of original notes previously accepted for exchange as of the original expiration
date may not be withdrawn.
To withdraw a tender of original notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at its address set forth in this prospectus prior to 5:00 p.m., New York
City time, on the expiration date. Any such notice of withdrawal must:
(a) specify the name of the depositor, who is the person having
deposited the original notes to be withdrawn,
(b) identify the original notes to be withdrawn, including the
certificate number or numbers and principal amount of such original notes
or, in the case of original notes transferred by book-entry transfer, the
name and number of the account at Depository Trust Company to be credited,
(c) be signed by the depositor in the same manner as the original
signature on the letter of transmittal by which such original notes were
tendered, including any required signature guarantees, or be accompanied by
documents of transfer sufficient to have the trustee with respect to the
original notes register the transfer of such original notes into the name
of the depositor withdrawing the tender and
(d) specify the name in which any such original notes are to be
registered, if different from that of the depositor. All questions as to
the validity, form and eligibility, including time of receipt, of such
withdrawal notices will be determined by us, and our determination shall be
final and binding on all parties. Any original notes so withdrawn will be
deemed not to have been validly tendered for purposes of the exchange offer
and no new notes will be issued with respect to the original notes
withdrawn unless the original notes so withdrawn are validly retendered.
Any original notes which have been tendered but which are not accepted for
exchange will be returned to its holder without cost to such holder as soon
as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn original notes may be retendered by
following one of the procedures described above under "-- Procedures for
Tendering" at any time prior to the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange, any new notes for any original
notes, and may terminate or amend the exchange offer before the expiration date,
if the exchange offer violates any applicable law or interpretation by the staff
of the Securities and Exchange Commission.
If we determine in our reasonable discretion that the foregoing condition
exists, we may
(1) refuse to accept any original notes and return all tendered
original notes to the tendering holders,
(2) extend the exchange offer and retain all original notes tendered
prior to the expiration of the exchange offer, subject, however, to the
rights of holders who tendered such original notes to withdraw their
tendered original notes, or
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(3) waive such condition, if permissible, with respect to the exchange
offer and accept all properly tendered original notes which have not been
withdrawn. If such waiver constitutes a material change to the exchange
offer, we will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the holders, and we will extend the
exchange offer as required by applicable law.
EXCHANGE AGENT
Harris Trust and Savings Bank has been appointed as exchange agent for the
exchange offer. Questions and requests for assistance and requests for
additional copies of this prospectus or of the letter of transmittal should be
directed to Harris Trust and Savings Bank addressed as follows:
For Information by Telephone:
(212) 701-7624
HARRIS TRUST AND SAVINGS BANK
<TABLE>
<S> <C>
By Registered or Certified Mail By Hand or Overnight Mail:
c/o Harris Trust Company of New York c/o Harris Trust Company of New York
Wall Street Station Wall Street Plaza
P.O. Box 1023 88 Pine Street
New York, New York 10268-1023 19th Floor
New York, New York 10005
Attention: Reorganization Trust Department
</TABLE>
By Facsimile Transmission:
(212) 701-7637
(Telephone Confirmation)
(212) 701-7624
Harris Trust and Savings Bank is an affiliate of the trustee under the
indentures governing the notes.
FEES AND EXPENSES
We have agreed to bear the expenses of the exchange offer pursuant to the
exchange and registration rights agreements. We have not retained any
dealer-manager in connection with the exchange offer and will not make any
payments to brokers, dealers or others soliciting acceptances of the exchange
offer. We, however, will pay the exchange agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection with providing the services.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us. Such expenses include fees and expenses of Harris Trust and
Savings Bank as exchange agent, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the original
notes as reflected in our accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by us.
The expenses of the exchange offer and the unamortized expenses related to the
issuance of the original notes will be amortized over the term of the notes.
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CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of original notes who are eligible to participate in the exchange
offer but who do not tender their original notes will not have any further
registration rights, and their original notes will continue to be subject to
restrictions on transfer. Accordingly, such original notes may be resold only
- to us, upon redemption of these notes or otherwise,
- so long as the original notes are eligible for resale pursuant to Rule
144A under the Securities Act, to a person inside the United States whom
the seller reasonably believes is a qualified institutional buyer within
the meaning of Rule 144A in a transaction meeting the requirements of
Rule 144A,
- in accordance with Rule 144 under the Securities Act, or under another
exemption from the registration requirements of the Securities Act, and
based upon an opinion of counsel reasonably acceptable to us,
- outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act, or
- under an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any state of
the United States.
REGULATORY APPROVALS
We do not believe that the receipt of any material federal or state
regulatory approval will be necessary in connection with the exchange offer,
other than the effectiveness of the exchange offer registration statement under
the Securities Act.
OTHER
Participation in the exchange offer is voluntary and holders of original
notes should carefully consider whether to accept the terms and condition of
this exchange offer. Holders of the original notes are urged to consult their
financial and tax advisors in making their own decisions on what action to take
with respect to the exchange offer.
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BUSINESS
OVERVIEW
We are the fourth largest operator of cable television systems in the
United States, serving approximately 6.2 million customers. After giving effect
to the Kalamazoo transaction, we will serve approximately 6.3 million customers.
We offer a full range of traditional cable television services. Our service
offerings include the following programming packages:
- basic programming;
- expanded basic programming;
- premium service; and
- pay-per-view television programming.
As part of our Wired World vision, we are also beginning to offer an array
of new services including:
- digital television;
- interactive video programming; and
- high-speed Internet access.
We are also exploring opportunities in telephony.
The new products and services described above will take advantage of the
significant bandwidth of our cable systems. We are accelerating the upgrade of
our cable systems to more quickly provide these products and services.
For the year ended December 31, 1999, pro forma for our merger with Marcus
Holdings, the acquisitions completed since the beginning of 1999, the recent
transfer to Charter Holdings of the Fanch, Falcon and Avalon cable systems and
the Kalamazoo transaction, our revenues would have been approximately $3.0
billion.
Mr. Allen, the principal owner of Charter Communications, Inc. and one of
the computer industry's visionaries, has long believed in a Wired World in which
cable technology will facilitate the convergence of television, computers and
telecommunications. We believe cable's ability to deliver voice, video and data
at high speeds will enable it to serve as the primary platform for the delivery
of new services to the home and workplace.
BUSINESS STRATEGY
Our objective is to increase our operating cash flow by increasing our
customer base and the amount of cash flow per customer. To achieve this
objective, we are pursuing the following strategies:
INTEGRATE AND IMPROVE ACQUIRED CABLE SYSTEMS. We seek to rapidly integrate
acquired cable systems and apply our core operating strategies to raise the
financial and operating performance of these acquired systems. Our integration
process occurs in three stages:
System Evaluation. We conduct an extensive evaluation of each system
we acquire. This process begins prior to reaching an agreement to purchase
the system and focuses on the system's:
- demographic profile of the market as well as the number of homes
passed and customers;
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- business plan;
- customer service standards;
- management capabilities; and
- technological capacity and compatibility.
We also evaluate opportunities to consolidate headends and billing and
other administrative functions. Based upon this evaluation, we formulate plans
for customer service centers, plant upgrades, market positioning, new product
and service launches and human resource requirements.
Implementation of Our Core Operating Strategies. To achieve our high
standards for customer satisfaction and financial and operating
performance, we:
- attract and retain high quality local management;
- empower local managers with a high degree of day-to-day operational
autonomy;
- set key financial and operating benchmarks for management to meet,
such as revenue and cash flow per subscriber, subscriber growth,
customer service and technical standards; and
- provide incentives to all employees through grants of cash bonuses
and equity options.
Ongoing Support and Monitoring. We provide local managers with
regional and corporate management guidance, marketing and other support for
implementation of their business plans. We monitor performance of our
acquired cable systems on a frequent basis to ensure that performance goals
can be met.
The turn-around in our Fort Worth system, which our management team began
to manage in October 1998, is an example of our success in integrating newly
acquired cable systems into our operations. We introduced a customer care team
that has worked closely with city governments to improve customer service and
local government relations, and each of our customer service representatives
attended a training program. We also conducted extensive training programs for
our technical and engineering, dispatch, sales and support, and management
personnel. We held a series of sales events and service demonstrations to
increase customer awareness and enhance our community exposure and reputation.
We reduced the new employee hiring process from two to three weeks to three to
five days. As a result of these and other actions taken by the Charter
management team, relations with local franchising authorities are greatly
improved, customer service has been significantly enhanced, and the number of
customers and operating cash flow have increased.
OFFER NEW PRODUCTS AND SERVICES. We intend to expand the array of products
and services we offer to our customers to implement our Wired World vision.
Using digital technology, we plan to offer additional channels on our existing
service tiers, create new service tiers, introduce multiple packages of premium
services and increase the number of pay-per-view channels. We also plan to add
digital music services and interactive program guides which are comprehensive
guides to television program listings that can be accessed by network, time,
date or programming genre. In addition, we have begun to roll out advanced
services, including interactive video programming and high-speed Internet
access, and we are currently exploring opportunities in telephony. We have
entered into agreements with several providers of high-speed Internet and other
interactive services, including High-Speed Access Corp., EarthLink Network,
Inc., Excite@Home Corporation, Convergence.com, WorldGate Communications, Inc.
and Wink Communications, Inc. We have recently entered into a joint venture with
Vulcan Ventures Inc. and Go2Net, Inc. to deliver high-speed Internet portal
services to our customers.
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UPGRADE THE BANDWIDTH CAPACITY OF OUR SYSTEMS. We plan to spend
approximately $6.0 billion from 2000 to 2002 for capital expenditures.
Approximately $3.5 billion will be used to upgrade our systems to bandwidth
capacity of 550 megahertz or greater. Upgrading to at least 550 megahertz of
bandwidth capacity will allow us to:
- offer advanced services, such as digital television, Internet access and
other interactive services;
- increase channel capacity up to 82 analog channels, or even more
programming channels if some of our bandwidth is used for digital
services; and
- permit two-way communication which will give our customers the ability
to send and receive signals over the cable system so that high-speed
cable services, such as Internet access, will not require a separate
telephone line and will enable our systems to provide telephony
services.
The remaining capital will be spent on plant extensions, new services,
converters and system maintenance.
As of December 31, 1999, approximately 45% of our customers were served by
cable systems with at least 550 megahertz bandwidth capacity, and approximately
30% of our customers had two-way communication capability. By year-end 2003, we
expect that approximately 98% of our customers will be served by cable systems
with at least 550 megahertz bandwidth capacity and two-way communication
capability and approximately 92% of our customers will be served by cable
systems with at least 750 megahertz bandwidth and two-way communication
capability.
Our planned upgrades are designed to reduce the number of headends from
1,257 at year-end 1999, including the Fanch, Falcon, Avalon and Bresnan cable
systems and the Kalamazoo transaction, to 459 at year-end 2003. Reducing the
number of headends will reduce headend equipment and maintenance expenditures
and, together with other upgrades, will provide enhanced picture quality and
system reliability. In addition, by year-end 2003, we expect that approximately
90% of our customers will be served by headends serving at least 10,000
customers.
MAXIMIZE CUSTOMER SATISFACTION. To maximize customer satisfaction, we
operate our business to provide reliable, high-quality products and services,
superior customer service and attractive programming choices at reasonable
rates. We have implemented stringent internal customer service standards which
we believe meet or exceed those established by the National Cable Television
Association, the Washington, D.C.-based trade association for the cable
television industry. We believe that our customer service efforts have
contributed to our superior customer growth, and will strengthen the Charter
brand name and increase acceptance of our new products and services.
EMPLOY INNOVATIVE MARKETING. We have developed and successfully
implemented a variety of innovative marketing techniques to attract new
customers and increase revenue per customer. Our marketing efforts focus on
tailoring Charter-branded entertainment and information services that provide
value, choice, convenience and quality to our customers. We use demographic
"cluster codes" to address messages to target audiences through direct mail and
telemarketing. Cluster codes identify customers by marketing type such as young
professionals, retirees or families. In addition, we promote our services on
radio, in local newspapers and by door-to-door selling. In many of our systems,
we offer discounts to customers who purchase multiple premium services such as
Home Box Office or Showtime. We also have a coordinated strategy for retaining
customers that includes televised retention advertising to reinforce the link
between quality service and the Charter brand name and to encourage customers to
purchase higher service levels. Successful implementation of these marketing
techniques has contributed to internal customer growth rates in excess of the
cable industry average
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in each year from 1996 through 1999 for the systems we owned in each of those
years. We have begun to implement our marketing programs in all of the systems
we have recently acquired.
EMPHASIZE LOCAL MANAGEMENT AUTONOMY WHILE PROVIDING REGIONAL AND CORPORATE
SUPPORT AND CENTRALIZED FINANCIAL CONTROLS. Our local cable systems are
organized into eleven operating regions. A regional management team oversees
multiple local system operations in each region. We believe that a strong
management presence at the local system level:
- improves our customer service;
- increases our ability to respond to customer needs and programming
preferences;
- reduces the need for a large centralized corporate staff;
- fosters good relations with local governmental authorities; and
- strengthens community relations.
Our regional management teams work closely with both local managers and
senior management in our corporate office to develop budgets and coordinate
marketing, programming, purchasing and engineering activities. Our centralized
financial management enables us to set financial and operating benchmarks and
monitor performance on an ongoing basis. In order to attract and retain high
quality managers at the local and regional operating levels, we provide a high
degree of operational autonomy and accountability along with cash and
equity-based compensation. Charter Communications Holding Company has a plan to
distribute to directors, consultants and substantially all employees, including
members of corporate management and key regional and system-level management
personnel, options exercisable for up to 25,009,798 Charter Communications
Holding Company membership units that are automatically exchanged for shares of
Charter Communications, Inc. Class A common stock on a one-for-one basis.
CONCENTRATE OUR SYSTEMS IN TIGHTER GEOGRAPHICAL CLUSTERS. To improve
operating margins and increase operating efficiencies, we regularly seek to
improve the geographic clustering of our cable systems by selectively swapping
our cable systems for systems of other cable operators or acquiring systems in
close proximity to our systems. We believe that by concentrating our systems in
clusters, we will be able to generate higher growth in revenues and operating
cash flow. Clustering enables us to consolidate headends and spread fixed costs
over a larger subscriber base. Charter Communications, Inc. and AT&T Broadband &
Internet Services have entered into a non-binding letter of intent to exchange
certain cable systems. If completed, this transaction will allow us to improve
the clustering of our cable systems in certain key markets. We are negotiating
with several other cable operators whose systems we consider to be potential
acquisition or swapping candidates.
CHARTER ORGANIZATIONAL STRUCTURE
Each of the entities in our organizational structure and how it relates to
us is described below. In our discussion of the following entities, we make the
same assumptions as described on page 3 with respect to our organizational
chart.
OWNERSHIP OF CHARTER COMMUNICATIONS, INC. Mr. Allen owns less than 2% of
the outstanding capital stock of Charter Communications, Inc. and controls
approximately 93.7% of the voting power of Charter Communications, Inc.'s
capital stock. The remaining equity interest and voting control are held by the
public. Mr. Allen's voting control arises from his ownership of Charter
Communications, Inc.'s high vote Class B common stock, his Class A common stock,
and his ownership of Vulcan Cable III Inc., which owns membership units in
Charter Communications Holding Company that are exchangeable for shares of high
vote Class B common stock of Charter Communications, Inc.
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VULCAN CABLE III INC. Mr. Allen owns 100% of the equity of Vulcan Cable
III. Vulcan Cable III has a 19.0% equity interest and no voting rights in
Charter Communications Holding Company. In August 1999, Mr. Allen, through
Vulcan Cable III, contributed to Charter Communications Holding Company $500
million in cash. In September 1999, he contributed an additional $825 million
through Vulcan Cable III, of which approximately $644.3 million was in cash and
approximately $180.7 million was in the form of equity interests Vulcan Cable
III acquired in connection with the Rifkin acquisition. Upon each of these
contributions, Vulcan Cable III received Charter Communications Holding Company
membership units at a price per membership unit of $20.73. In addition, in
November 1999, Mr. Allen, through Vulcan Cable III, made a $750 million cash
equity contribution to Charter Communications Holding Company for which Vulcan
Cable III received additional membership units at a price per membership unit of
$18.24.
CHARTER INVESTMENT, INC. Charter Investment, Inc. has a 38.8% equity
interest and no voting rights in Charter Communications Holding Company. Mr.
Allen owns approximately 96.8% of the outstanding stock of Charter Investment,
Inc. The remaining 3.2% equity is beneficially owned by our founders, Jerald L.
Kent, Barry L. Babcock and Howard L. Wood.
BRESNAN SELLERS. Under the terms of the Bresnan acquisition, some of the
sellers received a portion of their purchase price in Charter Communications
Holding Company common membership units rather than in cash. These common
membership units are exchangeable for shares of Charter Communications, Inc.
Class A common stock on a one-for-one basis. In addition, certain other Bresnan
sellers received a portion of the purchase price in preferred membership units
in an indirect subsidiary of Charter Holdings. The preferred membership units
are also exchangeable for shares of Charter Communications, Inc. Class A common
stock on a one-for-one basis. If all of the Bresnan sellers exchanged their
membership units in Charter Communications Holding Company or such indirect
subsidiary, as applicable, these equity holders as a group would have a 14.9%
equity interest in Charter Communications, Inc.
CHARTER COMMUNICATIONS HOLDING COMPANY, LLC. Charter Communications
Holding Company is the direct 100% parent of Charter Communications Holdings.
Charter Communications Holding Company is owned 39.6% by Charter Communications,
Inc., 19.0% by Vulcan Cable III Inc., 38.8% by Charter Investment, Inc. and 2.6%
by certain sellers in our Bresnan acquisition. All of the outstanding units in
Charter Communications Holding Company are exchangeable for shares of Class A
common stock of Charter Communications, Inc. on a one-for-one basis at any time.
Charter Communications, Inc. has 100% of the voting power of Charter
Communications Holding Company.
CHARTER COMMUNICATIONS HOLDINGS, LLC. Charter Holdings is a co-issuer of
$3.575 billion aggregate principal of notes issued in March 1999 (referred to as
the March 1999 Charter Holdings notes) and $1.532 billion aggregate principal
amount of the original notes issued in January 2000. Charter Holdings owns 100%
of Charter Capital, the co-issuer of the March 1999 Charter Holdings notes, the
original notes and the notes to be issued in the exchange offer. Charter
Holdings also owns the various subsidiaries that conduct all of our cable
operations, including the Charter, Falcon, Fanch, Avalon and Bresnan companies
described below.
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION. Charter Capital is a
wholly owned subsidiary of Charter Holdings and a co-issuer of the notes
described in the preceding paragraph.
CHARTER COMPANIES. These companies are subsidiaries of Charter Holdings
and own or operate all of the cable systems originally managed by Charter
Investment, Inc. (namely Charter Communications Properties Holdings, LLC, CCA
Group and CharterComm Holdings, LLC), the cable systems obtained through the
merger of Marcus Holdings with Charter Holdings and the cable systems we
acquired in eight acquisitions in 1999. Historical financial information is
presented separately for these acquired entities. Charter Operating, a direct
subsidiary of Charter Holdings, owns all of the Charter companies' operating
subsidiaries and is the borrower under the Charter
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Operating credit facilities. The Charter Companies also include the issuers of
the outstanding publicly held notes of Renaissance.
FALCON COMPANIES. These companies are subsidiaries of Charter Holdings and
own or operate all of the cable systems acquired in the Falcon acquisition and
Falcon Cable Communications, which is the borrower under the Falcon credit
facilities.
FANCH COMPANIES. These companies are subsidiaries of Charter Holdings and
own or operate all of the cable systems acquired in the Fanch acquisition and CC
VI Operating, LLC, which is the borrower under the Fanch credit facilities.
AVALON COMPANIES. These companies are subsidiaries of Charter Holdings and
own or operate all of the cable systems acquired in the Avalon acquisition,
including CC Michigan, LLC and CC New England, LLC, which are the borrowers
under the Avalon credit facilities. CC V Holdings, LLC (formerly Avalon Cable
LLC) and CC V Holdings Finance, Inc. (formerly Avalon Cable Finance Holdings,
Inc.) are co-issuers of the outstanding publicly held Avalon notes.
BRESNAN COMPANIES. These companies are subsidiaries of Charter Holdings
and own or operate all of the cable systems acquired in the Bresnan acquisition
and CC VIII Operating, LLC, which is the borrower under the Bresnan credit
facilities.
ACQUISITIONS
Our primary criterion in considering acquisition and swapping opportunities
is the financial return that we expect to ultimately realize. We consider each
acquisition in the context of our overall existing and planned operations,
focusing particularly on the impact on our size and scope and the ability to
reinforce our clustering strategy, either directly or through future swaps or
acquisitions. Other specific factors we consider in acquiring a cable system
are:
- demographic profile of the market as well as the number of homes passed
and customers within the system;
- per customer revenues and operating cash flow and opportunities to
increase these financial benchmarks;
- proximity to our existing cable systems or the potential for developing
new clusters of systems;
- the technological state of such system; and
- the level of competition within the local market.
We believe that there are significant advantages in increasing the size and
scope of our operations, including:
- improved economies of scale in management, marketing, customer service,
billing and other administrative functions;
- reduced costs for our cable plants and our infrastructure in general;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
We believe that as a result of our acquisition strategy and our systems
upgrade we will be well positioned to have cable systems with economies of scale
sufficient to allow us to execute our strategy to expand the array of products
and services that we offer to our customers as we implement our Wired World
vision. We will, however, continue to explore acquisitions and swaps of cable
systems that would further complement our existing cable systems.
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ACQUISITIONS COMPLETED IN 1999 AND 2000
MERGER WITH MARCUS HOLDINGS. On April 23, 1998, Mr. Allen acquired
approximately 99% of the non-voting economic interests in Marcus Cable Company,
L.L.C., and agreed to acquire the remaining interests in Marcus Cable. The
aggregate purchase price was approximately $1.4 billion, excluding $1.8 billion
in assumed liabilities. On February 22, 1999, Marcus Holdings was formed, and
all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings
on March 15, 1999. On March 31, 1999, Mr. Allen completed the acquisition of all
remaining interests of Marcus Cable. On April 7, 1999, the holding company
parent of the Marcus companies, Marcus Holdings, merged into Charter Holdings,
which was the surviving entity of the merger. The subsidiaries of Marcus
Holdings became subsidiaries of Charter Operating. During the period of
obtaining the requisite regulatory approvals for the transaction, the Marcus
systems came under common management with our subsidiaries in October 1998
pursuant to the terms of a management agreement.
The cable systems we acquired in the merger with Marcus Holdings are
located in Wisconsin, Tennessee, North Carolina, Georgia, California, Alabama
and Texas, has approximately 1,001,000 customers and is operated as part of our
North Central, Southeast, Southern California, Gulf Coast and Metroplex regions.
For the year ended December 31, 1999, Marcus had revenues of approximately
$511.9 million.
RENAISSANCE. In April 1999, one of our subsidiaries purchased Renaissance
Media Group LLC for approximately $459 million, consisting of $348 million in
cash and $111 million of assumed debt. Renaissance owns cable systems located in
Louisiana, Mississippi and Tennessee, has approximately 134,000 customers and is
operated as part of our Gulf Coast and Mid-South regions. For the year ended
December 31, 1999, Renaissance had revenues of approximately $62.4 million.
AMERICAN CABLE. In May 1999, one of our subsidiaries purchased American
Cable Entertainment, LLC for approximately $240 million. American Cable owns
cable systems located in California serving approximately 69,000 customers and
is operated as part of our Southern California region. For the year ended
December 31, 1999, American Cable had revenues of approximately $37.2 million.
GREATER MEDIA SYSTEMS. In June 1999, one of our subsidiaries purchased
certain cable systems of Greater Media Cablevision Inc. for approximately $500
million. The Greater Media systems are located in Massachusetts, have
approximately 176,000 customers and are operated as part of our Northeast
Region. For the year ended December 31, 1999, the Greater Media systems had
revenues of approximately $85.9 million.
HELICON. In July 1999, one of our subsidiaries acquired Helicon Partners
I, L.P. and affiliates for approximately $550 million, consisting of $410
million in cash, $115 million of assumed debt, and $25 million in the form of
preferred limited liability company interest of Charter-Helicon LLC, a direct
wholly owned subsidiary of Charter Communications, LLC. Helicon owns cable
systems located in Alabama, Georgia, New Hampshire, North Carolina, West
Virginia, South Carolina, Tennessee, Pennsylvania, Louisiana and Vermont, and
has approximately 171,000 customers. For the year ended December 31, 1999,
Helicon had revenues of approximately $85.2 million.
VISTA AND CABLE SATELLITE. One of our subsidiaries acquired Vista
Broadband Communications, LLC in July 1999 and acquired a cable system of Cable
Satellite of South Miami, Inc. in August 1999. These cable systems are located
in Georgia and southern Florida and serve a total of approximately 35,000
customers. The aggregate purchase price for these acquisitions was approximately
$148 million in cash. For the year ended December 31, 1999, these systems had
revenues of approximately $19.0 million.
RIFKIN. In September 1999, Charter Operating acquired Rifkin Acquisition
Partners L.L.L.P. and InterLink Communications Partners, LLLP for a purchase
price of approximately $1.46 billion,
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consisting of $1.2 billion in cash, $133.3 million in equity in Charter
Communications Holding Company and $128.0 million in assumed debt.
Rifkin owns cable systems primarily in Florida, Georgia, Illinois, Indiana,
Tennessee, Virginia and West Virginia, serving approximately 463,000 customers.
For the year ended December 31, 1999, Rifkin had revenues of approximately
$219.9 million.
INTERMEDIA SYSTEMS. In October 1999, Charter Communications, LLC purchased
certain cable systems of InterMedia Capital Partners IV, L.P., InterMedia
Partners and their affiliates in exchange for approximately $873 million in cash
and certain of our cable systems. The InterMedia systems serve approximately
420,000 customers in North Carolina, South Carolina, Georgia and Tennessee. As
part of this transaction, we agreed to "swap" some of our non-strategic cable
systems serving approximately 142,000 customers in Indiana, Montana, Utah and
northern Kentucky.
At the closing, we retained a cable system located in Indiana serving
approximately 30,000 customers for which we were unable to timely obtain the
necessary regulatory approvals of the system transfer. Such approval was
subsequently obtained and the Indiana system assets were transferred in March
2000.
This transaction, including the transfer of the retained Indiana system,
resulted in a net increase of 278,000 customers concentrated in our Southeast
and Mid-South regions. For the year ended December 31, 1999, the InterMedia
systems had revenues of approximately $179.3 million ($126.2 million net of
disposed systems).
BRESNAN. In February 2000, Charter Communications Holding Company and one
of our subsidiaries purchased Bresnan Communications Company Limited Partnership
for a total purchase price of approximately $3.1 billion, consisting of cash,
$1.0 billion in membership units in Charter Communications Holding Company and
an indirect subsidiary of Charter Communications Holding Company and $964.4
million in assumed debt.
The cable systems acquired in the Bresnan acquisition are primarily located
in Michigan, Minnesota, Wisconsin and Nebraska and serve approximately 686,000
customers. For the year ended December 31, 1999, these systems and systems
acquired by Bresnan since December 31, 1999 had revenues of approximately $290.7
million. In February 2000, Charter Communications Holding Company transferred to
us the interests it held in the Bresnan systems.
CAPITAL CABLE AND FARMINGTON. In April 2000, one of our subsidiaries
purchased a cable system of Falcon Capital Cable Partners, L.P. and another
cable system of Farmington Cablevision Company. These cable systems are
primarily located in Illinois, Indiana and Missouri. The aggregate purchase
price for these acquisitions was approximately $75 million in cash. For the year
ended December 31, 1999, these systems had revenues of approximately $13.5
million.
RECENT TRANSFERS COMPLETED IN JANUARY 2000
FANCH. In November 1999, Charter Communications Holding Company purchased
the partnership interests of Fanch Cablevision of Indiana, L.P., specified
assets of Cooney Cable Associates of Ohio, Limited Partnership, Fanch-JV2 Master
Limited Partnership, Mark Twain Cablevision Limited Partnership,
Fanch-Narragansett CSI Limited Partnership, North Texas Cablevision, Ltd., Post
Cablevision of Texas, Limited Partnership and Spring Green Communications, L.P.
and the stock of Tioga Cable Company, Inc., Cable Systems, Inc. and, indirectly,
Hornell Television Service, Inc. for a total combined purchase price of
approximately $2.4 billion in cash. These interests and assets were transferred
to us on January 1, 2000.
The cable systems acquired in this acquisition are located in Colorado,
Indiana, Kansas, Kentucky, Michigan, Mississippi, New Mexico, Oklahoma, Texas
and Wisconsin, and serve
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approximately 528,000 customers. For the year ended December 31, 1999, these
systems had revenues of approximately $218.2 million.
FALCON. In November 1999, Charter Communications Holding Company purchased
partnership interests in Falcon Communications, L.P. from Falcon Holding Group,
L.P. and TCI Falcon Holdings, LLC, interests in a number of Falcon entities held
by Falcon Cable Trust and Falcon Holding Group, Inc., specified interests in
Enstar Communications Corporation and Enstar Finance Company, LLC held by Falcon
Holding Group, L.P., and specified interests in Adlink held by DHN Inc. These
interests were transferred to us on January 1, 2000.
The purchase price for the acquisition was approximately $3.5 billion,
consisting of cash, $550 million in common membership units in Charter
Communications Holding Company issued to certain of the Falcon sellers and $1.7
billion in assumed debt.
The Falcon cable systems are located in California and the Pacific
Northwest, Missouri, North Carolina, Alabama and Georgia and serve approximately
955,000 customers. For the year ended December 31, 1999, these systems had
revenues of approximately $427.7 million.
AVALON. In November 1999, Charter Communications Holding Company purchased
directly and indirectly all of the equity interests of Avalon Cable of Michigan
Holdings, Inc. from Avalon Cable Holdings LLC and Avalon Investors, L.L.C. for
approximately $832 million, consisting of $558.2 million in cash and $273.8
million in assumed notes. These interests were transferred to us on January 1,
2000.
Avalon operates primarily in Michigan and New England and serves
approximately 252,000 customers. For the year ended December 31, 1999, Avalon
had revenues of approximately $108.3 million.
PENDING KALAMAZOO TRANSACTION
In March 2000, Charter Communications, Inc. 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 Communications,
Inc. As a result of this merger, Charter Communications, Inc. will become the
indirect owner of the Kalamazoo system. The merger consideration of
approximately $173 million will be paid in Class A common stock of Charter
Communications, Inc. After the merger, Charter Communications, Inc. will
contribute 100% of the equity interests of the direct owner of the Kalamazoo
system to Charter Communications Holding Company in exchange for membership
units. Charter Communications Holding Company will in turn contribute the equity
interests to Charter Holdings, which will in turn contribute the equity
interests to a subsidiary. The Kalamazoo cable system has approximately 49,000
customers and had revenues of approximately $20.3 million for the year ended
December 31, 1999. We anticipate that this transaction will close in the third
quarter of 2000.
PENDING SWAP TRANSACTION
On December 1, 1999, Charter Communications, Inc. entered into a
non-binding letter of intent with AT&T Broadband & Internet Services to exchange
certain cable systems. The Swap Transaction would involve cable systems owned by
AT&T located in municipalities in Alabama, Georgia, Illinois and Missouri
serving approximately 705,000 subscribers and certain of our cable systems
located in municipalities in California, Connecticut, Massachusetts, Texas and
certain other states, serving approximately 631,000 subscribers. As part of the
Swap Transaction, we will be required to pay AT&T approximately $108 million in
cash. This represents the difference in the agreed values of the systems being
exchanged. The Swap Transaction is subject to the negotiation and execution of a
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definitive exchange agreement, regulatory approvals and other conditions typical
in transactions of this type. We cannot assure you that the Swap Transaction
will be completed.
PRODUCTS AND SERVICES
We offer our customers a full array of traditional cable television
services and programming and we have begun to offer new and advanced high
bandwidth services such as high-speed Internet access. We plan to continually
enhance and upgrade these services, including adding new programming and other
telecommunications services, and will continue to position cable television as
an essential service.
TRADITIONAL CABLE TELEVISION SERVICES. As of December 31, 1999, pro forma
for the recent transfers and the Bresnan acquisition, approximately 85% of our
customers subscribed to both "basic" and "expanded basic" service and generally
receive a line-up of between 33 and 85 channels of television programming,
depending on the bandwidth capacity of the system. Customers who pay additional
amounts can also subscribe to additional channels, either individually or in
packages of several channels, as add-ons to the basic channels. As of December
31, 1999, more than 22% of our customers subscribe to premium channels, with
additional customers subscribing to other special add-on packages. We tailor
both our basic channel line-up and our additional channel offerings to each
system according to demographics, programming preferences, competition, price
sensitivity and local regulation.
Our traditional cable television service offerings include the following:
- BASIC CABLE. All of our customers receive basic cable services, which
generally consist of local broadcast television, local community
programming, including governmental and public access, and limited
satellite programming. For the year ended December 31, 1999, pro forma
for the recent transfers, the average monthly fee was $13.54 for our
basic service.
- EXPANDED BASIC CABLE. This expanded tier includes a group of
satellite-delivered or non-broadcast channels, such as Entertainment and
Sports Programming Network (ESPN), Cable News Network (CNN) and Lifetime
Television, in addition to the basic channel line-up. For the year ended
December 31, 1999, pro forma for the recent transfers, the average
monthly fee was $14.88 for our expanded basic service.
- PREMIUM CHANNELS. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming. Home
Box Office, Cinemax and Showtime are typical examples. We offer
subscriptions to these channels either individually or in packages. For
the year ended December 31, 1999, pro forma for the recent transfers,
the average monthly fee was $6.15 per premium subscription.
- PAY-PER-VIEW. These channels allow customers to pay to view a single
showing of a recently released movie, a one-time special sporting event
or music concerts on an unedited, commercial-free basis. We currently
charge a fee that ranges from $2.95 to $8.95 for movies. For special
events, such as championship boxing matches, we have charged a fee of up
to $54.95.
We have employed a variety of targeted marketing techniques to attract new
customers by focusing on delivering value, choice, convenience and quality. We
employ direct mail and telemarketing, using demographic "cluster codes" to
target specific messages to target audiences. In many of our systems, we offer
discounts to customers who purchase premium services on a limited trial basis in
order to encourage a higher level of service subscription. We also have a
coordinated strategy for retaining customers that includes televised retention
advertising to reinforce the decision to subscribe and to encourage customers to
purchase higher service levels.
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NEW PRODUCTS AND SERVICES. A variety of emerging technologies and the
rapid growth of Internet usage have presented us with substantial opportunities
to provide new or expanded products and services to our customers and to expand
our sources of revenue. The desire for such new technologies and the use of the
Internet by businesses in particular have triggered a significant increase in
our commercial market penetration. As a result, we are in the process of
introducing a variety of new or expanded products and services beyond the
traditional offerings of analog television programming for the benefit of both
our residential and commercial customers. These new products and services
include:
- digital television and its related enhancements;
- high-speed Internet access via cable modems installed in personal
computers;
- WorldGate television-based Internet access, which allows customers to
access the Internet through the use of our two-way capable cable plant
without the need for a personal computer;
- interactive services, such as Wink, which adds interactivity and
electronic commerce opportunities to traditional programming and
advertising; and
- telephony and data transmission services, which are private network
services interconnecting locations for a customer.
Cable television's high bandwidth allows cable to be well positioned to
deliver a multitude of channels and/or new and advanced products and services.
We believe that this high bandwidth will be a key factor in the successful
delivery of these products and services.
DIGITAL TELEVISION. As part of upgrading our systems, we are installing
headend equipment capable of delivering digitally encoded cable transmissions to
a two-way digital-capable set-top converter box in the customer's home. This
digital connection offers significant advantages. For example, we can compress
the digital signal to allow the transmission of up to twelve digital channels in
the bandwidth normally used by one analog channel. This will allow us to
increase both programming and service offerings, including near video-on-demand
for pay-per-view customers. We expect to increase the amount of these services
purchased by our customers.
Digital services customers may receive a mix of additional television
programming, an electronic program guide and up to 40 channels of digital music.
The additional programming falls into four categories which are targeted toward
specific markets:
- additional expanded basic channels, which are marketed in systems
primarily serving rural communities;
- additional premium channels, which are marketed in systems serving both
rural and urban communities;
- "multiplexes" of premium channels to which a customer previously
subscribed, such as multiple channels of HBO or Showtime, which are
varied as to time of broadcast or programming content theme and which
are marketed in systems serving both rural and urban communities; and
- additional pay-per-view programming, such as more pay-per-view options
and/or frequent showings of the most popular films to provide near
video-on-demand, which are more heavily marketed in systems primarily
serving both rural and urban communities.
As part of our pricing strategy for digital services, we have established a
retail rate of $4.95 to $8.95 per month for the digital set-top converter and
the delivery of "multiplexes" of premium services, additional pay-per-view
channels, digital music and an electronic programming guide. Some
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of our systems also offer additional expanded basic tiers of service. These
tiers of services retail for $3.95 per month each or $8.95 for all three tiers.
As of December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, more than 155,400 of our customers subscribed to the digital
service offered in 85 markets. As of December 31, 1999, pro forma for the recent
transfers and the Bresnan acquisition, approximately 4.7 million of our
customers were served by cable systems capable of delivering digital services.
By year-end 2000, we anticipate that digital services will pass approximately
7.0 million homes.
INTERNET ACCESS. We currently provide Internet access to our customers by
two principal means:
- via cable modems attached to personal computers, either directly or
through an outsourcing contract with an Internet service provider; and
- through television access, via a service such as WorldGate.
We also provide Internet access in some markets through traditional dial-up
telephone modems, using a third party service provider.
The principal advantage of cable Internet connections is the high speed of
data transfer over a cable system. We currently offer these services to our
residential customers over coaxial cable at speeds that can range up to
approximately 50 times the speed of a conventional telephone modem. Furthermore,
a two-way communication cable system using a hybrid fiber optic/coaxial
structure can support the entire connection at cable modem speeds without the
need for a separate telephone line. If the cable system only supports one-way
signals from the headend to the customer, the customer must use a separate
telephone line in order to send signals to the provider, although such customer
still receives the benefit of high speed cable access when downloading
information, which is the primary reason for using cable as an Internet
connection. In addition to Internet access over our traditional coaxial system,
we also provide our commercial customers fiber optic cable access at a price
that we believe is less than the price offered by the telephone companies.
In the past, cable Internet connections have provided customers with widely
varying access speeds because each customer accessed the Internet by sending and
receiving data through a node. Users connecting simultaneously through a single
node share the bandwidth of that node, so that users' connection speeds may
diminish as additional users connect through the same node. To induce users to
switch to our Internet services, we guarantee our cable modem customers the
minimum access speed selected from several speed options we offer. We also
provide higher guaranteed access speeds for customers willing to pay an
additional cost. In order to meet these guarantees, we are increasing the
bandwidth of our systems and "splitting" nodes easily and cost-effectively to
reduce the number of customers per node.
CABLE MODEM-BASED INTERNET ACCESS. We have deployed cable modem-based
Internet access services in 84 markets including Los Angeles, California; St.
Louis, Missouri; and Fort Worth, Texas.
As of December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, we provided Internet access service to approximately 65,600
residential customers and 280 commercial customers. The following table
indicates the projected availability of cable modem-based Internet access
services in our systems, as of the dates indicated. Only a small percentage of
our customers currently subscribe to these services.
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<TABLE>
<CAPTION>
HOMES MADE AVAILABLE FOR
ADVANCED DATA SERVICES
--------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- -----------------
(PRO FORMA) (PROJECTED)
<S> <C> <C>
HIGH-SPEED INTERNET ACCESS VIA CABLE MODEMS:
High Speed Access Corp................................... 1,128,300 3,180,500
EarthLink/Charter Pipeline............................... 708,700 772,700
Excite@Home.............................................. 867,800 917,700
Convergence.com.......................................... 263,200 --
In-House/Other........................................... 445,600 523,700
--------- ---------
Total cable modems..................................... 3,413,600 5,394,600
========= =========
Internet access via WorldGate............................ 428,800 488,800
========= =========
</TABLE>
We have a relationship with High Speed Access Corp. to offer Internet
access in some of our smaller systems. High Speed Access also provides Internet
access services to our customers under the Charter Pipeline brand name. Although
the Internet access service is provided by High Speed Access, the Internet
"domain name" of our customer's e-mail address and web site, if any, is
"Charter.net," allowing the customer to switch or expand to our other Internet
services without a change of e-mail address.
High Speed Access provides three different tiers of service to us. The base
tier is similar to our arrangements with EarthLink and Excite@Home described
below. The turnkey tier bears all capital, operating and marketing costs of
providing the service, and seeks to build economies of scale in our smaller
systems that we cannot efficiently build ourselves by simultaneously contracting
to provide the same services to other small geographically contiguous systems.
The third tier allows for a la carte selection of services between the base tier
and the turnkey tier. As of December 31, 1999, pro forma for the recent
transfers and the Bresnan acquisition, we have made Internet access available to
approximately 1,128,300 of our homes passed, and approximately 15,200 customers
have signed up for the service. During 2000, we anticipate making available for
service an additional 73 markets to High Speed Access, covering approximately
2,052,200 additional homes passed.
We have an agreement with EarthLink Network, Inc., an independent Internet
service provider, to provide service marketed and branded as Charter
Pipeline(TM), which is a cable modem-based, high-speed Internet access service
we offer. EarthLink and MindSpring Enterprises, Inc. merged in February 2000
creating the second-largest Internet service provider (ISP) in the United
States. We currently charge a monthly usage fee of between $24.95 and $39.95.
Our customers have the option to lease a cable modem for $10 to $15 a month or
to purchase a modem for between $200 and $300. As of December 31, 1999, we made
EarthLink Internet access available to approximately 708,700 homes passed and
had approximately 10,500 customers who subscribed to this service.
We have a revenue sharing agreement with Excite@Home, under which
Excite@Home provides Internet service to customers in our systems serving Fort
Worth, University Park and Highland Park, Texas. The Excite@Home network
provides high-speed, cable modem-based Internet access using our cable
infrastructure. As of December 31, 1999, pro forma for the recent transfers and
the Bresnan acquisition, we have made Excite@Home available to approximately
867,800 of our homes passed and had approximately 18,200 customers who
subscribed to this service.
We also have services agreements with Convergence.com under which
Convergence.com provides Internet service to customers in systems acquired from
Rifkin. The Convergence.com network provides high-speed, cable modem-based
Internet access using our cable infrastructure. As of December 31, 1999, pro
forma for the recent transfers and the Bresnan acquisition, we have made
available Convergence.com service to approximately 263,200 homes passed and had
approximately 7,100 customers.
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We actively market our cable modem service to businesses in each one of our
systems where we have the capability to offer such service. Our marketing
efforts are often door-to-door, and we have established a separate division
whose function is to make businesses aware that this type of Internet access is
available through us. We also provide several virtual local area networks for
municipal and educational facilities in our Los Angeles cluster including
California Institute of Technology located in Pasadena, the City of Pasadena and
the City of West Covina.
TV-BASED INTERNET ACCESS. We have a non-exclusive agreement with WorldGate
to provide its TV-based e-mail and Internet access to our cable customers.
WorldGate's technology is only available to cable systems with two-way
capability. WorldGate offers easy, low-cost Internet access to customers at
connection speeds ranging up to 128 kilobits per second. For a monthly fee, we
provide our customers with e-mail and Internet access that does not require the
use of a PC, an existing or additional telephone line, or any additional
equipment. Instead, the customer accesses the Internet through the set-top box,
which the customer already has on his television set, and a wireless keyboard,
that is provided with the service and which interfaces with the box. WorldGate
works on advanced analog and digital converters and, therefore, can be installed
utilizing advanced analog converters already deployed. In contrast, other
converter-based, non-PC Internet access products require a digital platform and
a digital converter prior to installation.
Customers who opt for television-based Internet access are generally
first-time Internet users who prefer this more user-friendly interface. Although
the WorldGate service bears the WorldGate brand name, the Internet domain names
of the customers who use this service is "Charter.net." This allows the
customers to switch or expand to our other Internet services without a change of
e-mail address.
We first offered WorldGate to customers on the upgraded portion of our
systems in St. Louis in April 1998. We are also currently offering this service
in five other systems. In addition, we plan to introduce it in four additional
systems during 2000. As of December 31, 1999, pro forma for the recent transfers
and the Bresnan acquisition, we provided WorldGate Internet service to
approximately 7,100 customers.
INTERNET PORTAL SERVICES. On October 1, 1999, Charter Communications
Holding Company, Vulcan Ventures, an entity controlled by Mr. Allen, and Go2Net,
Inc. entered into a joint venture to form Broadband Partners, Inc. Broadband
will provide access to the Internet through a "portal" to our customers on the
digital service tier. A portal is an Internet web site that serves as a user's
initial point of entry to the World Wide Web. By offering selected content,
services and links to other web sites, a portal guides and directs users through
the World Wide Web. In addition, the portal generates revenues from advertising
on its own web pages and by sharing revenues generated by linked or featured web
sites.
Revenue splits and other economic terms in this arrangement will be at
least as favorable to us as terms between Broadband and any other parties.
Charter Communications Holding Company has agreed to use Broadband's portal
services exclusively for an initial six-year period that will begin when the
portal services are launched, except that Charter Communications Holding
Company's existing agreements with other Internet high-speed portal services and
High Speed Access may run for their current term to the extent that such
agreements do not allow for the carriage of content provided by Charter
Communications Holding Company or Vulcan Ventures. The joint venture is for an
initial 25-year term, subject to successive five-year renewals by mutual
consent. Vulcan Ventures will own 55.2%, Charter Communications Holding Company
will own 24.9% and Go2Net will own 19.9% of Broadband's equity interests and
Vulcan Ventures will have voting control over the Broadband entity. Broadband's
board of directors will consist of three directors designated by Vulcan Ventures
and one by each of Charter Communications Holding Company and Go2Net.
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Each of Broadband's investors will be obligated to provide their pro rata
share of funding for Broadband's operations and capital expenditures, except
that Vulcan Ventures will fund our portion of Broadband's expenses for the first
four years and will fund Go2Net's portion of Broadband's expenses to the extent
Go2Net's portion exceeds budget for the first four years.
We believe that our participation in the Broadband joint venture will
facilitate the delivery of a broad array of Internet products and services to
our customers over the television through the use of an advanced digital set-top
box or through the personal computer.
The Broadband joint venture has not yet established a timetable for a
commercial launch of its portal services. However, we anticipate that alpha and
beta testing of this Internet portal service will be completed during 2000. We
do not anticipate that our participation in the joint venture will have a
material adverse impact on our financial condition or results of operations for
the foreseeable future.
WINK-ENHANCED PROGRAMMING. We have formed a relationship with Wink, which
sells technology to embed interactive features, such as additional information
and statistics about a program or the option to order an advertised product,
into programming and advertisements. A customer with a Wink-enabled set-top box
and a Wink-enabled cable provider sees an icon flash on the screen when
additional Wink features are available to enhance a program or advertisement. By
pressing the select button on a standard remote control, a viewer of a
Wink-enhanced program is able to access additional information regarding such
program, including, for example, information on prior episodes or the program's
characters. A viewer watching an advertisement would be able to access
additional information regarding the advertised product and may also be able to
utilize the two-way transmission features to order a product. We have bundled
Wink's services with our traditional cable services in both our advanced analog
and digital platforms. Wink's services are provided free of charge. A company
controlled by Mr. Allen has made an equity investment in Wink.
Various programming networks, including CNN, NBC, ESPN, HBO, Showtime,
Lifetime, VH1, the Weather Channel, and Nickelodeon, are currently producing
over 1,000 hours of Wink-enhanced programming per week. Under certain
revenue-sharing arrangements, we will modify our headend technology to allow
Wink-enabled programming to be offered on our systems. We receive fees from Wink
each time one of our customers uses Wink to request certain additional
information or order an advertised product.
TELEPHONE SERVICES. We expect to be able to offer cable telephony services
in the near future using our systems' direct, two-way connections to homes and
other buildings. We are exploring technologies using Internet protocol
telephony, as well as traditional switching technologies that are currently
available, to transmit digital voice signals over our systems. AT&T and other
telephone companies have already begun to pursue strategic partnering and other
programs which make it attractive for us to acquire and develop this alternative
Internet protocol technology. For the last two years, we have sold telephony
services as a competitive access provider in the state of Wisconsin through one
of our subsidiaries, and are currently looking to expand our services as a
competitive access provider into other states.
JOINT VENTURE WITH RCN CORPORATION. On October 1, 1999, Charter
Communications Holding Company and RCN Corporation entered into a binding term
sheet containing the principal terms of a non-exclusive joint venture to provide
a broad range of telephony services to the customers of Charter Communications
Holding Company's subsidiaries in its Los Angeles franchise territory. RCN is
engaged in the businesses of bundling residential voice, video and Internet
access operations, cable operations and certain long distance telephony
operations. RCN is developing advanced fiber optic networks to provide a wide
range of telecommunications services, including long distance telephone, video
programming and data services, such as high-speed Internet access.
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Charter Communications Holding Company will provide access to our Los
Angeles customer base and will provide the capital necessary to develop
telephony capability in Los Angeles. In addition, Charter Communications Holding
Company will provide the necessary personnel to oversee and manage the telephony
services. RCN will provide the necessary personnel and support services to
develop and implement telephony services to be provided by Charter
Communications Holding Company. We will pay RCN's fees at rates consistent with
industry market compensation. We will have all rights to the telephony business
and assets and will receive all revenues derived from the telephony business
unless the parties expand RCN's role by mutual agreement. We believe that our
telephony joint venture, together with Mr. Allen's investment in RCN, may allow
us to take advantage of RCN's telephony experience as we deliver telephone
services to our customers, although we cannot assure you that we will realize
anticipated advantages.
The term sheet contains only the principal terms of this joint venture and
provides that the parties will enter into definitive agreements, which will
contain, among other terms, details of the compensation to be received by RCN.
To date, we have only had preliminary discussions with RCN regarding specific
operational matters and have not determined a timetable for the commencement of
services by the joint venture. We do not anticipate that this joint venture will
have a material impact on our financial condition or results of operations in
the foreseeable future.
OUR SYSTEMS
As of December 31, 1999, including the recent transfers of the Fanch,
Falcon and Avalon cable systems, acquisitions completed since this date and the
Kalamazoo transaction, our cable systems consisted of approximately 182,000
miles of coaxial and approximately 12,600 sheath miles of fiber optic cable
passing approximately 10.0 million households and serving approximately 6.2
million customers. Coaxial cable is a type of cable used for broadband data and
cable systems. This type of cable has excellent broadband frequency
characteristics, noise, immunity and physical durability. The cable is connected
from each node to individual homes or buildings. A node is a single connection
to a cable system's main high-capacity fiber optic cable that is shared by a
number of customers. A sheath mile is the actual length of cable in miles. Fiber
optic cable is a communication medium that uses hair-thin glass fibers to
transmit signals over long distances with minimum signal loss or distortion. As
of December 31, 1999, without giving effect to acquisitions since that date and
the recent transfers, approximately 45% of our customers were served by systems
with at least 550 megahertz bandwidth capacity, approximately 30% had at least
750 megahertz bandwidth capacity and approximately 30% were served by systems
capable of providing two-way interactive communication capability. Such two-way
interactive communication capability includes two-way Internet connections,
services provided by Wink, and interactive program guides.
CORPORATE MANAGEMENT. Pursuant to a services agreement between Charter
Communications, Inc. and Charter Investment, Inc., Charter Investment, Inc.
provides the necessary personnel and services to manage Charter Communications
Holding Company, Charter Holdings and their subsidiaries. These personnel and
services are provided to Charter Communications, Inc. on a cost reimbursement
basis. Management of Charter Communications, Inc. and Charter Investment, Inc.
consists of approximately 310 people led by Charter Communications chief
executive officer Jerald L. Kent. They are responsible for coordinating and
overseeing our operations, including certain critical functions, such as
marketing and engineering, that are conducted by personnel at the regional and
local system level. The corporate office also performs certain financial control
functions such as accounting, finance and acquisitions, payroll and benefit
administration, internal audit, purchasing and programming contract
administration on a centralized basis.
OPERATING REGIONS. To manage and operate our systems, we have established
two divisions that contain a total of eleven operating regions. Each of the two
divisions is managed by a Senior Vice
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President who reports directly to Mr. Kent and is responsible for overall
supervision of the operating regions within the division. Each region is managed
by a team consisting of a Senior Vice President or a Vice President, supported
by operational, marketing and engineering personnel. Within each region, certain
groups of cable systems are further organized into clusters. We believe that
much of our success is attributable to our operating philosophy which emphasizes
decentralized management, with decisions being made as close to the customer as
possible.
The Western Division is comprised of the following regions: Central, North
Central, Southern California, Northwest, Michigan and National. The Eastern
Division is comprised of the following regions: Southeast, Mid-South, Northeast,
Gulf Coast and Mid-Atlantic.
The following table provides an overview of customer data for each of our
operating regions as of December 31, 1999, pro forma for the recent transfers,
the Bresnan acquisition, and the Kalamazoo Transaction, after which our systems
will pass approximately 10.0 million homes serving approximately 6.2 million
customers.
CUSTOMER DATA AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
ACQUISITIONS AND
CHARTER RECENT KALAMAZOO
HOLDINGS TRANSFERS SUBTOTAL TRANSACTION TOTAL
--------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
WESTERN DIVISION
Central....................... 318,464 142,865 461,329 -- 461,329
North Central................. 408,865 391,697 800,562 -- 800,562
Southern California........... 588,906 159,082 747,988 -- 747,988
Northwest..................... -- 370,619 370,619 -- 370,619
Michigan...................... -- 544,327 544,327 48,500 592,827
National...................... 242,537 185,215 427,752 -- 427,752
--------- --------- --------- ------ ---------
1,558,772 1,793,805 3,352,577 48,500 3,401,077
EASTERN DIVISION
Southeast..................... 823,671 136,481 960,152 -- 960,152
Mid-South..................... 477,543 65,533 543,076 -- 543,076
Northeast..................... 302,047 26,061 328,108 -- 328,108
Gulf Coast.................... 365,502 66,986 432,488 -- 432,488
Mid-Atlantic.................. 183,803 371,052 554,855 -- 554,855
--------- --------- --------- ------ ---------
2,152,566 666,113 2,818,679 -- 2,818,679
--------- --------- --------- ------ ---------
Total......................... 3,711,338 2,459,918 6,171,256 48,500 6,219,756
========= ========= ========= ====== =========
</TABLE>
The following discussion provides a description of our operating regions as
of December 31, 1999, giving effect to the recent transfers, acquisitions closed
since this date and the Kalamazoo transaction.
CENTRAL REGION. The Central region consists of cable systems serving
approximately 461,000 customers of which approximately 261,000 customers reside
in and around St. Louis County or in adjacent areas in Illinois. The remaining
customers, approximately 200,000, reside in small to medium-sized communities in
Missouri, Illinois and Indiana.
NORTH CENTRAL REGION. The North Central region consists of cable systems
serving approximately 801,000 customers located throughout the states of
Wisconsin and Minnesota. Approximately 518,000 and 283,000 customers reside in
the states of Wisconsin and Minnesota, respectively. Within the state of
Wisconsin, the two largest operating clusters are located in and around Madison,
serving approximately 231,000 customers, and Fond du Lac, serving approximately
107,000 customers.
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Within the state of Minnesota, the two largest operating clusters are located in
and around Rochester, serving approximately 142,000 customers, and St. Cloud,
serving approximately 62,000 customers.
SOUTHERN CALIFORNIA REGION. The Southern California region consists of
cable systems serving approximately 748,000 customers located in the state of
California, with approximately 509,000 customers in the Los Angeles metropolitan
area. These customers reside primarily in the communities of Pasadena, Alhambra,
Glendale, Long Beach and Riverside. We also have approximately 239,000 customers
in central California, principally located in the communities of San Luis
Obispo, West Sacramento and Turlock.
NORTHWEST REGION. The Northwest region was formed in connection with the
recent Fanch and Falcon acquisitions. After these acquisitions, the Northwest
region consists of cable systems serving approximately 371,000 customers
residing in the states of Oregon, Washington, Idaho, Utah and California. The
two largest operating clusters in the Northwest region are located in and around
Kennewick, Washington, serving approximately 85,000 customers and Medford,
Oregon, serving approximately 72,000 customers.
MICHIGAN REGION. The Michigan region was formed in connection with the
recent Fanch, Avalon, Falcon transfers and the Bresnan acquisition. Pro forma
for these transactions and the pending transaction, the Michigan region will
consist of cable systems serving approximately 593,000 customers. The largest
operating cluster in the Michigan region is located in and around Bay City,
Michigan serving approximately 132,000 customers.
NATIONAL REGION. The National region consists of cable systems serving
approximately 240,000 customers residing in small to medium-sized communities in
the states of Nebraska, Texas, New Mexico, North Dakota, Kansas, Colorado and
Oklahoma and cable systems serving approximately 188,000 customers in Texas of
which approximately 132,000 are served by the Fort Worth, Texas system. These
systems are managed from our Fort Worth, Texas regional office.
SOUTHEAST REGION. The Southeast region consists of cable systems serving
approximately 960,000 customers residing primarily in small to medium-sized
communities in North Carolina, South Carolina, Georgia and Florida. There are
significant clusters of cable systems in and around the cities and counties of
Greenville/Spartanburg, South Carolina; Hickory and Asheville, North Carolina;
and Atlanta, Georgia.
MID-SOUTH REGION. The Mid-South region consists of cable systems serving
approximately 543,000 customers residing in the states of Tennessee and
Kentucky. The Mid-South region has a significant cluster of cable systems in and
around Kingsport, Tennessee serving approximately 124,000 customers.
NORTHEAST REGION. The Northeast region consists of cable systems serving
approximately 328,000 customers residing in the states of Connecticut and
Massachusetts. These systems serve the communities of Newtown and Willimantic,
Connecticut, and areas in and around Pepperell and Worcester, Massachusetts.
GULF COAST REGION. The Gulf Coast region was formed in connection with the
Fanch and Falcon acquisitions. The Gulf Coast region consists of cable systems
serving approximately 432,000 customers residing in the states of Louisiana,
Mississippi and Alabama. Within the state of Alabama, the two largest operating
clusters are located in and around Birmingham, serving approximately 117,000
customers, and Montgomery, serving approximately 25,000 customers.
MID-ATLANTIC REGION. The Mid-Atlantic region consists of cable systems
serving approximately 555,000 customers residing in the states of Virginia, West
Virginia, Vermont, Ohio, Pennsylvania, New York and Maryland. The Mid-Atlantic
region has significant clusters of cable systems in and
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around the cities of Charleston, West Virginia, serving approximately 189,000
customers, and Johnstown, Pennsylvania, serving approximately 77,000 customers.
PLANT AND TECHNOLOGY OVERVIEW. We have engaged in an aggressive program to
upgrade our existing cable plant over the next three years. For the period from
January 1, 2000 to December 31, 2002, we plan to spend approximately $6.0
billion for capital expenditures, approximately $3.5 billion of which will be
used to upgrade our systems to bandwidth capacity of 550 megahertz or greater,
so that we may offer advanced services. The remaining capital will be spent on
plant extensions, new services, converters and system maintenance.
The following table describes the current technological state of our
systems, including the recent transfers, and the anticipated progress of planned
upgrades through 2003, based on the percentage of our customers who will have
access to the bandwidth and two-way capability.
<TABLE>
<CAPTION>
LESS THAN 750 MEGAHERTZ TWO-WAY
550 MEGAHERTZ 550 MEGAHERTZ OR GREATER 870 MEGAHERTZ CAPABILITY
------------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1999....... 53% 14% 30% 3% 33%
December 31, 2000....... 33% 9% 32% 26% 58%
December 31, 2001....... 17% 7% 33% 43% 76%
December 31, 2002....... 6% 5% 33% 56% 89%
December 31, 2003....... 2% 6% 33% 59% 92%
</TABLE>
We have adopted the hybrid fiber coaxial cable (HFC) architecture as the
standard for our ongoing systems upgrades. HFC architecture combines the use of
fiber optic cable, which can carry hundreds of video, data and voice channels
over extended distances, with coaxial cable, which requires a more extensive
signal amplification in order to obtain the desired transmission levels for
delivering channels. In most systems, we deliver our signals via fiber optic
cable to individual nodes serving a maximum of 500 homes or commercial
buildings. Currently, our average node size is approximately 380 homes per node.
Our HFC architecture consists of six strands of fiber to each node, with two
strands activated and four strands reserved for future services. We believe that
this network design provides high capacity and superior signal quality, and will
enable us to provide the newest forms of telecommunications services to our
customers. The primary advantages of HFC architecture over traditional coaxial
cable networks include:
- increased channel capacity of cable systems;
- reduced number of amplifiers, which are devices to compensate for signal
loss caused by coaxial cable, needed to deliver signals from the headend
to the home, resulting in improved signal quality and reliability;
- reduced number of homes that need to be connected to an individual node,
improving the capacity of the network to provide high-speed Internet
access and reducing the number of households affected by disruptions in
the network; and
- sufficient dedicated bandwidth for two-way services, which avoids
reverse signal interference problems that can otherwise occur when you
have two-way communication capability.
The HFC architecture will enable us to offer new and enhanced services,
including:
- additional channels and tiers;
- expanded pay-per-view options;
- high-speed Internet access;
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- wide area networks, which permit a network of computers to be connected
together beyond an area;
- point-to-point data services, which can switch data links from one point
to another; and
- digital advertising insertion, which is the insertion of local, regional
and national programming.
The upgrades will facilitate our new services in two primary ways:
- Greater bandwidth allows us to send more information through our
systems. This provides us with the capacity to provide new services in
addition to our current services. As a result, we will be able to roll
out digital cable programming in addition to existing analog channels
offered to customers who do not wish to subscribe to a package of
digital services.
- Enhanced design configured for two-way communication with the customer
allows us to provide cable Internet services without telephone support
and other interactive services, such as an interactive program guide,
impulse pay-per-view, video-on-demand and Wink, that cannot be offered
without upgrading the bandwidth capacity of our systems.
This HFC architecture will also position us to offer cable telephony
services in the future, using either Internet protocol technology or
switch-based technology, another method of linking communications.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
Providing a high level of service to our customers has been a central
driver of our historical success. Our emphasis on system reliability,
engineering support and superior customer satisfaction is key to our management
philosophy. In support of our commitment to customer satisfaction, we operate a
24-hour customer service hotline in most systems and offer on-time installation
and service guarantees. It is our policy that if an installer is late for a
scheduled appointment the customer receives free installation, and if a service
technician is late for a service call the customer receives a $20 credit.
As of December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, we maintained seventeen call centers located in our eleven regions,
which are responsible for handling call volume for more than 53% of our
customers. They are staffed with dedicated personnel who provide service to our
customers 24 hours a day, seven days a week. We believe operating regional call
centers allows us to provide "localized" service, which also reduces overhead
costs and improves customer service. We have invested significantly in both
personnel and equipment to ensure that these call centers are professionally
managed and employ state-of-the-art technology. As of December 31, 1999, pro
forma for the recent transfers and the Bresnan acquisition, we employed
approximately 2,920 customer service representatives. Our customer service
representatives receive extensive training to develop customer contact skills
and product knowledge critical to successful sales and high rates of customer
retention. As of December 31, 1999, pro forma for the recent transfers and the
Bresnan acquisition, we had approximately 5,490 technical employees who are
encouraged to enroll in courses and attend regularly scheduled on-site seminars
conducted by equipment manufacturers to keep pace with the latest technological
developments in the cable television industry. We utilize surveys, focus groups
and other research tools as part of our efforts to determine and respond to
customer needs. We believe that all of this improves the overall quality of our
services and the reliability of our systems, resulting in fewer service calls
from customers.
We are also committed to fostering strong community relations in the towns
and cities our systems serve. We support many local charities and community
causes in various ways, including marketing promotions to raise money and
supplies for persons in need, and in-kind donations that
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include production services and free air-time on major cable networks. Recent
charity affiliations include campaigns for "Toys for Tots," United Way, local
theatre, children's museums, local food banks and volunteer fire and ambulance
corps. We also participate in the "Cable in the Classroom" program, whereby
cable television companies throughout the United States provide schools with
free cable television service. In addition, we install and provide free basic
cable service to public schools, government buildings and non-profit hospitals
in many of the communities in which we operate. We also provide free cable
modems and high-speed Internet access to schools and public libraries in our
franchise areas. We place a special emphasis on education, and regularly award
scholarships to employees who intend to pursue courses of study in the
communications field.
SALES AND MARKETING
PERSONNEL RESOURCES. We have a centralized team responsible for
coordinating the marketing efforts of our individual systems. For most of our
systems with over 30,000 customers we have a dedicated marketing manager, while
smaller systems are handled regionally. We believe our success in marketing
comes in large part from new and innovative ideas and from good interaction
between our corporate office, which handles programs and administration, and our
field offices, which implement the various programs. We are also continually
monitoring the regulatory arena, customer perception, competition, pricing and
product preferences to increase our responsiveness to our customer base. Our
customer service representatives are given the incentive to use their daily
contacts with customers as opportunities to sell our new service offerings.
MARKETING STRATEGY. Our long-term marketing objective is to increase cash
flow through deeper market penetration and growth in revenue per household. To
achieve this objective and to position our service as an indispensable consumer
service, we are pursuing the following strategies:
- increase the number of rooms per household with cable;
- introduce new cable products and services;
- design product offerings to enable greater opportunity for customer
choices;
- utilize "tiered" packaging strategies to promote the sale of premium
services and niche programming;
- offer our customers more value through discounted bundling of products;
- increase the number of residential consumers who use our set-top box,
which enables them to obtain advanced digital services such as a greater
number of television stations and interactive services;
- target households based on demographic data;
- develop specialized programs to attract former customers, households
that have never subscribed and illegal users of the service; and
- employ Charter branding of products to promote customer awareness and
loyalty.
We have innovative marketing programs which utilize market research on
selected systems, compare the data to national research and tailor marketing
programs for individual markets. We gather detailed customer information through
our regional marketing representatives and use the Claritas geodemographic data
program and consulting services to create unique packages of services and
marketing programs. These marketing efforts and the follow-up analysis provide
consumer information down to the city block or suburban subdivision level, which
allows us to create very targeted marketing programs.
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We seek to maximize our revenue per customer through the use of "tiered"
packaging strategies to market premium services and to develop and promote niche
programming services.
We regularly use targeted direct mail campaigns to sell these tiers and
services to our existing customer base. We are developing an in-depth profile
database that goes beyond existing and former customers to include all homes
passed. This database information is expected to improve our targeted direct
marketing efforts, bringing us closer toward our objective of increasing total
customers as well as sales per customer for both new and existing customers. For
example, using customer profile data currently available, we are able to
identify customers who have children under a specified age and do not currently
subscribe to The Disney Channel. We then target our marketing efforts with
respect to The Disney Channel to those households. In 1998, we were chosen by
Claritas Corporation, sponsor of a national marketing competition across all
industries, as the first place winner in their media division, which includes
cable systems operations, telecommunications and newspapers, for our national
segmenting and targeted marketing program.
In 1998, we introduced a new package of premium services. Customers receive
a substantial discount on bundled premium services of HBO, Showtime, Cinemax and
The Movie Channel. We were able to negotiate favorable terms with premium
networks, which allowed minimal impact on margins and provided substantial
volume incentives to grow the premium category. The MVP package has increased
our premium household penetration, premium revenue and cash flow. We are
currently introducing this same premium strategy in the systems we have recently
acquired.
We expect to continue to invest significant amounts of time, effort and
financial resources in the marketing and promotion of new and existing services.
To increase customer penetration and increase the level of services used by our
customers, we use a coordinated array of marketing techniques, including
door-to-door solicitation, telemarketing, media advertising and direct mail
solicitation. We believe we have one of the cable television industry's highest
success rates in attracting and retaining customers who have never before
subscribed to cable television. Historically, these "nevers" are the most
difficult customers to attract and retain.
PROGRAMMING SUPPLY
GENERAL. We believe that offering a wide variety of conveniently scheduled
programming is an important factor influencing a customer's decision to
subscribe to and retain our cable services. We devote considerable resources to
obtaining access to a wide range of programming that we believe will appeal to
both existing and potential customers of basic and premium services. We rely on
extensive market research, customer demographics and local programming
preferences to determine channel offerings in each of our markets.
PROGRAMMING SOURCES. We obtain basic and premium programming from a number
of suppliers, usually pursuant to a written contract. As of December 31, 1999,
we obtained approximately 64% of our programming through contracts entered into
directly with a programming supplier. We obtained the rest of our programming
through TeleSynergy, Inc., which offers its partners contract benefits in buying
programming by virtue of volume discounts available to a larger buying base.
Recent consolidation in the cable television industry coupled with our growth
through acquisitions has reduced the benefits associated with our participation
in TeleSynergy. As a result of our recent acquisitions, we reviewed our
programming arrangements and terminated our agreement with TeleSynergy,
effective January 31, 2000.
Programming tends to be made available to us for a flat fee per customer.
However, some channels are available without cost to us. In connection with the
launch of a new channel, we may receive a distribution fee to support the
channel launch, a portion of which is applied to marketing
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expenses associated with the channel launch. The amounts we receive in
distribution fees are not significant.
Our programming contracts generally continue for a fixed period of time,
usually from three to ten years, and are subject to negotiated renewal. Although
longer contract terms are available, we prefer to limit contracts to three years
so that we retain flexibility to change programming and include new channels as
they become available. Some program suppliers offer marketing support or volume
discount pricing structures. Some of our programming agreements with premium
service suppliers offer cost incentives under which premium service unit prices
decline as certain premium service growth thresholds are met.
For home shopping channels, we receive a percentage of the amount spent in
home shopping purchases by our customers on channels we carry. In 1998, cash
receipts totaled approximately $220,000. In 1999, cash receipts totaled
approximately $5.0 million.
PROGRAMMING COSTS. Our cable programming costs have increased in recent
years and are expected to continue to increase due to factors including:
- system acquisitions;
- additional programming being provided to customers;
- increased cost to produce or purchase cable programming; and
- inflationary increases.
In every year we have operated, our costs to acquire programming have
exceeded customary inflationary and cost-of-living type increases. Sports
programming costs have increased significantly over the past several years. In
addition, contracts to purchase sports programming sometimes contain built-in
cost increases for programming added during the term of the contract which we
may or may not have the option to add to our service offerings.
Under rate regulation of the Federal Communications Commission, cable
operators may increase their rates to customers to cover increased costs for
programming, subject to certain limitations. See "Regulation and Legislation."
We believe we will, as a general matter, be able to pass increases in our
programming costs through to customers, although we cannot assure you that it
will be possible.
RATES
Pursuant to the Federal Communications Commission's rules, we have set
rates for cable-related equipment, such as converter boxes and remote control
devices and installation services. These rates are based on actual costs plus an
11.25% rate of return. We have unbundled these charges from the charges for the
provision of cable service.
Rates charged to our customers vary based on the market served and service
selected, and are typically adjusted on an annual basis. As of December 31,
1999, including the Fanch, Falcon and Avalon cable systems, the average monthly
fee was $13.54 for basic service and $14.88 for expanded basic service.
Regulation of the expanded basic service was eliminated by federal law as of
March 31, 1999 and such rates are now based on market conditions. A one-time
installation fee, which may be waived in part during certain promotional
periods, is charged to new customers. We believe our rate practices are in
accordance with Federal Communications Commission Guidelines and are consistent
with those prevailing in the industry generally. See "Regulation and
Legislation."
THEFT PROTECTION
The unauthorized tapping of cable plant and the unauthorized receipt of
programming using cable converters purchased through unauthorized sources are
problems which continue to challenge
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the entire cable industry. We have adopted specific measures to combat the
unauthorized use of our plant to receive programming. For instance, in several
of our regions, we have instituted a "perpetual audit" whereby each technician
is required to check at least four other nearby residences during each service
call to determine if there are any obvious signs of piracy, namely, a drop line
leading from the main cable line into other homes. Addresses where the
technician observes drop lines are then checked against our customer billing
records. If the address is not found in the billing records, a sales
representative calls on the unauthorized user to correct the "billing
discrepancy" and persuade the user to become a formal customer. In our
experience, approximately 25% of unauthorized users who are solicited in this
manner become customers. Billing records are then closely monitored to guard
against these new customers reverting to their status as unauthorized users.
Unauthorized users who do not convert are promptly disconnected and, in certain
instances, flagrant violators are referred for prosecution. In addition, we have
prosecuted individuals who have sold cable converters programmed to receive our
signals without proper authorization.
FRANCHISES
As of December 31, 1999, pro forma for the recent transfers, our systems
operated pursuant to an aggregate of approximately 3,670 franchises, permits and
similar authorizations issued by local and state governmental authorities. As of
December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, we held approximately 4,215 franchises in the aggregate. Each
franchise is awarded by a governmental authority and is usually not transferable
unless the granting governmental authority consents. Most franchises are subject
to termination proceedings in the event of a material breach. In addition, most
franchises require us to pay the granting authority a franchise fee of up to
5.0% of gross revenues generated by cable television services under the
franchise (i.e., the maximum amount that may be charged under the Communications
Act).
Our franchises have terms which range from four years to more than 32
years. Prior to the scheduled expiration of most franchises, we initiate renewal
proceedings with the granting authorities. This process usually takes three
years but can take a longer period of time and often involves substantial
expense. The Communications Act provides for an orderly franchise renewal
process in which granting authorities may not unreasonably withhold renewals. If
a renewal is withheld and the granting authority takes over operation of the
affected cable system or awards it to another party, the granting authority must
pay the existing cable operator the "fair market value" of the system. The
Communications Act also established comprehensive renewal procedures requiring
that an incumbent franchisee's renewal application be evaluated on its own merit
and not as part of a comparative process with competing applications. In
connection with the franchise renewal process, many governmental authorities
require the cable operator make certain commitments, such as technological
upgrades to the system, which may require substantial capital expenditures. We
cannot assure you, however, that any particular franchise will be renewed or
that it can be renewed on commercially favorable terms. Our failure to obtain
renewals of our franchises, especially those in major metropolitan areas where
we have the most customers, would have a material adverse effect on our
business, results of operations and financial condition.
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The following table summarizes our systems' franchises, including the
Fanch, Falcon and Avalon cable systems, by year of expiration and approximate
number of basic customers as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE PERCENTAGE
OF OF TOTAL TOTAL BASIC OF TOTAL
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES CUSTOMERS(A) CUSTOMERS
- - - ---------------------------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Prior to December 31, 1999.................... 116 3% 124,300 2%
2000 to 2002.................................. 862 24% 1,452,000 27%
2003 to 2005.................................. 847 23% 1,174,500 21%
2006 or after................................. 1,844 50% 2,732,300 50%
----- --- --------- ---
Total....................................... 3,669 100% 5,483,100 100%
===== === ========= ===
</TABLE>
- - - ---------------
(a) Includes approximately 30,000 customers served by an Indiana cable system
that we did not transfer at the time of the InterMedia closing but
transferred in March 2000.
Under the 1996 Telecom Act, state and local authorities are prohibited from
limiting, restricting or conditioning the provision of telecommunications
services. They may, however, impose "competitively neutral" requirements and
manage the public rights-of-way. Granting authorities may not require a cable
operator to provide telecommunications services or facilities, other than
institutional networks, as a condition of an initial franchise grant, a
franchise renewal, or a franchise transfer. The 1996 Telecom Act also limits
franchise fees to an operator's cable-related revenues and clarifies that they
do not apply to revenues that a cable operator derives from providing new
telecommunications services.
We believe our relations with the franchising authorities under which our
systems are operated are generally good. Substantially all of the material
franchises relating to our systems which are eligible for renewal have been
renewed or extended at or prior to their stated expiration dates.
COMPETITION
We face competition in the areas of price, service offerings and service
reliability. We compete with other providers of television signals and other
sources of home entertainment. In addition, as we expand into additional
services such as Internet access, interactive services and telephony, we will
face competition from other providers of each type of service. See "Risk
Factors -- Business -- We operate in a very competitive business environment
which can adversely affect our business and operations."
To date, we believe that we have not lost a significant number of customers
or a significant amount of revenue to our competitors' systems. However,
competition from other providers of the technologies we expect to offer in the
future may have a negative impact on our business in the future.
Through mergers such as the recent merger of Tele-Communications, Inc. and
AT&T and the pending merger of America Online, Inc. (AOL) and Time Warner Inc.,
customers will come to expect a variety of services from a single provider.
While these mergers have no direct or immediate impact on our business, it
encourages providers of cable and telecommunications services to expand their
service offerings. It also encourages consolidation in the cable industry as
cable operators recognize the competitive benefits of a large customer base and
expanded financial resources.
Key competitors today include:
BROADCAST TELEVISION. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using an "off-air" antenna. The extent of such
competition is dependent upon the quality and quantity of broadcast
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signals available through "off-air" reception compared to the services provided
by the local cable system. The recent licensing of digital spectrum by the
Federal Communications Commission will provide incumbent television licenses
with the ability to deliver high definition television pictures and multiple
digital-quality program streams, as well as advanced digital services such as
subscription video.
DBS. Direct broadcast satellite, known as DBS, has emerged as significant
competition to cable systems. The DBS industry has grown rapidly over the last
several years, far exceeding the growth rate of the cable television industry,
and now serves more than 10 million subscribers nationwide. DBS service allows
the subscriber to receive video services directly via satellite using a
relatively small dish antenna. Moreover, video compression technology allows DBS
providers to offer more than 100 digital channels, thereby surpassing the
typical analog cable system. DBS companies historically were prohibited from
retransmitting popular local broadcast programming, but a change to the
copyright laws in November 1999 eliminated this legal impediment. After an
initial six-month grace period, DBS companies will need to secure retransmission
consent from the popular broadcast stations they wish to carry, and they will
face mandatory carriage obligations of less popular broadcast stations as of
January 2002. In response to the legislation, DirecTV, Inc. and EchoStar
Communications Corporation already have begun carrying the major network
stations in the nation's top television markets. DBS, however, is limited in the
local programming it can provide because of the current capacity limitations of
satellite technology. It is, therefore, expected that DBS companies will offer
local broadcast programming only in the larger U.S. markets in the foreseeable
future. The same legislation providing for DBS carriage of local broadcast
stations reduced the compulsory copyright fees paid by DBS companies and allows
them to continue offering distant network signals to rural customers. In March
2000, both DirecTV and EchoStar announced that they would be capable of
providing two-way high-speed Internet access by the end of this year. AOL, the
nation's leading provider of Internet services has announced a plan to invest
$1.5 billion in Hughes Electronics Corp., DirecTV's parent company, and these
companies intend to jointly market AOL's prospective Internet television service
to DirecTV's DBS customers.
DSL. The deployment of digital subscriber line technology, known as DSL,
will allow Internet access to subscribers at data transmission speeds greater
than those of modems over conventional telephone lines. Several telephone
companies and other companies are introducing DSL service. The Federal
Communications Commission recently released an order in which it mandated that
incumbent telephone companies grant access to the high frequency portion of the
local loop over which they provide voice services. This will enable competitive
carriers to provide DSL services over the same telephone lines simultaneously
used by incumbent telephone companies to provide basic telephone service.
However, in a separate order the Federal Communications Commission declined to
mandate that incumbent telephone companies unbundle their internal packet
switching functionality or related equipment for the benefit of competitive
carriers. This functionality or equipment could otherwise have been used by
competitive carriers directly to provide DSL or other high-speed broadband
services. We are unable to predict whether the Federal Communications
Commission's decisions will be sustained upon administrative or judicial appeal,
the likelihood of success of the Internet access offered by our competitors or
the impact on our business and operations of these competitive ventures.
TRADITIONAL OVERBUILDS. Cable television systems are operated under
non-exclusive franchises granted by local authorities. More than one cable
system may legally be built in the same area. It is possible that a franchising
authority might grant a second franchise to another cable operator and that
franchise might contain terms and conditions more favorable than those afforded
us. In addition, entities willing to establish an open video system, under which
they offer unaffiliated programmers non-discriminatory access to a portion of
the system's cable system may be able to avoid local franchising requirements.
Well financed businesses from outside the cable industry, such as public
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utilities which already possess fiber optic and other transmission lines in the
areas they serve may over time become competitors. There has been a recent
increase in the number of cities that have constructed their own cable systems,
in a manner similar to city-provided utility services. There has been an
increased interest in traditional overbuilds by private companies. Constructing
a competing cable system is a capital intensive process which involves a high
degree of risk. We believe that in order to be successful, a competitor's
overbuild would need to be able to serve the homes and businesses in the
overbuilt area on a more cost-effective basis than us. Any such overbuild
operation would require either significant access to capital or access to
facilities already in place that are capable of delivering cable television
programming.
As of December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, we are aware of overbuild situations in some of our cable systems.
Approximately 115,000 basic customers, or approximately 1.9% of our total basic
customers, are passed by these overbuilds. Additionally, we have been notified
that franchises have been awarded, and present potential overbuild situations,
in other of our systems. These potential overbuild areas service an aggregate of
approximately 134,000 basic customers or approximately 2.2% of our total basic
customers. In response to such overbuilds, these systems have been designated
priorities for the upgrade of cable plant and the launch of new and enhanced
services. We have upgraded many of these systems to at least 750 megahertz
two-way HFC architecture, and anticipate upgrading the other systems to at least
750 megahertz by December 31, 2001.
TELEPHONE COMPANIES AND UTILITIES. The competitive environment has been
significantly affected by both technological developments and regulatory changes
enacted in The Telecommunications Act of 1996, which were designed to enhance
competition in the cable television and local telephone markets. Federal
cross-ownership restrictions historically limited entry by local telephone
companies into the cable television business. The 1996 Telecom Act modified this
cross-ownership restriction, making it possible for local exchange carriers who
have considerable resources to provide a wide variety of video services
competitive with services offered by cable systems.
As we expand our offerings to include Internet and other telecommunications
services, we will be subject to competition from other telecommunications
providers. The telecommunications industry is highly competitive and includes
competitors with greater financial and personnel resources, who have brand name
recognition and long-standing relationships with regulatory authorities.
Moreover, mergers, joint ventures and alliances among franchise, wireless or
private cable television operators, local exchange carriers and others may
result in providers capable of offering cable television, Internet, and
telecommunications services in direct competition with us.
Several telephone companies have obtained or are seeking cable television
franchises from local governmental authorities and are constructing cable
systems. Cross-subsidization by local exchange carriers of video and telephony
services poses a strategic advantage over cable operators seeking to compete
with local exchange carriers that provide video services. Some local exchange
carriers may choose to make broadband services available under the open video
regulatory framework of the Federal Communications Commission or through
wireless technology. In addition, local exchange carriers provide facilities for
the transmission and distribution of voice and data services, including Internet
services, in competition with our existing or potential interactive services
ventures and businesses, including Internet service, as well as data and other
non-video services. We cannot predict the likelihood of success of the broadband
services offered by our competitors or the impact on us of such competitive
ventures. The entry of telephone companies as direct competitors in the video
marketplace, however, may become more widespread and could adversely affect the
profitability and valuation of the systems.
Additionally, we are subject to competition from utilities which possess
fiber optic transmission lines capable of transmitting signals with minimal
signal distortion.
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PRIVATE CABLE. Additional competition is posed by satellite master antenna
television systems known as "SMATV systems" serving multiple dwelling units,
referred to in the cable industry as "MDU's", such as condominiums, apartment
complexes, and private residential communities. These private cable systems may
enter into exclusive agreements with such MDUs, which may preclude operators of
franchise systems from serving residents of such private complexes. Such private
cable systems can offer both improved reception of local television stations and
many of the same satellite-delivered program services which are offered by cable
systems. SMATV systems currently benefit from operating advantages not available
to franchised cable systems, including fewer regulatory burdens and no
requirement to service low density or economically depressed communities.
Exemption from regulation may provide a competitive advantage to certain of our
current and potential competitors. The FCC ruled in 1998 that private cable
operators can lease video distribution capacity from local telephone companies
and distribute cable programming services over public rights-of-way without
obtaining a cable franchise. In 1999, both the Fifth and Seventh Circuit Courts
of Appeals upheld this FCC policy.
WIRELESS DISTRIBUTION. Cable television systems also compete with wireless
program distribution services such as multi-channel multipoint distribution
systems or "wireless cable," known as MMDS. MMDS uses low-power microwave
frequencies to transmit television programming over-the-air to paying customers.
Wireless distribution services generally provide many of the programming
services provided by cable systems, and digital compression technology is likely
to increase significantly the channel capacity of their systems. Both analog and
digital MMDS services require unobstructed "line of sight" transmission paths.
Analog MMDS has impacted our customer growth in Riverside and Sacramento,
California and Missoula, Montana. Digital MMDS is a more significant competitor,
presenting potential challenges to us in Los Angeles, California and Atlanta,
Georgia.
PROPERTIES
Our principal physical assets consist of cable television distribution
plant and equipment, including signal receiving, encoding and decoding devices,
headend reception facilities, distribution systems and customer drop equipment
for each of our cable television systems.
Our cable television plant and related equipment are generally attached to
utility poles under pole rental agreements with local public utilities and
telephone companies, and in certain locations are buried in underground ducts or
trenches. We own or lease real property for signal reception sites and business
offices in many of the communities served by our systems and for our principal
executive offices. We own most of our service vehicles.
Our subsidiaries own the real property housing a regional data center in
Town & Country, Missouri, as well as the regional office for the Northeast
Region in Newtown, Connecticut and additional real estate located in Hickory,
North Carolina; Hammond, Louisiana; and West Sacramento and San Luis Obispo,
California. Our subsidiaries lease space for our regional data center located in
Dallas, Texas and additional locations for business offices throughout our
operating regions and generally own the towers on which our equipment is
located. Our headend locations are generally located on owned or leased parcels
of land, and we generally own the towers on which our equipment is located.
We believe that our properties are in good operating condition and are
suitable for our business operations.
EMPLOYEES
Pursuant to a services agreement between Charter Communications, Inc. and
Charter Investment, Inc., Charter Investment, Inc. provides the necessary
personnel and services to manage Charter Communications Holding Company and its
subsidiaries, including us. These personnel and
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services are provided to Charter Communications, Inc. on a cost reimbursement
basis. Charter Communications, Inc. currently has only thirteen employees, all
of whom are senior management and are also executive officers of Charter
Investment, Inc. The management of Charter Communications, Inc. and Charter
Investment, Inc. consists of approximately 325 people led by Charter
Communications chief executive officer Jerald L. Kent. They are responsible for
coordinating and overseeing our operations, including certain critical
functions, such as marketing and engineering, that are conducted by personnel at
the regional and local system level. The corporate office also performs certain
financial control functions such as accounting, finance and acquisitions,
payroll and benefit administration, internal audit, purchasing and programming
contract administration on a centralized basis.
As of February 29, 2000, our subsidiaries had approximately 11,970
full-time equivalent employees of which 375 were represented by the
International Brotherhood of Electrical Workers. We believe we have a good
relationship with our employees and have never experienced a work stoppage. See
"Certain Relationships and Related Transactions."
INSURANCE
We have insurance to cover risks incurred in the ordinary course of
business, including general liability, property coverage, business interruption
and workers' compensation insurance in amounts typical of similar operators in
the cable industry and with reputable insurance providers. As is typical in the
cable industry, we do not insure our underground plant. We believe our insurance
coverage is adequate.
LEGAL PROCEEDINGS
We are involved from time to time in routine legal matters incidental to
our business. We believe that the resolution of such matters will not have a
material adverse impact on our financial position or results of operations.
REGULATION AND LEGISLATION
The following summary addresses the key regulatory developments and
legislation affecting the cable television industry.
The operation of a cable system is extensively regulated by the Federal
Communications Commission, some state governments and most local governments.
The 1996 Telecom Act has altered the regulatory structure governing the nation's
communications providers. It removes barriers to competition in both the cable
television market and the local telephone market. Among other things, it also
reduces the scope of cable rate regulation and encourages additional competition
in the video programming industry by allowing local telephone companies to
provide video programming in their own telephone service areas.
The 1996 Telecom Act requires the Federal Communications Commission to
undertake a host of implementing rulemakings. Moreover, Congress and the Federal
Communications Commission have frequently revisited the subject of cable
regulation. Future legislative and regulatory changes could adversely affect our
operations, and there have been calls in Congress and at the Federal
Communications Commission to maintain or even tighten cable regulation in the
absence of widespread effective competition.
CABLE RATE REGULATION. The 1992 Cable Act imposed an extensive rate
regulation regime on the cable television industry, which limited the ability of
cable companies to increase subscriber fees. Under that regime, all cable
systems were subjected to rate regulation, unless they faced "effective
competition" in their local franchise area. Federal law defines "effective
competition" on a
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community-specific basis as requiring satisfaction of conditions rarely
satisfied in the current marketplace.
Although the Federal Communications Commission established the underlying
regulatory scheme, local government units, commonly referred to as local
franchising authorities, are primarily responsible for administering the
regulation of the lowest level of cable service -- the basic service tier, which
typically contains local broadcast stations and public, educational, and
government access channels. Before a local franchising authority begins basic
service rate regulation, it must certify to the Federal Communications
Commission that it will follow applicable federal rules. Many local franchising
authorities have voluntarily declined to exercise their authority to regulate
basic service rates. Local franchising authorities also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services.
As of December 31, 1999, pro forma for the recent transfers and the Bresnan
acquisition, approximately 17% of our local franchising authorities were
certified to regulate basic tier rates. The 1992 Cable Act permits communities
to certify and regulate rates at any time, so that it is possible that
additional localities served by the systems may choose to certify and regulate
basic rates in the future.
The Federal Communications Commission historically administered rate
regulation of cable programming service tiers, which are the expanded basic
programming packages that offer services other than basic programming and which
typically contains satellite-delivered programming. As of December 31, 1999, pro
forma for the recent transfers and the Bresnan acquisition, we had cable
programming service tier rate complaints relating to approximately 440,000
customers pending at the Federal Communications Commission. Under the 1996
Telecom Act, however, the Federal Communications Commission's authority to
regulate cable programming service tier rates sunset on March 31, 1999. The
Federal Communications Commission has taken the position that it will still
adjudicate pending cable programming service tier complaints but will strictly
limit its review, and possible refund orders, to the time period predating the
sunset date. We do not believe any adjudications regarding these pre-sunset
complaints will have a material adverse effect on our business. The elimination
of cable programming service tier regulation on a prospective basis affords us
substantially greater pricing flexibility.
Under the rate regulations of the Federal Communication Commission, most
cable systems were required to reduce their basic service tier and cable
programming service tier rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carriage. The Federal Communications Commission
has modified its rate adjustment regulations to allow for annual rate increases
and to minimize previous problems associated with regulatory lag. Operators also
have the opportunity to bypass this "benchmark" regulatory scheme in favor of
traditional "cost-of-service" regulation in cases where the latter methodology
appears favorable. Cost of service regulation is a traditional form of rate
regulation, under which a utility is allowed to recover its costs of providing
the regulated service, plus a reasonable profit. The Federal Communications
Commission and Congress have provided various forms of rate relief for smaller
cable systems owned by smaller operators. Premium cable services offered on a
per-channel or per-program basis remain unregulated. However, federal law
requires that the basic service tier be offered to all cable subscribers and
limits the ability of operators to require purchase of any cable programming
service tier if a customer seeks to purchase premium services offered on a
per-channel or per-program basis, subject to a technology exception which
sunsets in 2002.
As noted above, Federal Communications Commission regulation of cable
programming service tier rates for all systems, regardless of size, sunset
pursuant to the 1996 Telecom Act on March 31,
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1999. As a result, the regulatory regime just discussed is now essentially
applicable only to the basic service tier and cable equipment. The 1996 Telecom
Act also relaxes existing "uniform rate" requirements by specifying that uniform
rate requirements do not apply where the operator faces "effective competition,"
and by exempting bulk discounts to multiple dwelling units, although complaints
about predatory pricing still may be made to the Federal Communications
Commission.
CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Telecom Act creates a more
favorable environment for us to provide telecommunications services beyond
traditional video delivery. It provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. A cable
operator is authorized under the 1996 Telecom Act to provide telecommunications
services without obtaining a separate local franchise. States are authorized,
however, to impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality, and consumer protection.
State and local governments also retain their authority to manage the public
rights-of-way and may require reasonable, competitively neutral compensation for
management of the public rights-of-way when cable operators provide
telecommunications service. The favorable pole attachment rates afforded cable
operators under federal law can be gradually increased by utility companies
owning the poles, beginning in 2001, if the operator provides telecommunications
service, as well as cable service, over its plant. The Federal Communications
Commission clarified that a cable operator's favorable pole rates are not
endangered by the provision of Internet access, but a recent decision by the
11th Circuit Court of Appeals disagreed and suggested that Internet traffic is
neither cable service nor telecommunications service and might leave cable
attachments that carry Internet traffic ineligible for Pole Attachment Act
protections.
Cable entry into telecommunications will be affected by the regulatory
landscape now being developed by the Federal Communications Commission and state
regulators. One critical component of the 1996 Telecom Act to facilitate the
entry of new telecommunications providers, including cable operators, is the
interconnection obligation imposed on all telecommunications carriers. The
Supreme Court upheld most of the Federal Communications Commission
interconnection regulations. Although these regulations should enable new
telecommunications entrants to reach viable interconnection agreements with
incumbent carriers, many issues, including which specific network elements the
Federal Communications Commission can mandate that incumbent carriers make
available to competitors, remain subject to administrative and judicial appeal.
If the Federal Communications Commission's current list of unbundled network
elements is upheld on appeal, it would make it easier for us to provide
telecommunications service.
INTERNET SERVICE. Although there is at present no significant federal
regulation of cable system delivery of Internet services, and the Federal
Communications Commission recently issued several reports finding no immediate
need to impose such regulation, this situation may change as cable systems
expand their broadband delivery of Internet services. In particular, proposals
have been advanced at the Federal Communications Commission and Congress that
would require cable operators to provide access to unaffiliated Internet service
providers and online service providers. The FCC recently rejected a petition by
certain Internet service providers attempting to use existing modes of access
that are commercially leased to gain access to cable system delivery. Finally,
some states and local franchising authorities are considering the imposition of
mandatory Internet access requirements as part of cable franchise renewals or
transfers and a few local jurisdictions have adopted these requirements. A
federal district court in Portland, Oregon recently upheld the legal ability of
local franchising authority to impose such conditions, but an appeal was filed
with the Ninth Circuit Court of Appeals, oral argument has been held and the
parties are awaiting a decision. Other local authorities have imposed or may
impose mandatory Internet access requirements on cable operators. These
developments could, if they become widespread, burden the capacity of cable
systems and complicate our own plans for providing Internet service.
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TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Telecom Act allows
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable cross-ownership ban. Local exchange carriers,
including the regional telephone companies, can now compete with cable operators
both inside and outside their telephone service areas with certain regulatory
safeguards. Because of their resources, local exchange carriers could be
formidable competitors to traditional cable operators. Various local exchange
carriers already are providing video programming services within their telephone
service areas through a variety of distribution methods, including both the
deployment of broadband wire facilities and the use of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers or any other cable
competitor providing video programming to subscribers through broadband wire
should be regulated as a traditional cable operator, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier or other cable competitor elects to deploy its broadband plant as an
open video system. To qualify for favorable open video system status, the
competitor must reserve two-thirds of the system's activated channels for
unaffiliated entities. The Fifth Circuit Court of Appeals reversed certain of
the Federal Communications Commission's open video system rules, including its
preemption of local franchising. The Federal Communications Commission recently
revised its OVS rules to eliminate this general preemption, thereby leaving
franchising discretion to state and local authorities. It is unclear what effect
this ruling will have on the entities pursuing open video system operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of co-located cable systems. Co-located cable
systems are cable systems serving an overlapping territory. Cable operator
buyouts of co-located local exchange carrier systems, and joint ventures between
cable operators and local exchange carriers in the same market are also
prohibited. The 1996 Telecom Act provides a few limited exceptions to this
buyout prohibition, including a carefully circumscribed "rural exemption." The
1996 Telecom Act also provides the Federal Communications Commission with the
limited authority to grant waivers of the buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The 1996
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services, including cable television,
notwithstanding the Public Utility Holding Company Act. Electric utilities must
establish separate subsidiaries, known as "exempt telecommunications companies"
and must apply to the Federal Communications Commission for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several such utilities have been granted broad authority by the Federal
Communications Commission to engage in activities which could include the
provision of video programming.
ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecom Act eliminates
statutory restrictions on broadcast/cable cross-ownership, including broadcast
network/cable restrictions, but leaves in place existing Federal Communications
Commission regulations prohibiting local cross-ownership between co-located
television stations and cable systems.
Pursuant to the 1992 Cable Act, the Federal Communications Commission
adopted rules precluding a cable system from devoting more than 40% of its
activated channel capacity to the carriage of affiliated national video program
services. Also pursuant to the 1992 Cable Act, the Federal Communications
Commission has adopted rules that preclude any cable operator from serving more
than 30% of all U.S. domestic multichannel video subscribers, including cable
and direct broadcast satellite subscribers. This provision might require AT&T to
divest certain cable ownership. However, this provision has been stayed pending
further judicial review.
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MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast
signal carriage requirements. Broadcast signal carriage is the transmission of
broadcast television signals over a cable system to cable customers. These
requirements, among other things, allow local commercial television broadcast
stations to elect once every three years between "must carry" status or
"retransmission consent" status. Less popular stations typically elect must
carry, which is the broadcast signal carriage requirement that allows local
commercial television broadcast stations to require a cable system to carry the
station. More popular stations, such as those affiliated with a national
network, typically elect retransmission consent which is the broadcast signal
carriage requirement that allows local commercial television broadcast stations
to negotiate for payments for granting permission to the cable operator to carry
the stations. Must carry requests can dilute the appeal of a cable system's
programming offerings because a cable system with limited channel capacity may
be required to forego carriage of popular channels in favor of less popular
broadcast stations electing must carry. Retransmission consent demands may
require substantial payments or other concessions. Either option has a
potentially adverse effect on our business. The burden associated with must
carry may increase substantially if broadcasters proceed with planned conversion
to digital transmission and the Federal Communications Commission determines
that cable systems must carry all analog and digital broadcasts in their
entirety. This burden would reduce capacity available for more popular video
programming and new internet and telecommunication offerings. A rulemaking is
now pending at the Federal Communications Commission regarding the imposition of
dual digital and analog must carry.
ACCESS CHANNELS. Local franchising authorities can include franchise
provisions requiring cable operators to set aside certain channels for public,
educational and governmental access programming. Federal law also requires cable
systems to designate a portion of their channel capacity, up to 15% in some
cases, for commercial leased access by unaffiliated third parties. The Federal
Communications Commission has adopted rules regulating the terms, conditions and
maximum rates a cable operator may charge for commercial leased access use. We
believe that requests for commercial leased access carriages have been
relatively limited. The Federal Communications Commission recently rejected a
request that unaffiliated Internet service providers be found eligible for
commercial leased access. Although we do not believe such use is in accord with
the governing statute, a contrary ruling, should the ruling be appealed, could
lead to substantial leased activity by Internet service providers and disrupt
our own plans for Internet service.
ACCESS TO PROGRAMMING. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes video programmers affiliated with cable companies from
favoring their cable operators over new competitors and requires such
programmers to sell their programming to other multichannel video distributors.
This provision limits the ability of vertically integrated cable programmers to
offer exclusive programming arrangements to cable companies. There also has been
interest expressed in further restricting the marketing practices of cable
programmers, including subjecting programmers who are not affiliated with cable
operators to all of the existing program access requirements, and subjecting
terrestrially delivered programming to the program access requirements.
Terrestrially delivered programming is programming delivered other than by
satellite. These changes should not have a dramatic impact on us, but would
limit potential competitive advantages we now enjoy. Pursuant to the Satellite
Home Viewer Improvement Act, the Federal Communications Commission has adopted
regulations governing retransmission consent negotiations between broadcasters
and all multichannel video programming distributors, including cable and DBS.
INSIDE WIRING; SUBSCRIBER ACCESS. In an order issued in 1997, the Federal
Communications Commission established rules that require an incumbent cable
operator upon expiration of a multiple dwelling unit service contract to sell,
abandon, or remove "home run" wiring that was installed by the
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cable operator in a multiple dwelling unit building. These inside wiring rules
are expected to assist building owners in their attempts to replace existing
cable operators with new programming providers who are willing to pay the
building owner a higher fee, where such a fee is permissible. The Federal
Communications Commission has also proposed abrogating all exclusive multiple
dwelling unit service agreements held by incumbent operators, but allowing such
contracts when held by new entrants. In another proceeding, the Federal
Communications Commission has preempted restrictions on the deployment of
private antenna on rental property within the exclusive use of a tenant, such as
balconies and patios. This Federal Communications Commission ruling may limit
the extent to which we along with multiple dwelling unit owners may enforce
certain aspects of multiple dwelling unit agreements which otherwise prohibit,
for example, placement of digital broadcast satellite receiver antennae in
multiple dwelling unit areas under the exclusive occupancy of a renter. These
developments may make it even more difficult for us to provide service in
multiple dwelling unit complexes.
OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION. In addition to
the Federal Communications Commission regulations noted above, there are other
regulations of the Federal Communications Commission covering such areas as:
- equal employment opportunity,
- subscriber privacy,
- programming practices, including, among other things,
(1) syndicated program exclusivity, which is a Federal Communications
Commission rule which requires a cable system to delete particular
programming offered by a distant broadcast signal carried on the
system which duplicates the programming for which a local broadcast
station has secured exclusive distribution rights,
(2) network program nonduplication,
(3) local sports blackouts,
(4) indecent programming,
(5) lottery programming,
(6) political programming,
(7) sponsorship identification,
(8) children's programming advertisements, and
(9) closed captioning,
- registration of cable systems and facilities licensing,
- maintenance of various records and public inspection files,
- aeronautical frequency usage,
- lockbox availability,
- antenna structure notification,
- tower marking and lighting,
- consumer protection and customer service standards,
- technical standards,
- consumer electronics equipment compatibility, and
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- emergency alert systems.
The Federal Communications Commission recently ruled that cable customers
must be allowed to purchase cable converters from third parties and established
a multi-year phase-in during which security functions, which would remain in the
operator's exclusive control, would be unbundled from basic converter functions,
which could then be satisfied by third party vendors. The first phase
implementation date is July 1, 2000 and compliance may be technically and
operationally difficult in some locations.
The Federal Communications Commission has the authority to enforce its
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of Federal Communications Commission licenses needed to
operate certain transmission facilities used in connection with cable
operations.
COPYRIGHT. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool, that varies depending on the size
of the system, the number of distant broadcast television signals carried, and
the location of the cable system, cable operators can obtain blanket permission
to retransmit copyrighted material included in broadcast signals. The possible
modification or elimination of this compulsory copyright license is the subject
of continuing legislative review and could adversely affect our ability to
obtain desired broadcast programming. We cannot predict the outcome of this
legislative activity. Copyright clearances for nonbroadcast programming services
are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers and
Broadcast Music, Inc. The cable industry has had a long series of negotiations
and adjudications with both organizations. A prior voluntarily negotiated
agreement with Broadcast Music has now expired, and is subject to further
proceedings. The governing rate court recently set retroactive and prospective
cable industry rates for American Society of Composers music based on the
previously negotiated Broadcast Music rate. Although we cannot predict the
ultimate outcome of these industry proceedings or the amount of any license fees
we may be required to pay for past and future use of association-controlled
music, we do not believe such license fees will be significant to our business
and operations.
STATE AND LOCAL REGULATION. Cable systems generally are operated pursuant
to nonexclusive franchises granted by a municipality or other state or local
government entity in order to cross public rights-of-way. Federal law now
prohibits local franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises. Cable franchises
generally are granted for fixed terms and in many cases include monetary
penalties for non-compliance and may be terminable if the franchisee failed to
comply with material provisions.
The specific terms and conditions of franchises vary materially between
jurisdictions. Each franchise generally contains provisions governing cable
operations, service rates, franchising fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states,
including Connecticut, subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. Although local franchising authorities have
considerable discretion in establishing franchise terms, there are certain
federal limitations. For example, local franchising authorities cannot insist on
franchise fees exceeding 5% of the system's gross cable-related revenues, cannot
dictate the particular technology used by the system, and cannot specify video
programming other than identifying broad categories
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of programming. Certain states are considering the imposition of new broadly
applied telecommunications taxes.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a local franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such local franchising authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for
consent. Historically, most franchises have been renewed for and consents
granted to cable operators that have provided satisfactory services and have
complied with the terms of their franchise.
Under the 1996 Telecom Act, states and local franchising authorities are
prohibited from limiting, restricting, or conditioning the provision of
competitive telecommunications services, except for certain "competitively
neutral" requirements and as necessary to manage the public rights-of-way. This
law should facilitate entry into competitive telecommunications services,
although certain jurisdictions still may attempt to impose rigorous entry
requirements. In addition, local franchising authorities may not require a cable
operator to provide any telecommunications service or facilities, other than
institutional networks under certain circumstances, as a condition of an initial
franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom
Act also provides that franchising fees are limited to an operator's
cable-related revenues and do not apply to revenues that a cable operator
derives from providing new telecommunications services.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Charter Holdings is a holding company with no operations. Charter Capital
is a direct wholly owned finance subsidiary of Charter Holdings that exists
solely for the purpose of serving as co-obligor of the notes and the March 1999
Charter Holdings notes and has no operations. Neither Charter Holdings nor
Charter Capital has any employees. We and our direct and indirect subsidiaries
are managed by Charter Communications, Inc. See "Certain Relationships and
Related Transactions."
The persons listed below are directors of Charter Communications, Inc.,
Charter Communications Holding Company, Charter Holdings or Charter Capital, as
indicated. Each of the directors is elected annually.
<TABLE>
<CAPTION>
DIRECTORS AGE POSITION
- - - --------- --- --------
<S> <C> <C>
Paul G. Allen............................. 47 Chairman of the Board of Directors of Charter
Communications, Inc. and Director of Charter
Communications Holding Company
Jerald L. Kent............................ 43 Director of Charter Communications, Inc., Charter
Communications Holding Company, Charter
Holdings and Charter Capital
Marc B. Nathanson......................... 54 Director of Charter Communications, Inc.
Ronald L. Nelson.......................... 47 Director of Charter Communications, Inc.
Nancy B. Peretsman........................ 46 Director of Charter Communications, Inc.
William D. Savoy.......................... 35 Director of Charter Communications, Inc., Charter
Communications Holding Company and Charter
Holdings
Howard L. Wood............................ 60 Director of Charter Communications, Inc.
</TABLE>
The following sets forth certain biographical information with respect to
the directors listed above.
PAUL G. ALLEN has been Chairman of the board of directors of Charter
Communications, Inc. since July 1999, and Chairman of the board of directors of
Charter Investment, Inc. since December 1998. Mr. Allen, a co-founder of
Microsoft Corporation, has been a private investor for more than five years,
with interests in a wide variety of companies, many of which focus on multimedia
digital communications. These companies include Interval Research Corporation,
Vulcan Ventures, Inc., Vulcan Programming, Inc., and Vulcan Cable III Inc. He is
a director of Microsoft Corporation, USA Networks, Inc. and various other
private corporations.
JERALD L. KENT has been the President, Chief Executive Officer and a
director of Charter Communications, Inc. since July 1999 and of Charter
Investment, Inc. since April 1995. He previously held the position of Chief
Financial Officer of Charter Investment, Inc. Prior to co-founding Charter
Investment, Inc. in 1993, Mr. Kent was Executive Vice President and Chief
Financial Officer of Cencom Cable Associates, Inc., where he previously held
other executive positions. Earlier he was with Arthur Andersen LLP, where he
attained the position of tax manager. Mr. Kent is a member of the board of
directors of High Speed Access Corp., Cable Television Laboratories, Inc. and
Com21 Inc. Mr. Kent, a certified public accountant, received his undergraduate
and M.B.A. degrees from Washington University.
MARC B. NATHANSON has been a director of Charter Communications, Inc. since
January 2000. Mr. Nathanson was Chairman and Chief Executive Officer of Falcon
Holding Group, Inc. and its
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predecessors from 1975 to 1999, and held the same positions with Enstar
Communications Corporation from 1988 until November 1999. Prior to 1975, he held
executive positions with Teleprompter Corporation, Warner Cable, and Cypress
Communications Corporation. He is a director of Digital Entertainment Network,
Inc. and of the National Cable Television Association and serves as Chairman of
U.S. International Broadcasting Agency.
RONALD L. NELSON has been a director of Charter Communications, Inc. since
November 1999. Mr. Nelson is a founding member of Dream Works LLC, where he has
served in executive management since 1994. Prior to that time, during his 15
years at Paramount Communications Inc., he served in a variety of operating and
executive positions. He currently serves as a member of the board of directors
of Advanced Tissue Sciences, Inc. Mr. Nelson has a B.S. from the University of
California at Berkeley and an M.B.A. from the University of California at Los
Angeles.
NANCY B. PERETSMAN has been a director of Charter Communications, Inc.
since November 1999. Ms. Peretsman has been a Managing Director and Executive
Vice President of Allen & Company Incorporated, an investment bank unrelated to
Mr. Allen, since 1995. From 1983 to 1995 she was an investment banker at Salomon
Brothers Inc., where she was a Managing Director since 1990. She is a director
of Oxygen Media, Inc., Priceline.com Incorporated and several privately held
companies. She received a B.A. from Princeton University and an M.P.P.M. from
Yale University.
WILLIAM D. SAVOY has been a director of Charter Communications, Inc. since
July 1999 and a director of Charter Investment, Inc. since December 1998. Since
1990, Mr. Savoy has been an officer and a director of many affiliates of Mr.
Allen, including Vice President and a director of Vulcan Ventures, Inc.,
President of Vulcan Northwest, Inc., and President and a director of Vulcan
Programming, Inc. and Vulcan Cable III Inc. Mr. Savoy also serves as a director
of drugstore.com, inc., Go2Net, Inc., Harbinger Corporation, High Speed Access
Corp., Metricom, Inc., Telescan, Inc., Ticketmaster Online -- CitySearch, Inc.,
USA Networks, Inc., and Value America, Inc. Mr. Savoy holds a B.S. in computer
science, accounting and finance from Atlantic Union College.
HOWARD L. WOOD has been a director of Charter Communications, Inc. since
January 2000. Mr. Wood co-founded Charter Investment, Inc. in 1993 and served in
various executive capacities until November 1999, when he became a consultant to
Charter Communications, Inc. Prior to 1993, Mr. Wood was Chief Executive Officer
of Cencom Cable Associates, Inc., where he also served in various other
executive positions. Earlier he was Partner-in-Charge of the St. Louis Tax
Division of Arthur Andersen LLP. He is a director of VanLiner Group, Inc., First
State Community Bank, Gaylord Entertainment Company and Data Research, Inc. Mr.
Wood, a certified public accountant, graduated from Washington University (St.
Louis) School of Business.
DIRECTOR COMPENSATION
The employee directors of Charter Holdings, Charter Capital, Charter
Communications Holding Company and Charter Communications, Inc. do not receive
any additional compensation for serving as a director, nor are they paid any
fees for attendance at any meeting of the board of directors. Each non-employee
director of Charter Communications, Inc., other than Mr. Allen, has been issued
40,000 fully vested options in consideration for agreeing to join the board of
directors and may receive additional compensation to be determined. Directors
may also be reimbursed for the actual reasonable costs incurred in connection
with attendance at board meetings.
EMPLOYMENT AND OTHER AGREEMENTS
Effective as of December 23, 1998, Jerald L. Kent entered into an
employment agreement with Mr. Allen for a three-year term with automatic
one-year renewals. The employment agreement was
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assigned by Mr. Allen to Charter Investment, Inc. as of December 23, 1998.
Charter Investment, Inc. subsequently assigned Mr. Kent's employment agreement
to Charter Communications, Inc. and Charter Communications, Inc. has assumed all
rights and obligations of Charter Investment, Inc. under the agreement, except
with respect to the grant of options, which have already been granted by Charter
Communications Holding Company.
Under this agreement, Mr. Kent has agreed to serve as President and Chief
Executive Officer of Charter Communications, Inc., with responsibility for the
nationwide general management, administration and operation of all present and
future business of Charter Communications, Inc. and its subsidiaries. During the
initial term of the agreement, Mr. Kent receives an annual base salary of
$1,250,000, or such higher rate as may from time to time be determined by
Charter Communications, Inc.'s board of directors in its discretion. In
addition, Mr. Kent is eligible to receive an annual bonus in an aggregate amount
not to exceed $625,000, to be determined by the board based on an assessment of
the performance of Mr. Kent as well as the achievement of certain financial
targets.
Under the agreement, Mr. Kent is entitled to participate in any disability
insurance, pension, or other benefit plan afforded to employees generally or
executives of Charter Communications, Inc. Mr. Kent will be reimbursed by
Charter Communications, Inc. for life insurance premiums up to $30,000 per year,
and is granted personal use of the corporate airplane. Mr. Kent was also granted
a car valued at up to $100,000 and the fees and dues for his membership in a
country club of his choice. Also under this agreement and a related agreement
with Charter Communications Holding Company, Mr. Kent received options to
purchase 7,044,127 Charter Communications Holding Company membership units. The
options have a term of ten years and vested 25% on December 23, 1998. The
remaining 75% vest 1/36 on the first day of each of the 36 months commencing on
the first day of the thirteenth month following December 23, 1998. The terms of
these options provide that immediately following the issuance of Charter
Communications Holding Company membership units received upon exercise of such
options, these units will be automatically exchanged for shares of Charter
Communications, Inc. Class A common stock on a one-for-one basis.
Charter Communications, Inc. will indemnify and hold harmless Mr. Kent to
the maximum extent permitted by law from and against any claims, damages,
liabilities, losses, costs or expenses in connection with or arising out of the
performance by Mr. Kent of his duties.
If the agreement expires because Charter Communications, Inc. gives Mr.
Kent notice of its intention not to extend the initial term, or if the agreement
is terminated by Mr. Kent for good reason or by Charter Communications, Inc.
without cause:
- Charter Communications, Inc. will pay to Mr. Kent an amount equal to the
aggregate base salary due to Mr. Kent for the remaining term and the
board of directors will consider additional amounts, if any, to be paid
to Mr. Kent; and
- any unvested options of Mr. Kent shall immediately vest.
EXECUTIVE OFFICERS
The following persons are executive officers of each of Charter
Communications, Inc., Charter Communications Holding Company and Charter
Holdings:
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AGE POSITION
------------------ --- --------
<S> <C> <C>
Jerald L. Kent......................... 43 President and Chief Executive Officer
David G. Barford....................... 41 Senior Vice President of Operations -- Western
Division
Mary Pat Blake......................... 44 Senior Vice President -- Marketing and Programming
Eric A. Freesmeier..................... 47 Senior Vice President -- Administration
</TABLE>
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<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AGE POSITION
------------------ --- --------
<S> <C> <C>
Thomas R. Jokerst...................... 50 Senior Vice President -- Advanced Technology
Development
Kent D. Kalkwarf....................... 40 Senior Vice President and Chief Financial Officer
Ralph G. Kelly......................... 43 Senior Vice President -- Treasurer
David L. McCall........................ 44 Senior Vice President of Operations -- Eastern
Division
John C. Pietri......................... 50 Senior Vice President -- Engineering
Michael E. Riddle...................... 41 Senior Vice President and Chief Information Officer
Steven A. Schumm....................... 47 Executive Vice President, Assistant to the President
Curtis S. Shaw......................... 51 Senior Vice President, General Counsel and Secretary
Stephen E. Silva....................... 40 Senior Vice President -- Corporate Development and
Technology
</TABLE>
Information regarding our executive officers is set forth below.
Our executive officers, except for Mr. Riddle, were appointed to their
positions following our formation in February 1999, and became employees of
Charter Communications, Inc. in November 1999. Prior to that time, they were
employees of Charter Investment, Inc. All of our executive officers
simultaneously serve in the same capacity with Charter Investment, Inc.
JERALD L. KENT, President, Chief Executive Officer and director of Charter
Communications, Inc. Mr. Kent has held these positions with Charter
Communications, Inc. since July 1999 and with Charter Investment, Inc. since
April 1995. He previously held the position of Chief Financial Officer of
Charter Investment, Inc. Prior to co-founding Charter Investment, Inc. in 1993,
Mr. Kent was Executive Vice President and Chief Financial Officer of Cencom
Cable Associates, Inc., where he previously held other executive positions.
Earlier he was with Arthur Andersen LLP, where he attained the position of tax
manager. Mr. Kent is a member of the board of directors of High Speed Access
Corp., Cable Television Laboratories, Inc. and Com21 Inc. Mr. Kent, a certified
public accountant, received his undergraduate and M.B.A. degrees from Washington
University.
DAVID G. BARFORD, Senior Vice President of Operations -- Western
Division. Prior to joining Charter Investment, Inc. in 1995, Mr. Barford held
various senior marketing and operating roles during nine years at Comcast Cable
Communications, Inc. He received a B.A. from California State University,
Fullerton, and an M.B.A. from National University.
MARY PAT BLAKE, Senior Vice President -- Marketing and Programming. Prior
to joining Charter Investment, Inc. in 1995, Ms. Blake was active in the
emerging business sector and formed Blake Investments, Inc. in 1993. She has 18
years of experience with senior management responsibilities in marketing, sales,
finance, systems, and general management. Ms. Blake received a B.S. from the
University of Minnesota and an M.B.A. from the Harvard Business School.
ERIC A. FREESMEIER, Senior Vice President -- Administration. From 1986
until joining Charter Investment, Inc. in 1998, Mr. Freesmeier served in various
executive management positions at Edison Brothers Stores, Inc. Earlier he held
management and executive positions at Montgomery Ward. Mr. Freesmeier holds
bachelor's degrees from the University of Iowa and a master's degree from
Northwestern University's Kellogg Graduate School of Management.
THOMAS R. JOKERST, Senior Vice President -- Advanced Technology
Development. Mr. Jokerst joined Charter Investment, Inc. in 1994. Previously he
served as a vice president of Cable Television Laboratories and as a regional
director of engineering for Continental Cablevision. He is a graduate of Ranken
Technical Institute and of Southern Illinois University.
KENT D. KALKWARF, Senior Vice President and Chief Financial Officer. Prior
to joining Charter Investment, Inc. in 1995, Mr. Kalkwarf was employed for 13
years by Arthur Andersen LLP, where
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he attained the position of senior tax manager. He has extensive experience in
cable, real estate, and international tax issues. Mr. Kalkwarf has a B.S. from
Illinois Wesleyan University and is a certified public accountant.
RALPH G. KELLY, Senior Vice President --Treasurer. Prior to joining
Charter Investment, Inc. in 1993, Mr. Kelly was controller and then treasurer of
Cencom Cable Associates. He left Charter in 1994, to become chief financial
officer of CableMaxx, Inc., and returned in 1996. Mr. Kelly received his
bachelor's degree in accounting from the University of Missouri -- Columbia and
his M.B.A. from Saint Louis University.
DAVID L. MCCALL, Senior Vice President of Operations -- Eastern
Division. Prior to joining Charter Investment, Inc. in 1995, Mr. McCall was
associated with Crown Cable and its predecessor company, Cencom Cable
Associates, Inc., from 1983 to 1994. Mr. McCall has served as a director of the
South Carolina Cable Television Association for ten years and is a member of the
Southern Cable Association's Tower Club.
JOHN C. PIETRI, Senior Vice President -- Engineering. Prior to joining
Charter Investment, Inc. in 1998, Mr. Pietri was with Marcus Cable for 9 years,
most recently serving as senior vice president and chief technical officer.
Earlier he was in operations with West Marc Communications and Minnesota Utility
Contracting. Mr. Pietri attended the University of Wisconsin-Oshkosh.
MICHAEL E. RIDDLE, Senior Vice President and Chief Information
Officer. Prior to joining Charter Communications, Inc. in December 1999, Mr.
Riddle was director, applied technologies of Cox Communications for 4 years.
Prior to that, he held technical and management positions during 17 years at
Southwestern Bell and its subsidiaries. Mr. Riddle attended Fort Hays State
University.
STEVEN A. SCHUMM, Executive Vice President, Assistant to the
President. Prior to joining Charter Investment, Inc. in 1998, Mr. Schumm was
managing partner of the St. Louis office of Ernst & Young LLP, where he was a
partner for 14 of 24 years. He served as one of 10 members of the firm's
National Tax Committee. Mr. Schumm earned a B.S. degree from Saint Louis
University.
CURTIS S. SHAW, Senior Vice President, General Counsel and
Secretary. Prior to joining Charter Investment, Inc. in 1997, Mr. Shaw served
as corporate counsel to NYNEX since 1988. He has over 26 years of experience as
a corporate lawyer, specializing in mergers and acquisitions, joint ventures,
public offerings, financings, and federal securities and antitrust law. Mr. Shaw
received a B.A. with honors from Trinity College and a J.D. from Columbia
University School of Law.
STEPHEN E. SILVA, Senior Vice President -- Corporate Development and
Technology. From 1983 until joining Charter Investment, Inc. in 1995, Mr. Silva
served in various management positions at U.S. Computer Services, Inc. He is a
member of the board of directors of High Speed Access Corp.
The employee directors of Charter Communications, Inc. do not receive any
compensation for serving as a director, nor are they paid any fees for
attendance at any meeting of the board of directors. Each non-employee director
other than Mr. Allen has been issued 40,000 options in connection with joining
or agreeing to join the board of directors and may receive additional
compensation to be determined. Directors may also be reimbursed for the actual
reasonable costs incurred in connection with attendance at board meetings.
EMPLOYMENT AND CONSULTING AGREEMENTS
Effective as of December 23, 1998, Jerald L. Kent entered into an
employment agreement with Mr. Allen for a three-year term with automatic
one-year renewals. The employment agreement was assigned by Mr. Allen to Charter
Investment, Inc. as of December 23, 1998. Charter Investment, Inc. subsequently
assigned Mr. Kent's employment agreement to Charter Communications, Inc. and
Charter Communications, Inc. has assumed all rights and obligations of Charter
Investment, Inc.
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<PAGE> 120
under the agreement, except with respect to the grant of options which have
already been granted by Charter Communications Holding Company.
Under this agreement, Mr. Kent has agreed to serve as President and Chief
Executive Officer of Charter Communications, Inc., with responsibility for the
nationwide general management, administration and operation of all present and
future business of Charter Communications, Inc. and its subsidiaries. During the
initial term of the agreement, Mr. Kent receives an annual base salary of
$1,250,000, or such higher rate as may from time to time be determined by
Charter Communications, Inc.'s board of directors in its discretion. In
addition, Mr. Kent is eligible to receive an annual bonus in an aggregate amount
not to exceed $625,000, to be determined by the board based on an assessment of
the performance of Mr. Kent as well as the achievement of certain financial
targets.
Under the agreement, Mr. Kent is entitled to participate in any disability
insurance, pension, or other benefit plan afforded to employees generally or
executives of Charter Communications, Inc. Mr. Kent will be reimbursed by
Charter Communications, Inc. for life insurance premiums up to $30,000 per year,
and is granted personal use of the corporate airplane. Mr. Kent was also granted
a car valued at up to $100,000 and the fees and dues for his membership in a
country club of his choice. Also under this agreement and a related agreement
with Charter Communications Holding Company, Mr. Kent received options to
purchase 7,044,127 Charter Communications Holding Company membership units. The
options have a term of ten years and vested 25% on December 23, 1998. The
remaining 75% vest 1/36 on the first day of each of the 36 months commencing on
the first day of the thirteenth month following December 23, 1998. The terms of
these options provide that immediately following the issuance of Charter
Communications Holding Company membership units received upon exercise of such
options, these units will be automatically exchanged for shares of Charter
Communications, Inc. Class A common stock on a one-for-one basis. Charter
Communications, Inc. will indemnify and hold harmless Mr. Kent to the maximum
extent permitted by law from and against any claims, damages, liabilities,
losses, costs or expenses in connection with or arising out of the performance
by Mr. Kent of his duties.
If the agreement expires because Charter Communications, Inc. gives Mr.
Kent notice of its intention not to extend the initial term, or if the agreement
is terminated by Mr. Kent for good reason or by Charter Communications, Inc.
without cause:
- Charter Communications, Inc. will pay to Mr. Kent an amount equal to the
aggregate base salary due to Mr. Kent for the remaining term and the
board of directors will consider additional amounts, if any, to be paid
to Mr. Kent; and
- any unvested options of Mr. Kent shall immediately vest.
Effective as of November 12, 1999, Charter Communications, Inc. entered
into a consulting agreement with Howard L. Wood. In connection with this
agreement, Mr. Wood received options to purchase 40,000 membership units of
Charter Communications Holding Company, which vested immediately. Upon exercise
of such options, the membership units received are immediately exchanged for
shares of Charter Communications, Inc. Class A common stock on one-for-one
basis. The consulting agreement has a one-year term with automatic one-year
renewals. Under this agreement, Mr. Wood provides consulting services to Charter
Communications, Inc. and will also be responsible for such other duties as the
Chief Executive Officer determines. During the term of this agreement, Mr. Wood
will receive annual cash compensation initially at a rate of $60,000. In
addition, Mr. Wood is entitled to receive health benefits as well as use of an
office and a full-time secretary. Charter Communications, Inc. will indemnify
and hold harmless Mr. Wood to the maximum extent permitted by law from and
against any claims, damages, liabilities, losses, costs or expenses incurred in
connection with or arising out of the performance by him of his duties.
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<PAGE> 121
Effective as of May 25, 1999, Marc B. Nathanson entered into a letter
agreement with Charter Communications, Inc. for a three-year term. Under this
agreement, Mr. Nathanson agreed to serve as Vice-Chairman and as a director of
Charter Communications, Inc. During the term of this agreement, Mr. Nathanson
will receive a benefit equal to $193,197 per year, which amount is being paid by
Charter Communications, Inc. to a company controlled by Mr. Nathanson. In
addition, Mr. Nathanson is entitled to the rights and benefits provided to other
directors of Charter Communications, Inc. Charter Communications, Inc. will
indemnify and hold harmless Mr. Nathanson to the maximum extent permitted by law
from and against any claims, damages, liabilities, losses, costs or expenses
incurred in connection with or arising out of the performance by Mr. Nathanson
of his duties.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Most executive officer compensation determinations have been made based
upon the recommendations of Mr. Kent. Prior to November 1999, these
determinations were made by the board of directors of Charter Investment, with
option grant determinations being made in conjunction with the board of
directors of Charter Communications Holding Company. During this period, the
board of Charter Investment included Messrs. Allen, Savoy and Kent, and the
board of Charter Communications Holding Company included Messrs. Savoy and Kent.
Commencing in November 1999, when Charter Communications, Inc. became the
successor principal employer of the executive officers, the board of directors
of Charter Communications, Inc. took over the role of the Charter Investment
board in the decision-making process. In November 1999, the board of directors
of Charter Communications, Inc. was comprised of Messrs. Allen, Savoy, Kent and
Nelson, and Ms. Peretsman. Commencing in February 2000, when the Charter
Communications, Inc. board of directors appointed a compensation committee
comprised of Messrs. Allen, Savoy, Nathanson and Wood, executive officers
compensation matters, including option grants, were delegated to the new
committee.
EXECUTIVE COMPENSATION
None of the executive officers listed above has ever received any
compensation from Charter Holdings or Charter Capital, nor do such individuals
expect to receive compensation from Charter Holdings or Charter Capital at any
time in the future. The following table sets forth information regarding the
compensation paid to executive officers of Charter Communications, Inc., the
manager of Charter Holdings and its subsidiaries, during the fiscal years ended
December 31, 1999 and 1998, including the Chief Executive Officer, each of the
other four most highly compensated executive officers as of December 31, 1999,
and two other highly compensated executive officers who resigned during 1999.
Through the beginning of November 1999, such executive officers had received
their compensation from Charter Investment, Inc., the former manager of Charter
Holdings and its subsidiaries. Effective in November 1999, such officers began
receiving their compensation from Charter Communications, Inc. Pursuant to a
mutual services agreement between Charter Communications, Inc. and Charter
Investment, Inc., each of those entities provides services to each other,
including the knowledge and expertise of their respective officers. See "Certain
Relationships and Related Transactions."
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<PAGE> 122
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARD
--------------------------------------- ------------
YEAR OTHER SECURITIES
ENDED ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION DEC. 31 SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- - - --------------------------- ------- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Jerald L. Kent.................... 1999 1,250,000 --(1) 80,799(2) -- --
President and Chief Executive 1998 790,481 641,353 -- 7,044,127 --
Officer
Steven A. Schumm(3)............... 1999 400,000 60,000 -- 80,000 --
Executive Vice President 1998 -- 12,300 -- -- --
David G. Barford.................. 1999 235,000 80,000 -- 200,000 --
Senior Vice President of 1998 220,000 225,000(4) -- -- 8,390,888(5)
Operations -- Western Division
Curtis S. Shaw.................... 1999 200,000 80,000 -- 200,000 --
Senior Vice President, General 1998 190,000 80,000 -- -- 8,178,967(5)
Counsel and Secretary
John C. Pietri(6)................. 1999 200,000 70,000 -- 165,000 --
Senior Vice President -- 1998 -- -- -- -- --
Engineering
Barry L. Babcock(7)............... 1999 623,000 -- -- 65,000 385,093(8)
Former Vice Chairman 1998 575,000 925,000(9) -- -- --
Howard L. Wood(10)................ 1999 311,300 -- -- 145,000 --
Former Vice Chairman 1998 575,000(11) 675,000(12) -- -- --
</TABLE>
- - - -------------------------
(1) Mr. Kent is entitled under his employment agreement to receive a bonus for
1999 in an amount up to $625,000. The amount of any 1999 bonus has not yet
been determined.
(2) Includes $55,719 paid for club membership and dues and $20,351 attributed
to personal use of Charter Investment, Inc.'s airplane.
(3) Mr. Schumm became affiliated with Charter Investment, Inc. on December 16,
1998.
(4) Includes $150,000 received as a one-time bonus.
(5) Received in March 1999, in connection with a one-time change of control
payment under the terms of a previous equity appreciation rights plan. This
payment was triggered by the acquisition of us by Mr. Allen on December 23,
1998, but was income for 1999.
(6) Mr. Pietri became affiliated with Charter Investment, Inc. on January 1,
1999.
(7) Mr. Babcock resigned as an executive officer, terminated his employment and
became a consultant in October 1999.
(8) Includes a bonus of $312,500 and accrued vacation of $48,077 paid in
connection with termination of Mr. Babcock's employment agreement, plus
$24,516 as consulting fees.
(9) Includes $500,000 earned as a one-time bonus upon signing of an employment
agreement.
(10) Mr. Wood resigned as an executive officer, terminated his employment and
became a consultant in November 1999.
(11) Includes a bonus of $468,750 and accrued vacation of $24,038 paid in
connection with termination of Mr. Wood's employment agreement, plus $8,166
in consulting fees.
(12) Includes $250,000 earned as a one-time bonus upon signing of an employment
agreement.
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<PAGE> 123
1999 AGGREGATED OPTION EXERCISES AND OPTION VALUE TABLE
The following table sets forth for certain executive officers information
concerning options exercised during 1999, including the value realized upon
exercise, and the number of securities for which options were held at December
31, 1999, including the value of unexercised "in-the-money" options (i.e., the
positive spread between the exercise price of outstanding options and the market
value of Charter Communications, Inc.'s Class A common stock on December 31,
1999), the options granted during the fiscal year ended December 31, 1999, and
the value of unexercised options as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SECURITIES AT DECEMBER 31, 1999 DECEMBER 31, 1999(1)
ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jerald L. Kent.......... -- -- 1,761,031 5,283,096 -- --
David G. Barford........ -- -- -- 200,000 -- --
Curtis S. Shaw.......... -- -- -- 200,000 -- --
John C. Pietri.......... -- -- -- 165,000 -- --
Barry L. Babcock........ -- -- 65,000 -- -- --
Howard L. Wood.......... -- -- 145,000 -- -- --
</TABLE>
- - - ---------------
(1) No options were in-the-money as of December 31, 1999.
1999 OPTION GRANTS
The following table shows individual grants of options made to certain
named executive officers during 1999. All such grants were made under the option
plan.
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE VALUE AT
MEMBERSHIP % OF TOTAL ASSUMED ANNUAL RATES OF
UNITS OPTIONS MEMBERSHIP UNIT PRICE
UNDERLYING GRANTED TO APPRECIATION FOR OPTION TERM(1)
OPTIONS EMPLOYEES EXERCISE EXPIRATION --------------------------------
NAME GRANTED IN 1999 PRICE DATE 5% 10%
- - - ---- ---------- ---------- -------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jerald L. Kent..................... -- -- -- -- -- --
Steven A. Schumm................... 782,681 5.7% $20.00 2/8/09 $9,844,478 $24,947,839
David G. Barford................... 200,000 1.5% 20.00 2/8/09 2,515,579 6,374,970
Curtis S. Shaw..................... 200,000 1.5% 20.00 2/8/09 2,515,579 6,374,970
John C. Pietri..................... 165,000 1.2% 20.00 2/8/09 2,075,352 5,259,350
Barry L. Babcock................... 65,000 0.5% 20.00 2/8/09 817,563 2,071,865
Howard L. Wood..................... 65,000 1.1% 20.00 2/8/09 817,563 2,071,865
80,000 19.00 11/8/09 955,920 2,422,488
</TABLE>
- - - ---------------
(1) This column shows the hypothetical gains on the options granted based on
assumed annual compound price appreciation of 5% and 10% over the full
ten-year term of the options. The assumed rates of appreciation are mandated
by the SEC and do not represent our estimate or projection of future prices.
OPTION PLAN
The Charter Communications Option Plan was adopted in February 1999. This
plan provides for the grant of options to purchase up to 25,009,798 membership
units in Charter Communications Holding Company. Under the terms of the plan,
each membership unit acquired as a result of exercise of options will be
exchanged automatically for shares of Class A common stock of Charter
Communications, Inc. on a one-for-one basis. The plan provides for grants of
options to current and
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<PAGE> 124
prospective to employees and consultants of Charter Communications Holding
Company and its affiliates and current and prospective non-employee directors of
Charter Communications, Inc. The plan is intended to promote the long-term
financial interest of Charter Communications Holding Company and its affiliates
by encouraging eligible individuals to acquire an ownership position in Charter
Communications Holding Company and its affiliates and providing incentives for
performance. The options expire after ten years from the date of grant. Under
the plan, the plan administrator has the discretion to accelerate the vesting of
any options.
As of March 31, 2000, a total of 18,972,081 options are outstanding under
the plan. Of the options granted on February 9, 1999, there remain outstanding
8,478,881 options with an exercise price of $20.00. Of the options granted on
April 5, 1999, there remain outstanding 395,800 options with an exercise price
of $20.73. Of the options granted on November 8, 1999, there remain outstanding
4,530,800 options with an exercise price of $19.00. Of the options granted on
February 15, 2000, there remain outstanding 5,566,600 with an exercise price of
$19.47. Of the options granted on February 9, 1999, 130,000 options have vested.
Of the remaining 8,348,881 options granted on that date, one-fourth vest on
April 3, 2000 and the remainder vest 1/45 on each monthly anniversary following
April 3, 2000. One-fourth of the options granted on April 5, 1999 vest on the
15-month anniversary from April 5, 1999, with the remainder vesting 1/45 on each
monthly anniversary for 45 months following the 15-month anniversary of the date
of grant. Of the options granted on November 8, 1999, 240,000 options have
vested. Of the remaining 4,290,800 options granted on that date, one-fourth vest
on February 8, 2001, with the remainder vesting 1/45 on each monthly anniversary
following the 15-month anniversary of the date of grant. Of the options granted
on February 15, 2000, one-fourth vest on May 15, 2001 and the remaining vest
1/45 on each 15 month anniversary following February 15, 2000. The options
expire after ten years from the date of grant.
Any unvested options issued under the plan vest immediately upon a change
of control of Charter Communications Holding Company. Options will not vest upon
a change of control, however, to the extent that any such acceleration of
vesting would result in the disallowance of specified tax deductions that would
otherwise be available to Charter Communications Holding Company or any of its
affiliates or to the extent that any optionee would be liable for any excise tax
under a specified section of the tax code. In the plan, a change of control
includes:
(1) a sale of more than 49.9% of the outstanding membership units in
Charter Communications Holding Company, except where Mr. Allen and his
affiliates retain effective voting control of Charter Communications
Holding Company;
(2) a merger or consolidation of Charter Communications Holding
Company with or into any other corporation or entity, except where Mr.
Allen and his affiliates retain effective voting control of Charter
Communications Holding Company; or
(3) any other transaction or event, including a sale of the assets of
Charter Communications Holding Company, that results in Mr. Allen holding
less than 50.1% of the voting power of the surviving entity, except where
Mr. Allen and his affiliates retain effective voting control of Charter
Communications Holding Company.
If an optionee's employment with or service to Charter Communications
Holding Company or its affiliates is terminated other than for cause, the
optionee has the right to exercise any vested options within sixty days of the
termination of employment. After this sixty-day period, all vested and unvested
options held by the optionee are automatically canceled. If an optionee's
employment or service is terminated for cause, any unexercised options are
automatically canceled. In this case, Mr. Allen, or, at his option, Charter
Communications Holding Company will have the right for ninety days after
termination to purchase all membership units held by the optionee for a purchase
price equal to the exercise price at which the optionee acquired the membership
units, or the optionee's purchase price for the membership units if they were
not acquired on the exercise of an option.
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<PAGE> 125
In the event of an optionee's death or disability, all vested options may
be exercised until the earlier of their expiration and one year after the date
of the optionee's death or disability. Any options not so exercised will
automatically be canceled. Upon termination for any other reason, all unvested
options will immediately be canceled and the optionee will not be entitled to
any payment. All vested options will be automatically canceled if not exercised
within ninety days after termination.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS. The limited
liability company agreement of Charter Holdings and the certificate of
incorporation of Charter Capital limit the liability of their respective
directors to the maximum extent permitted by Delaware law. The Delaware General
Corporation Law provides that a limited liability company and a corporation may
eliminate or limit the personal liability of a director for monetary damages for
breach of fiduciary duty as a director, except for liability for:
(1) any breach of the director's duty of loyalty to the corporation
and its stockholders;
(2) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) unlawful payments of dividends or unlawful stock purchases or
redemptions; or
(4) any transaction from which the director derived an improper
personal benefit.
The limited liability company agreement of Charter Holdings and the by-laws
of Charter Capital provide that directors and officers shall be indemnified for
acts or omissions performed or omitted that are determined, in good faith, to be
in our best interest. No such indemnification is available for actions
constituting bad faith, willful misconduct or fraud.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Charter Holdings
and Charter Capital pursuant to the foregoing provisions, we have been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
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PRINCIPAL EQUITY HOLDERS
Charter Holdings is a direct, wholly owned subsidiary of Charter
Communications Holding Company. Charter Communications, Inc. holds an
approximate 39.6% economic interest and 100% of the voting interest in Charter
Communications Holding Company. Charter Investment, Inc. and Vulcan Cable III
hold approximately a 38.8% and 19.0% economic interest, respectively, in Charter
Communications Holding Company.
The following table sets forth certain information regarding beneficial
ownership of Charter Communications, Inc. common stock and Charter
Communications Holding Company common membership units as of April 1, 2000 by:
- each of our directors and the directors of Charter Communications, Inc.;
- each of our named executive officers and the named executive officers of
Charter Communications, Inc.;
- all current directors and executive officers of Charter Holdings and
Charter Communications, Inc. as a group; and
- each person known by us to own beneficially 5% or more of the outstanding
shares of Charter Communications, Inc. common stock and shares of common
stock issuable upon exchange of Charter Communications Holding Company
membership units that are issuable upon exercise of options that are
vested or will vest within 60 days or upon exchange of membership units
held in a subsidiary of Charter Holdings.
With respect to the percentage of voting power of Charter Communications,
Inc. set forth in the following table:
- each holder of Class A common stock is entitled to one vote per share;
and
- each holder of Class B common stock is entitled to a number of votes
based on the number of outstanding Class B common stock and outstanding
membership units exchangeable for Class B common stock. For example, Mr.
Allen is entitled to ten votes for each share of Class B common stock
held by him or his affiliates and ten votes for each membership unit held
by him or his affiliates.
<TABLE>
<CAPTION>
NUMBER OF
CLASS A PERCENTAGE OF
NAME AND ADDRESS OF SHARES BENEFICIALLY SHARES BENEFICIALLY PERCENTAGE OF
BENEFICIAL OWNER OWNED(1) OWNED(2) VOTING POWER(3)
- - - ------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
Paul G. Allen(4)(5)(7)............................ 327,039,404 59.9% 93.7%
Charter Investment, Inc.(6)....................... 217,585,246 49.5% *
Vulcan Cable III Inc.(4)(7)....................... 106,715,234 32.5% *
Jerald L. Kent(8)................................. 2,656,549 1.2% *
Howard L. Wood(9)................................. 145,000 * *
Marc B. Nathanson(10)............................. 9,829,806 4.4% *
Ronald L. Nelson(11).............................. 40,000 * *
Nancy B. Peretsman(11)............................ 50,000 * *
William D. Savoy(12).............................. 515,669 * *
Steven A. Schumm(13).............................. 212,415 * *
David G. Barford(14).............................. 55,833 * *
Curtis S. Shaw(14)................................ 58,333 * *
John C. Pietri(15)................................ 49,000 * *
Barry L. Babcock(16).............................. 65,000 * *
</TABLE>
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<PAGE> 127
<TABLE>
<CAPTION>
NUMBER OF
CLASS A PERCENTAGE OF
NAME AND ADDRESS OF SHARES BENEFICIALLY SHARES BENEFICIALLY PERCENTAGE OF
BENEFICIAL OWNER OWNED(1) OWNED(2) VOTING POWER(3)
- - - ------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
All current directors and executive officers as a
group (19 persons)(17).......................... 340,631,014 61.9% 94.0%
Janus Capital Corporation(18)..................... 15,958,030 7.2 *
TCID of Michigan, Inc.(19)........................ 15,117,743 6.4% *
</TABLE>
- - - ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with Rule 13d-3. The named
holders of Charter Communications, Inc. Class B common stock and of Charter
Communications Holding Company membership units are deemed to be beneficial
owners of an equal number of shares of Charter Communications, Inc. Class A
common stock because such holdings are either convertible for (in the case
of Class B shares) or exchangeable into (in the case of the membership
units) shares of Class A common stock on a one-for-one basis. Unless
otherwise noted, the named holders have sole investment and voting power
with respect to the shares listed as beneficially owned.
(2) The calculation of this percentage assumes for each person that: the 50,000
shares of Class B common stock held by Mr. Allen have been converted into
shares of Class A common stock; all shares of Class A common stock that
such person has the right to acquire upon exchange of Charter
Communications Holding Company membership units upon exercise of options
that have vested or will vest within 60 days have been acquired; and that
none of the other listed persons or entities has received any shares of
common stock that are issuable to him or her pursuant to the exercise of
options or otherwise.
(3) The calculation of this percentage assumes that Mr. Allen's equity
interests are retained in the form that maximizes voting power (i.e., the
50,000 shares of Class B common stock held by Mr. Allen have not been
converted into shares of Class A common stock; that the membership units of
Charter Communications Holding Company owned by Vulcan Cable III have not
been exchanged for shares of Class A common stock; and that the membership
units of Charter Communications Holding Company owned by Charter
Investment, Inc. have not been exchanged for shares of Class A common
stock).
(4) The address of these persons is 110 110th Street, NE, Suite 550, Bellevue,
WA 98004.
(5) Mr. Allen is the owner of 100% of the Class B common stock which is
convertible into Class A common stock on a one-for-one basis; represents
217,585,246 membership units held by Charter Investment, Inc.; 106,715,233
membership units held by Vulcan Cable III; 2,688,925 shares of Class A
common stock held directly by Mr. Allen; and 50,000 shares of Class B
common stock held directly by Mr. Allen.
(6) The address of this person is Charter Communications, Inc., 12444
Powerscourt Drive, Suite 100, St. Louis, MO 63131.
(7) Of this amount, 475,669 shares of Class A common stock are issuable upon
exchange for membership units in Charter Communications Holding Company
held by Vulcan Cable III that are subject to options granted by Vulcan
Cable III to Mr. Savoy that have vested or will vest within 60 days.
(8) Represents 2,641,549 shares of Class A common stock issuable upon the
exchange of membership units that are issuable upon the exercise of options
that have vested or will vest within 60 days, and 15,000 shares of Class A
common stock held directly by Mr. Kent.
(9) Represents 145,000 shares of Class A common stock issuable upon exchange of
membership units that are issuable upon exercise of options that have
vested.
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<PAGE> 128
(10) Includes 40,000 shares of Class A common stock issuable upon exchange of
membership units that are issuable upon exercise of options that have
vested. Also includes 9,789,806 shares of Class A common stock as follows:
3,951,636 shares for which Mr. Nathanson has sole investment and voting
power, 5,444,861 shares for which he has shared voting and investment
power; and 393,309 shares for which he has sole investment power and shared
voting power. The address of this person is c/o Falcon Holding Group, Inc.
and Affiliates, 10900 Wilshire Blvd., Los Angeles, CA 90024.
(11) Includes 40,000 shares of Class A common stock issuable upon the exchange
of membership units that are issuable upon exercise of options that have
vested.
(12) Represents 40,000 shares of Class A common stock issuable upon the exchange
of membership units that are issuable upon exercise of options that have
vested and 475,669 shares of Class A common stock that Mr. Savoy would
receive upon exercise of options from Vulcan Cable III to purchase such
shares that have vested or will vest within 60 days.
(13) Includes 208,715 shares of Class A common stock issuable upon the exchange
of membership units that would be issued upon exercise of options that have
vested or will vest within 60 days and 2,200 shares for which Mr. Schumm
has shared investment and voting power.
(14) Includes 53,333 shares of Class A common stock issuable upon the exchange
of membership units that are issuable upon exercise of options that have
vested or will vest within 60 days.
(15) Includes 44,000 shares of Class A common stock issuable upon exchange of
membership units that are issuable upon exercise of options that have
vested or will vest within 60 days.
(16) Represents 65,000 shares of Class A common stock issuable upon exchange of
membership units that would be issued upon exercise of options that have
vested.
(17) Represents 50,000 shares of Class B common stock convertible into shares of
Class A common stock on a one-for-one basis; 12,638,606 shares of Class A
common stock; 324,300,479 shares of Class A common stock issuable upon the
exchange of outstanding Charter Communications Holding Company membership
units; and 3,641,929 shares of Class A common stock issuable upon exchange
of membership units that are issuable upon exercise of options that have
vested or will vest within 60 days.
(18) As reported in Schedule 13G provided to Charter Communications, Inc. on
February 16, 2000. Janus Capital Corporation is a registered investment
advisor that provides investment advice to investment companies and other
clients. As a result of being an investment advisor, Janus Capital may be
deemed to beneficially own shares held by its clients. As indicated in the
Schedule 13G, Mr. Thomas Bailey, President, Chairman of the Board and 12.2%
shareholder of Janus Capital disclaims beneficial ownership with respect to
such shares. The address of these persons is 100 Fillmore St., Denver,
Colorado 80206-4923.
(19) Represents shares of Class A common stock issuable upon exchange of
preferred membership units held in an indirect subsidiary of Charter
Holdings.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following sets forth certain transactions in which we and our
directors, executive officers and affiliates and the directors and executive
officers of Charter Communications, Inc., Charter Communications Holding
Company, Charter Capital and Charter Investment, Inc., are involved. We believe
that each of the transactions described below was on terms no less favorable to
us than could have been obtained from independent third parties.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
MERGER WITH MARCUS
On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting
economic interests in Marcus Cable, and agreed to acquire the remaining
interests in Marcus Cable. The aggregate purchase price was approximately $1.4
billion, excluding $1.8 billion in liabilities assumed. On February 22, 1999,
Marcus Holdings was formed, and all of Mr. Allen's interests in Marcus Cable
were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr.
Allen completed the acquisition of all remaining interests in Marcus Cable.
On December 23, 1998, Mr. Allen acquired approximately 94% of the equity of
Charter Investment, Inc. for an aggregate purchase price of approximately $2.2
billion, excluding $2.0 billion in debt assumed. On February 9, 1999, Charter
Holdings was formed as a wholly owned subsidiary of Charter Investment, Inc. On
February 10, 1999, Charter Operating was formed as a wholly owned subsidiary of
Charter Holdings. In April 1999, Mr. Allen merged Marcus Holdings 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, and, in turn,
Charter Operating. On May 25, 1999, Charter Communications Holding Company was
formed as a wholly owned subsidiary of Charter Investment, Inc. All of Charter
Investment, Inc.'s equity interests in Charter Holdings were transferred to
Charter Communications Holding Company.
In March 1999, we paid $20 million to Vulcan Northwest, an affiliate of Mr.
Allen, for reimbursement of direct costs incurred in connection with Mr. Allen's
acquisition of Marcus Cable. Such costs were principally comprised of financial,
advisory, legal and accounting fees.
On April 7, 1999, Mr. Allen merged Marcus Holdings into Charter Holdings.
Charter Holdings survived the merger, and the operating subsidiaries of Marcus
Holdings became subsidiaries of Charter Holdings.
At the time Charter Holdings issued $3.6 billion in principal amount of
notes in March 1999, this merger had not yet occurred. Consequently, Marcus
Holdings was a party to the indentures governing the March 1999 Charter Holdings
notes as a guarantor of Charter Holdings' obligations. Charter Holdings loaned
some of the proceeds from the sale of the March 1999 Charter Holdings notes to
Marcus Holdings, which amounts were used to complete the cash tender offers for
then-outstanding notes of subsidiaries of Marcus Holdings. Marcus Holdings
issued a promissory note in favor of Charter Holdings. The promissory note was
in the amount of $1.7 billion, with an interest rate of 9.92% and a maturity
date of April 1, 2007. Marcus Holdings guaranteed its obligations under the
promissory note by entering into a pledge agreement in favor of Charter Holdings
pursuant to which Marcus Holdings pledged all of its equity interests in Marcus
Cable as collateral for the payment and performance of the promissory note.
Charter Holdings pledged this promissory note to the trustee under the
indentures for the March 1999 Charter Holdings notes as collateral for the equal
and ratable benefit of the holders of the March 1999 Charter Holdings notes.
Upon the closing
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of the merger, and in accordance with the terms of the March 1999 Charter
Holdings notes and the indentures for the March 1999 Charter Holdings notes:
- the guarantee issued by Marcus Holdings was automatically terminated;
- the promissory note issued by Marcus Holdings was automatically
extinguished, with no interest having accrued or being paid; and
- the pledge in favor of Charter Holdings of the equity interests in Marcus
Cable as collateral under the promissory note and the pledge in favor of
the trustee of the promissory note as collateral for the March 1999
Charter Holdings notes were automatically released.
MANAGEMENT AGREEMENTS WITH CHARTER COMMUNICATIONS, INC.
PREVIOUS MANAGEMENT AGREEMENTS. Prior to March 18, 1999, pursuant to a
series of management agreements with certain of our subsidiaries, Charter
Investment, Inc. provided management and consulting services to those
subsidiaries. In exchange for these services, Charter Investment, Inc. was
entitled to receive management fees of 3% to 5% of the gross revenues of all of
our systems plus reimbursement of expenses. However, our previous credit
facilities limited such management fees to 3% of gross revenues. The balance of
management fees payable under the previous management agreements was accrued.
Payment is at the discretion of Charter Investment, Inc. Certain deferred
portions of management fees bore interest at the rate of 8% per annum. Following
the closing of Charter Operating's current credit facilities, the previous
management agreements were replaced by a revised management agreement. The
material terms of our previous management agreements are substantially similar
to the material terms of the revised management agreement.
PREVIOUS MANAGEMENT AGREEMENT WITH MARCUS. On October 6, 1998, Marcus
Cable entered into a management consulting agreement with Charter Investment,
Inc. pursuant to which Charter Investment, Inc. agreed to provide certain
management and consulting services to Marcus Cable and its subsidiaries, in
exchange for a fee equal to 3% of the gross revenues of Marcus Cable's systems
plus reimbursement of expenses. Management fees expensed by Marcus Cable during
the period from October 1998 to December 31, 1998 were approximately $3.3
million. Upon Charter Holdings' merger with Marcus Holdings and the closing of
Charter Operating's current credit facilities, this agreement was terminated and
the subsidiaries of Marcus Cable began to receive management and consulting
services from Charter Investment, Inc. under the revised management agreement
described below.
THE REVISED MANAGEMENT AGREEMENT. On February 23, 1999, Charter
Investment, Inc. entered into a revised management agreement with Charter
Operating, which was amended and restated as of March 17, 1999. Upon the closing
of Charter Operating's credit facilities on March 18, 1999, our previous
management agreements and the management consulting agreement with Marcus Cable
terminated and the revised management agreement became operative. Under the
revised management agreement, Charter Investment, Inc. agreed to manage the
operations of the cable television systems owned by Charter Operating's
subsidiaries, as well as any cable television systems Charter Operating
subsequently acquires. The term of the revised management agreement is ten
years.
The revised management agreement provided that Charter Operating would pay
Charter Investment, Inc. a management fee equal to its actual costs to provide
these services and a management fee of 3.5% of gross revenues. Gross revenues
include all revenues from the operation of Charter Operating's cable systems,
including, without limitation, subscriber payments, advertising revenues, and
revenues from other services provided by Charter Operating's cable systems.
Gross revenues do not include interest income or income from investments
unrelated to our cable systems.
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Payment of the management fee to Charter Investment, Inc. is permitted
under Charter Operating's current credit facilities, but ranks below Charter
Operating's payment obligations under its credit facilities. In the event any
portion of the management fee due and payable is not paid by Charter Operating,
it is deferred and accrued as a liability. Any deferred amount of the management
fee will bear interest at the rate of 10% per annum, compounded annually, from
the date it was due and payable until the date it is paid. As of December 31,
1999, no interest had accrued.
Pursuant to the terms of the revised management agreement, Charter
Operating agreed to indemnify and hold harmless Charter Investment, Inc. and its
shareholders, directors, officers and employees. This indemnity extends to any
and all claims or expenses, including reasonable attorneys' fees, incurred by
them in connection with any action not constituting gross negligence or willful
misconduct taken by them in good faith in the discharge of their duties to
Charter Operating.
The total management fees, including expenses, earned by Charter
Investment, Inc. under all management agreements were as follows:
<TABLE>
<CAPTION>
TOTAL FEES
YEAR FEES PAID EARNED
- - - ---- --------- ----------
(IN THOUSANDS)
<S> <C> <C>
Year Ended December 31, 1999................................ $ 48,528 $ 54,330
Year Ended December 31, 1998................................ 17,073 27,500
Year Ended December 31, 1997................................ 14,772 20,290
Year Ended December 31, 1996................................ 11,792 15,443
</TABLE>
As of December 31, 1999, approximately $25.4 million remains unpaid under
all management agreements.
ASSIGNMENT AND AMENDMENT OF REVISED CHARTER OPERATING MANAGEMENT
AGREEMENT. On November 12, 1999, Charter Investment, Inc. assigned to Charter
Communications, Inc. all of its rights and obligations under the revised Charter
Operating management agreement. In connection with the assignment, the revised
Charter Operating management agreement was amended to eliminate the 3.5%
management fee. Under the amended agreement, Charter Communications, Inc. is
entitled to reimbursement from Charter Operating for all of its expenses, costs,
losses, liabilities and damages paid or incurred by it in connection with the
performance of its services under the amended agreement, with no cap on the
amount of reimbursement.
MANAGEMENT AGREEMENT WITH CHARTER COMMUNICATIONS, INC. On November 12,
1999, Charter Communications, Inc. entered into a management agreement with
Charter Communications Holding Company. Under this agreement, Charter
Communications, Inc. manages and operates the cable television systems owned or
to be acquired by Charter Communications Holding Company and its subsidiaries,
to the extent such cable systems are not subject to management agreements
between Charter Communications, Inc. and specific subsidiaries of Charter
Communications Holding Company.
The terms of this management agreement are substantially similar to the
terms of the Charter Operating management agreement. Charter Communications,
Inc. is entitled to reimbursement from Charter Communications Holding Company
for all expenses, costs, losses, liabilities and damages paid or incurred by
Charter Communications, Inc. in connection with the performance of its services,
which expenses will include any fees Charter Communications, Inc. is obligated
to pay under the mutual services agreement described below. There is no cap on
the amount of reimbursement to which Charter Communications, Inc. is entitled.
MUTUAL SERVICES AGREEMENT WITH CHARTER INVESTMENT, INC. Charter
Communications, Inc. has only thirteen employees, all of whom are also executive
officers of Charter Investment, Inc. Effective
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November 12, 1999, Charter Communications, Inc. and Charter Investment, Inc.
entered into a mutual services agreement pursuant to which each entity provides
services to the other as may be reasonably requested in order to manage Charter
Communications Holding Company and to manage and operate the cable systems owned
by its subsidiaries, including Charter Holdings. In addition, officers of
Charter Investment, Inc. also serve as officers of Charter Communications, Inc.
The officers and employees of each entity are available to the other to provide
the services described above. All expenses and costs incurred with respect to
the services provided are paid by Charter Communications, Inc. Charter
Communications, Inc. will indemnify and hold harmless Charter Investment, Inc.
and its directors, officers and employees from and against any and all claims
that may be made against any of them in connection with the mutual services
agreement except due to its or their gross negligence or willful misconduct. The
term of the mutual services agreement is ten years, commencing on November 12,
1999, and the agreement may be terminated at any time by either party upon
thirty days' written notice to the other.
FALCON MANAGEMENT AGREEMENT. On November 12, 1999, Falcon Cable
Communications, a parent company of the Falcon operating companies, entered into
a management consulting agreement with Charter Communications, Inc. pursuant to
which Charter Communications, Inc. agreed to provide certain management and
consulting services to Falcon and its subsidiaries. The term of the management
agreement is ten years. The management agreement provides that Falcon will pay
Charter Communications, Inc. a management fee equal to its actual costs to
provide these services but limited to 5% of gross revenues.
Gross revenues include all revenues from the operation of Falcon's cable
systems, including, without limitation, subscriber payments, advertising
revenues, and revenues from other services provided by Falcon's cable systems.
Gross revenues do not include interest income or income from investments
unrelated to cable systems.
Payment of the management fee is subject to certain restrictions under the
Falcon credit facilities. In the event any portion of the management fee due and
payable is not paid by Falcon, it is deferred and accrued as a liability. Any
deferred amount of the management fee will bear interest at the rate of 10% per
annum, compounded annually, from the date it was due and payable until the date
it is paid.
FANCH MANAGEMENT AGREEMENT. On November 12, 1999, CC VI Operating Company,
LLC, the parent company of the Fanch operating companies, entered into a
management consulting agreement with Charter Communications, Inc. pursuant to
which Charter Communications, Inc. agreed to provide certain management and
consulting services to Fanch and its subsidiaries. The term of the management
agreement is ten years. The management agreement provides that Fanch will pay
Charter Communications, Inc. a management fee equal to its actual costs to
provide these services but limited to 5% of gross revenues.
Gross revenues include all revenues from the operation of Fanch's cable
systems, including, without limitation, subscriber payments, advertising
revenues, and revenues from other services provided by Fanch's cable systems.
Gross revenues do not include interest income or income from investments
unrelated to cable systems.
Payment of the management fee is subject to certain restrictions under the
Fanch credit facilities. In the event any portion of the management fee due and
payable is not paid by Fanch, it is deferred and accrued as a liability. Any
deferred amount of the management fee will bear interest at the rate of 10% per
annum, compounded annually, from the date it was due and payable until the date
it is paid.
AVALON MANAGEMENT ARRANGEMENT. Under the Avalon limited liability company
agreements, Charter Communications, Inc. agreed to provide certain management
and consulting services to
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CC Michigan, CC New England and their subsidiaries. Under these arrangements, CC
Michigan and CC New England will pay Charter Communications, Inc. a management
fee equal to their actual costs to provide these services but limited to 2% of
gross revenues.
Gross revenues include all revenues from the operation of the Avalon cable
systems, including, without limitation, subscriber payments, advertising
revenues, and revenues from other services provided by Avalon's cable systems.
Gross revenues do not include interest income or income from investments
unrelated to cable systems.
Payment of the management fee is permitted under the current credit
facilities of CC Michigan and CC New England, but ranks below the senior debt of
such companies and shall not be paid except to the extent allowed under such
credit facilities. In the event any portion of the management fee due and
payable is not paid by CC Michigan or CC New England, it is deferred and accrued
as a liability. Any deferred amount of the management fee will bear interest at
the rate of 10% per annum, compounded annually, from the date it was due and
payable until the date it is paid.
BRESNAN MANAGEMENT AGREEMENT. On February 14, 2000, CC VIII Operating LLC,
parent of the Bresnan cable systems, and several wholly owned subsidiaries,
entered into a management consulting agreement with Charter Communications, Inc.
pursuant to which Charter Communications, Inc. agreed to provide certain
management and consulting services to the Bresnan cable systems. The management
agreement provides that Bresnan will pay Charter Communications, Inc. a
management fee equal to its actual cost to provide these services without
limitation as to the amount. The term of the management agreement is ten years.
Payment of the management fee is subject to certain restrictions under the
Bresnan credit facilities. In the event that any portion of the management fee
due and payable is not paid by Bresnan, it is deferred and accrued as a
liability. Any deferred amount of the management fee will bear interest at the
rate of 10% per annum, compounded annually, from the date it was due and payable
until the date it is paid.
CONSULTING AGREEMENT
On March 10, 1999, Charter Holdings entered into a consulting agreement
with Vulcan Northwest and Charter Investment, Inc. Pursuant to the terms of the
consulting agreement, Charter Holdings retained Vulcan Northwest and Charter
Investment, Inc. to provide advisory, financial and other consulting services
with respect to acquisitions of the business, assets or stock of other companies
by Charter Holdings or by any of its affiliates. Such services include
participation in the evaluation, negotiation and implementation of these
acquisitions. The agreement expires on December 31, 2000, and automatically
renews for successive one-year terms unless otherwise terminated.
All reasonable out-of-pocket expenses incurred by Vulcan Northwest and
Charter Investment, Inc. are Charter Holdings' responsibility and must be
reimbursed. Charter Holdings must also pay Vulcan Northwest and Charter
Investment, Inc. a fee for their services rendered for each acquisition made by
Charter Holdings or any of its affiliates. This fee equals 1% of the aggregate
value of such acquisition. Neither Vulcan Northwest nor Charter Investment, Inc.
received or will receive a fee in connection with the American Cable,
Renaissance, Greater Media, Helicon, Vista, Cable Satellite, InterMedia, Rifkin,
Avalon, Falcon, Fanch and Bresnan acquisitions. No such fee is or would be
payable to either Vulcan Northwest or Charter Investment, Inc. in connection
with the Swap Transaction if that transaction is completed. Charter Holdings has
also agreed to indemnify and hold harmless Vulcan Northwest and Charter
Investment, Inc., and their respective officers, directors, stockholders,
agents, employees and affiliates, for all claims, actions, demands and expenses
that arise out of this consulting agreement and the services they provide to
Charter Holdings.
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Mr. Allen owns 100% of Vulcan Northwest and is the Chairman of the board.
William D. Savoy, another of Charter Communications, Inc.'s directors, is the
President and a director of Vulcan Northwest.
TRANSACTIONS WITH MR. ALLEN
On December 21, 1998, Mr. Allen contributed approximately $431 million to
Charter Investment, Inc. and received non-voting common stock of Charter
Investment, Inc. Such non-voting common stock was converted to voting common
stock on December 23, 1998. The $431 million contribution was used to redeem
stock of certain shareholders in Charter Investment, Inc.
On December 23, 1998, Mr. Allen contributed approximately $1.3 billion to
Charter Investment, Inc. and received voting common stock of Charter Investment,
Inc. Additionally, Charter Investment, Inc. borrowed approximately $6.2 million
in the form of a bridge loan from Mr. Allen. This bridge loan was contributed by
Mr. Allen to Charter Investment, Inc. in March 1999. No interest on such bridge
loan was accrued or paid by Charter Investment, Inc. On the same date, Mr. Allen
also contributed approximately $223.5 million to Vulcan Cable II, Inc., a
company owned by Mr. Allen. Vulcan II was merged with and into Charter
Investment, Inc. The $1.3 billion and $223.5 million contributions by Mr. Allen
were used by Charter Investment, Inc. to purchase the remaining interest in CCA
Group and CharterComm Holdings.
On January 5, 1999, Charter Investment, Inc. borrowed approximately $132.2
million in the form of a bridge loan from Mr. Allen. This bridge loan was
contributed by Mr. Allen to Charter Investment, Inc. in March 1999. No interest
on such bridge loan was accrued or paid by Charter Investment, Inc. On the same
date, Mr. Allen also acquired additional voting common stock of Charter
Investment, Inc. from Jerald L. Kent, Howard L. Wood and Barry L. Babcock for an
aggregate purchase price of approximately $176.7 million.
On January 11, 1999, Charter Investment, Inc. borrowed $25 million in the
form of a bridge loan from Mr. Allen. This bridge loan was contributed by Mr.
Allen to Charter Investment, Inc. in March 1999. No interest on such bridge loan
was accrued or paid by Charter Investment, Inc.
On March 16, 1999, Mr. Allen contributed approximately $124.8 million in
cash to Charter Investment, Inc. In connection with this contribution and the
contribution of the three bridge loans described above, Mr. Allen received
11,316 shares of common stock of Charter Investment, Inc.
All other contributions to Charter Investment, Inc. by Mr. Allen were used
in operations of Charter Investment, Inc. and were not contributed to Charter
Holdings.
On August 10, 1999, Vulcan Cable III Inc. purchased 24.1 million Charter
Communications Holding Company membership units for $500 million. On September
22, 1999, Mr. Allen, through Vulcan Cable III Inc., contributed an additional
$825 million, consisting of approximately $644.3 million in cash and
approximately $180.7 million in equity interests in Rifkin that Vulcan Cable III
Inc. had acquired in the Rifkin acquisition in exchange for 39.8 million Charter
Communications Holding Company membership units. Charter Communications Holding
Company in turn contributed the cash and equity interests to Charter Holdings.
As part of the membership interests purchase agreement, Vulcan Ventures
Incorporated, Charter Communications, Inc., Charter Investment, Inc. and Charter
Communications Holding Company entered into an agreement on September 21, 1999
regarding the right of Vulcan Ventures to use up to eight of our digital cable
channels. Specifically, we will provide Vulcan Ventures with exclusive rights
for carriage of up to eight digital cable television programming services or
channels on each of the digital cable television systems with local control of
the digital product now or hereafter owned, operated, controlled or managed by
us of 550 megahertz or more. If the system offers digital services but has less
than 550 megahertz of capacity, then the programming services will be equitably
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reduced. Upon request of Vulcan Ventures, we will attempt to reach a
comprehensive programming agreement pursuant to which we will pay the
programmer, if possible, a fee per digital subscriber. If such fee arrangement
is not achieved, then we and the programmer shall enter into a standard
programming agreement. We believe that this transaction is on terms at least as
favorable to us as Mr. Allen would negotiate with other cable operators.
In November 1999, in connection with Charter Communications, Inc.'s initial
public offering, Mr. Allen, through Vulcan Cable III Inc., purchased $750
million of membership units of Charter Communications Holding Company at a per
membership unit price equal to the net initial public offering price.
During the second and third quarters of 1999, one of our subsidiaries sold
interests in several airplanes to Mr. Allen for approximately $8 million. We
believe that the purchase price paid by Mr. Allen for these interests was the
fair market price.
ALLOCATION OF BUSINESS OPPORTUNITIES WITH MR. ALLEN
As described under "-- Business Relationships," Mr. Allen and a number of
his affiliates have interests in various entities that provide services or
programming to a number of our subsidiaries. Given the diverse nature of Mr.
Allen's investment activities and interests, and to avoid the possibility of
future disputes as to potential business, Charter Communications Holding Company
and Charter Communications, Inc., under the terms of their respective
organizational documents, may not, and may not allow their subsidiaries to,
engage in any business transaction outside the cable transmission business
except for the joint venture with Broadband Partners and incidental businesses
engaged in as of the closing of the initial public offering of Charter
Communications, Inc. This restriction will remain in effect until all of the
shares of Charter Communications, Inc.'s high-vote Class B common stock have
been converted into shares of Class A common stock due to Mr. Allen's equity
ownership falling below specified threshholds.
Should Charter Communications, Inc. or Charter Communications Holding
Company wish to pursue, or allow their subsidiaries to pursue, a business
transaction outside of this scope, it must first offer Mr. Allen the opportunity
to pursue the particular business transaction. If he decides not to do so and
consents to Charter Communications, Inc., Charter Communications Holding Company
or any of their subsidiaries engaging in the business transaction, it will be
able to do so. In any such case, the restated certificate of incorporation and
the limited liability company agreement of Charter Communications, Inc. and
Charter Communications Holding Company would be amended accordingly to
appropriately modify the current restrictions on their ability to engage in any
business other than the cable transmission business. The cable transmission
business means the business of transmitting video, audio, including telephony,
and data over cable television systems owned, operated or managed by Charter
Communications, Inc., Charter Communications Holding Company or any of their
subsidiaries from time to time. The businesses of RCN Corporation, a company in
which Mr. Allen has made a significant investment, are not considered cable
transmission businesses under these provisions. See "-- Business
Relationships -- RCN Corporation."
Under Delaware corporate law, each director of Charter Communications,
Inc., including Mr. Allen, is generally required to present to Charter
Communications, Inc. any opportunity he or she may have to acquire any cable
transmission business or any company whose principal business is the ownership,
operation or management of cable transmission businesses so that we may
determine whether we wish to pursue such opportunities. However, Mr. Allen and
the other directors generally will not have an obligation to present to Charter
Communications, Inc. other business opportunities and they may exploit such
opportunities for their own account.
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ASSIGNMENTS OF ACQUISITIONS
On January 1, 1999, Charter Investment, Inc. entered into a membership
purchase agreement with ACEC Holding Company, LLC for the acquisition of
American Cable. On February 23, 1999, Charter Investment, Inc. assigned its
rights and obligations under this agreement to one of our subsidiaries, Charter
Communications Entertainment II, LLC, effective as of March 8, 1999, or such
earlier date as mutually agreed to by the parties. The acquisition of American
Cable was completed in May 1999.
On February 17, 1999, Charter Investment, Inc. entered into an asset
purchase agreement with Greater Media, Inc. and Greater Media Cablevision, Inc.
for the acquisition of the Greater Media systems. On February 23, 1999, Charter
Investment, Inc. assigned its rights and obligations under this agreement to one
of our subsidiaries, Charter Communications Entertainment I, LLC. The
acquisition of the Greater Media systems was completed in June 1999.
On April 26, 1999, Charter Investment, Inc. entered into a purchase and
sale agreement with InterLink Communications Partners, LLLP and the other
sellers listed on the signature pages of the agreement. On June 30, 1999,
Charter Investment, Inc. assigned its rights and obligations under this
agreement to Charter Operating. The acquisition contemplated by these agreements
was completed in September 1999.
On April 26, 1999, Charter Investment, Inc. entered into a purchase and
sale agreement with Rifkin Acquisition Partners L.L.L.P and the other sellers
listed on the signature pages of the agreement. On June 30, 1999, Charter
Investment, Inc. assigned its rights and obligations under this agreement to
Charter Operating. The acquisition contemplated by these agreements was
completed in September 1999.
On April 26, 1999, Charter Investment, Inc. entered into the RAP indemnity
agreement with InterLink Communications Partners, LLLP and the other sellers and
InterLink partners listed on the signature pages of the agreement. On June 30,
1999, Charter Investment, Inc. assigned its rights and obligations under this
agreement to Charter Operating.
In May 1999, Charter Investment, Inc. entered into the Falcon purchase
agreement. As of June 22, 1999, pursuant to the first amendment to the Falcon
purchase agreement, Charter Investment, Inc. assigned its rights under the
Falcon purchase agreement to Charter LLC, a subsidiary of Charter Communications
Holding Company.
In May 1999, Charter Investment, Inc. entered into the Fanch purchase
agreement. On September 21, 1999, Charter Investment, Inc. assigned its rights
and obligations to purchase stock interests under this agreement to Charter
Communications Holding Company and its rights and obligations to purchase
partnership interests and assets under this agreement to Charter Communications
VI, LLC, an indirect wholly owned subsidiary of Charter Communications Holding
Company.
In December 1999, Charter Communications Holding Company entered into
contribution and sale agreements with three of its indirect subsidiaries.
Effective January 1, 2000 Charter Communications Holding Company transferred to
us the equity interests it held in the entities that owned the Fanch, Falcon and
Avalon cable systems.
In June 1999, Charter Communications Holding Company entered into the
Bresnan purchase agreement. In February 2000, Charter Communications Holding
Company assigned its rights under the Bresnan purchase agreement to purchase
certain assets to us and we accepted such assignment and assumed all obligations
of Charter Communications Holding Company under the Bresnan purchase agreement.
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INTERCOMPANY LOANS
In November 1999, Charter Communications Holding Company loaned $856
million to Charter Operating, maturing March 18, 2009. As of December 31, 1999,
the loan bore interest at a rate of 7.82% per year. In January 2000, Charter
Communications Holding Company loaned an additional $66 million to Charter
Operating, maturing March 18, 2009 with an interest rate of 7.79%. In February
2000, Charter Operating repaid $540 million. Accordingly, $382 million remained
outstanding as of February 29, 2000.
In November 1999, Charter Communications Holding Company loaned $21 million
to CC VI Operating Company, LLC, maturing November 30, 2009. The funds were used
by CC VI Operating Company to pay down a portion of amounts outstanding under
the Fanch credit facilities. Effective December 31, 1999, Charter Communications
Holding Company forgave the amounts outstanding, including accrued and unpaid
interest of approximately $314,000, and contributed such amounts to CC VI
Holdings, LLC, the parent company of the Fanch companies.
In November 1999, Charter Communications Holding Company loaned $173.0
million to Falcon Cable Communications, LLC, maturing December 31, 2008. As of
December 31, 1999, the loan bore interest at a rate of 7.57% per year. In
January 2000, Charter Communications Holding Company loaned an additional $373
million to Falcon Cable Communications with an interest rate of 7.54%. In
February 2000, Falcon Cable Communications repaid all outstanding balances.
In November and December 1999, Charter Communications, Inc. loaned $50
million to Charter Operating. As of December 31, 1999, these loans bore interest
at rates ranging from 7.865% to 7.9125% and mature March 18, 2009.
OTHER AGREEMENTS
Mr. Kent has entered into an employment agreement with Charter
Communications, Inc. We have summarized this agreement in "Directors and
Executive Officers -- Employment and Consulting Agreements."
Effective as of December 23, 1998, Howard L. Wood entered into an
employment agreement with Charter Investment, Inc. for a one-year term with
automatic one-year renewals. Under this agreement, Mr. Wood agreed to serve as
an officer of Charter Investment, Inc. During the initial term of the agreement,
Mr. Wood was entitled to receive a base salary for the remaining month of the
term of $312,500, or such higher rate as determined by the Chief Executive
Officer in his discretion. In addition, Mr. Wood was eligible to receive an
annual bonus to be determined by the board of directors in its discretion. Mr.
Wood received a one-time payment as part of his employment agreement of
$250,000. Under the agreement, Mr. Wood was entitled to participate in any
disability insurance, pension or other benefit plan afforded to employees
generally or executives of Charter Investment, Inc. Charter Investment, Inc.
agreed to indemnify and hold harmless Mr. Wood to the maximum extent permitted
by law from and against any claims, damages, liabilities, losses, costs or
expenses incurred in connection with or arising out of the performance by Mr.
Wood of his duties. Effective on November 12, 1999, this employment agreement
ceased to be effective. Mr. Wood received an amount equal to his base salary for
the remaining month of the term plus a bonus of $312,500. In addition, the
options then held by Mr. Wood vested in full.
Mr. Wood has entered into a consulting agreement with Charter
Communications, Inc. We have summarized this agreement in "Directors and
Executive Officers -- Employment and Consulting Agreements."
A company controlled by Mr. Wood occasionally leases to Charter
Communications, Inc. and its subsidiaries and affiliates an airplane for
business travel. Charter Communications, Inc. or its subsidiaries or affiliates,
as applicable, in turn, pays to such company market rates for such use.
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Mr. Wood reimburses Charter Communications, Inc. for the full annual cost of two
individuals qualified to operate the plane and who are otherwise available to
Charter in connection with its own flight operations.
In addition, Mr. Wood's daughter, a Vice President of Charter Investment,
Inc., received a bonus in the form of a three-year promissory note bearing
interest at 7% per year. One-third of the original outstanding principal amount
of the note is forgiven as long as she remains employed by Charter Investment,
Inc. at the end of each of the first three anniversaries of the issue date in
February 1999. The outstanding balance on the note as of February 29, 2000 was
$150,000.
Mr. Nathanson has entered into a letter agreement with Charter
Communications, Inc. We have summarized this agreement in "Directors and
Officers -- Employment and Consulting Agreements."
Effective as of December 23, 1998, Barry L. Babcock entered into an
employment agreement with Charter Investment, Inc. for a one-year term with
automatic one-year renewals. Under this agreement, Mr. Babcock agreed to serve
as Vice Chairman of Charter Investment, Inc. with responsibilities including the
government and public relations of Charter Investment, Inc. During the initial
term of the agreement, Mr. Babcock was entitled to receive a base salary of
$625,000, or such higher rate as may have been determined by the Chief Executive
Officer in his discretion. This employment agreement was terminated in October
1999. Pursuant to the termination agreement, Mr. Babcock received an amount
equal to his base salary for the remaining month of the term plus a $312,500
bonus. In addition, the options held by Mr. Babcock vested in full.
Effective as of November 12, 1999, Charter Communications, Inc. entered
into a consulting agreement with Mr. Babcock which expired in March 2000. During
the term of this agreement, Mr. Babcock received monthly cash compensation at a
rate of $10,000 per month, disability and health benefits and the use of an
office and secretarial services, upon request. Charter Communications, Inc.
agreed to indemnify and hold harmless Mr. Babcock to the maximum extent
permitted by law from and against any claims, damages, liabilities, losses,
costs or expenses incurred in connection with or arising out of the performance
by Mr. Babcock of his duties.
INSURANCE
Insurance covering our operations and workers' compensation is negotiated
by our manager, which was Charter Investment, Inc. prior to November 8, 1999 and
thereafter, Charter Communications, Inc. Charter Holdings expensed approximately
$13,797,000 for the year ended December 31, 1999, approximately $603,000 for the
year ended December 31, 1998, approximately $172,100 for the year ended December
31, 1997, and approximately $108,000 for the year ended December 31, 1996,
relating to insurance allocations.
OTHER RELATIONSHIPS
David L. McCall, Senior Vice President of Operations -- Eastern Division of
Charter Communications, Inc., is a partner in a partnership that leases office
space to us. The partnership has received approximately $177,500 pursuant to
such lease and related agreements for the year ended December 31, 1999. In
addition, approximately $646,000 was paid in 1999 to a construction company
controlled by Mr. McCall's brother, Marvin A. McCall for construction services.
In January 1999, Charter Investment, Inc. issued bonuses to executive
officers in the form of three-year promissory notes. One-third of the original
outstanding principal amount of each of these notes is forgiven, as long as the
employee is still employed by Charter Investment, Inc. or any of its
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affiliates, at the end of each of the first three anniversaries of the issue
date. The promissory notes bear interest at 7% per year. Outstanding balances as
of February 29, 2000 are as follows:
<TABLE>
<CAPTION>
INDIVIDUAL AMOUNT
---------- --------
<S> <C>
David G. Barford.................................. $300,000
Mary Pat Blake.................................... $300,000
Eric A. Freesmeier................................ $300,000
Thomas R. Jokerst................................. $300,000
Kent D. Kalkwarf.................................. $300,000
Ralph G. Kelly.................................... $300,000
David L. McCall................................... $300,000
John C. Pietri.................................... $150,000
Steven A. Schumm.................................. $600,000
Curtis S. Shaw.................................... $300,000
Stephen E. Silva.................................. $200,000
</TABLE>
Marc B. Nathanson was the Chairman of the board of directors of Falcon
Holding Group, Inc., which was the general partner of Falcon Holding Group, L.P.
from whom the Falcon cable systems were acquired.
BUSINESS RELATIONSHIPS
Mr. Allen or certain affiliates of Mr. Allen own equity interests or
warrants to purchase equity interests in various entities which provide a number
of our affiliates with services or programming. Among these entities are High
Speed Access Corp., WorldGate Communications, Inc., Wink Communications, Inc.,
ZDTV, L.L.C., USA Networks, Oxygen Media, Inc., Broadband Partners, Inc.,
Go2Net, Inc. and RCN Corporation. These affiliates include Charter Investment,
Inc. and Vulcan Ventures, Inc. Mr. Allen owns 100% of the equity of Vulcan
Ventures, and is its Chief Executive Officer. Mr. Savoy is also a Vice President
and a director of Vulcan Ventures. The various cable, Internet and telephony
companies that Mr. Allen has invested in may mutually benefit one another. The
Broadband Partners Internet portal joint venture announced in the fourth quarter
of 1999 is an example of a cooperative business relationship among his
affiliated companies. We can give no assurance, nor should you expect, that this
joint venture will be successful, that we will realize any benefits from this or
other relationships with Mr. Allen's affiliated companies or that we will enter
into any joint ventures or business relationships in the future with Mr. Allen's
affiliated companies.
Mr. Allen and his affiliates have made, and in the future likely will make,
numerous investments outside of us and our business. We cannot assure you that,
in the event that we or any of our subsidiaries enter into transactions in the
future with any affiliate of Mr. Allen, such transactions will be on terms as
favorable to us as terms we might have obtained from an unrelated third party.
Also, conflicts could arise with respect to the allocation of corporate
opportunities between us and Mr. Allen and his affiliates.
We have not instituted any formal plan or arrangement to address potential
conflicts of interest.
HIGH SPEED ACCESS. High Speed Access is a provider of high-speed Internet
access over cable modems. In November 1998, Charter Investment, Inc. entered
into a systems access and investment agreement with Vulcan Ventures and High
Speed Access and a related network services agreement with High Speed Access.
Additionally, Vulcan Ventures and High Speed Access entered into a programming
content agreement. Charter Investment Inc.'s rights and obligations under these
agreements were assigned by Charter Investment, Inc. to Charter Communications
Holding Company
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upon closing of Charter Communications, Inc's initial public offering. Under
these agreements, High Speed Access will have exclusive access to at least
750,000 of our homes with an installed cable drop from our cable system or which
is eligible for a cable drop by virtue of our cable system passing the home. The
term of the systems access and investment agreement continues until the earlier
of termination of the network services agreement or midnight of the day High
Speed Access ceases to provide High Speed Access services to cable subscribers
in a geographic area or region. The term of the network services agreement is,
as to a particular cable system, five years from the date revenue billing
commences for that cable system. Following the five-year initial term, the
network services agreement automatically renews on a year-to-year basis unless
Charter provides notice of termination prior to the end of the five-term in
accordance with the terms of the agreement. Additionally, Charter Communications
Holding Company can terminate High Speed Access' exclusivity rights, on a
system-by-system basis, if High Speed Access fails to meet performance
benchmarks or otherwise breaches the agreements including their commitment to
provide content designated by Vulcan Ventures. The programming content agreement
is effective until terminated for any breach and will automatically terminate
upon the expiration of the systems access and investment agreement. All of
Charter Communications Holding Company's operations take place at the subsidiary
level and it is as subsidiaries of Charter Communications Holding Company that
we derive our rights and obligations with respect to High Speed Access. Under
the terms of the network services agreement, we split revenue with High Speed
Access based on set percentages of gross revenues in each category of service.
The programming content agreement provides each of Vulcan Ventures and High
Speed Access with a license to use certain content and materials of the other on
a non-exclusive, royalty-free basis. Operations began in the first quarter of
1999. Net receipts from High Speed Access for the year ended December 31, 1999
were approximately $461,000.
Concurrently with entering into these agreements, High Speed Access issued
8 million shares of series B convertible preferred stock to Vulcan Ventures at a
purchase price of $2.50 per share. Vulcan Ventures also subscribed to purchase
2.5 million shares of series C convertible preferred stock, at a purchase price
of $5.00 per share on or before November 25, 2000, and received an option to
purchase an additional 2.5 million shares of series C convertible preferred
stock at a purchase price of $5.00 per share. In April 1999, Vulcan Ventures
purchased the entire 5 million shares of series C convertible preferred stock
for $25 million in cash. The shares of series B and series C convertible
preferred stock issued to Vulcan Ventures automatically converted at a price of
$3.23 per share into 22,224,688 million shares of common stock upon completion
of High Speed Access' initial public offering in June 1999.
Additionally, High Speed Access granted Vulcan Ventures warrants to
purchase up to 5,006,500 shares of common stock at a purchase price of $5.00 per
share. These warrants were converted to warrants to purchase up to 7,750,000
shares of common stock at a purchase price of $3.23 per share upon completion of
High Speed Access' initial public offering. The warrants were subsequently
assigned to Charter Communications Holding Company. The warrants are exercisable
at the rate of 1.55 shares of common stock for each home passed in excess of
750,000. On or before July 31, 2001 3.875 million warrants may be earned. These
warrants must be exercised on or before July 31, 2002. In addition, 3.875
million warrants may be earned on or before July 31, 2003 and must be exercised
on or before July 31, 2004. The warrants may be forfeited in certain
circumstances, generally if the number of homes passed in a committed system is
reduced.
As of December 31, 1999, Charter Communications Holding Company has earned
77,738 warrants under the agreements described above.
On April 13, 2000, Charter Communications, Inc. entered into a binding
letter of intent with High Speed Access. Charter Communications, Inc., on behalf
of itself and its subsidiaries, agreed to commit homes passed by our cable
television systems to High Speed Access for which High Speed
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Access will provide residential Tier 2 and above technical support and network
operations center support. Such systems will be in locations where we have
formally launched or intend to launch cable modem-based Internet access to
residential customers. Tier 2 support is support beyond the initial screening of
a problem.
We have agreed to commit an aggregate of 5,000,000 homes passed, including
all homes passed in systems previously committed by us to High Speed Access
(other than full turnkey systems), on or prior to the third anniversary of the
date of the definitive agreements. With respect to each system launched or
intended to be launched, we will pay a per customer fee to High Speed Access
according to agreed pricing terms. In addition, we will also compensate High
Speed Access for services that exceed certain minimum thresholds.
Upon entering into definitive agreements, High Speed Access will issue to
Charter Communications, Inc. a warrant to purchase shares of common stock of
High Speed Access at a price of $3.23 per share. Portions of such warrant will
become vested at the time an authorization to proceed is delivered to High Speed
Access with respect to a system, and will be based upon the number of homes
passed in such system. With respect to the initial aggregate 5,000,000 homes
passed, the warrant will provide that Charter Communications, Inc. will have the
right to purchase .775 shares of common stock for every home passed. With
respect to any additional homes passed, the warrant will provide that Charter
Communications, Inc. will have the right to purchase 1.55 shares of common stock
for every home passed.
The agreement governing the services to be provided by High Speed Access
will have a term of five years. We will have the option to renew the agreement
for additional successive 5-year terms on similar terms. On each renewal date,
High Speed Access will issue Charter Communications, Inc. an additional warrant
for each renewal term. These renewal warrants will grant Charter Communications,
Inc., the right to purchase additional shares of common stock at a price of
$10.00 per share. The number of shares of common stock subject to a renewal
warrant will be determined based upon .50 shares of common stock for every home
passed in each system committed to High Speed Access during the initial 5-year
term and each 5-year renewal term.
Either Charter Communications, Inc. or High Speed Access may terminate the
letter of intent if the definitive agreements are not executed by May 13, 2000.
The letter of intent and the definitive agreements may be assigned by Charter
Communications, Inc. to one or more of its direct or indirect subsidiaries
without consent from High Speed Access.
Vulcan Ventures owns 37.1% of the outstanding stock of High Speed Access.
Jerald L. Kent, our President and Chief Executive Officer and a director of the
issuers of the notes and of Charter Communications Holding Company and Charter
Communications, Inc. Stephen E. Silva, Senior Vice President -- Corporate
Development and Technology of Charter Communications, Inc., and Mr. Savoy, a
member of the boards of directors of Charter Holdings, Charter Communications
Holding Company and Charter Communications, Inc., are all members of the board
of directors of High Speed Access.
WORLDGATE. WorldGate is a provider of Internet access through cable
television systems. On November 7, 1997, Charter Investment, Inc. signed an
affiliation agreement with WorldGate pursuant to which WorldGate's services will
be offered to some of our customers. This agreement was assigned by Charter
Investment, Inc. to Charter Communications Holding Company upon the closing of
Charter Communications, Inc.'s initial public offering. The term of the
agreement is five years unless terminated by either party for failure of the
other party to perform any of its obligations or undertakings required under the
agreement. The agreement automatically renews for additional successive two-year
periods upon expiration of the initial five-year term. All of Charter
Communications Holding Company's operations take place at the subsidiary level
and it is as
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subsidiaries of Charter Communications Holding Company that we derive our rights
and obligations with respect to WorldGate. Pursuant to the agreement, we have
agreed to use our reasonable best efforts to deploy the WorldGate Internet
access service within a portion of our cable television systems and to install
the appropriate headend equipment in all of our major markets in those systems.
Major markets for purposes of this agreement include those in which we have more
than 25,000 customers. We incur the cost for the installation of headend
equipment. In addition, we have agreed to use our reasonable best efforts to
deploy such service in all non-major markets that are technically capable of
providing interactive pay-per-view service, to the extent we determine that it
is economically practical. When WorldGate has a telephone return path service
available, we will, if economically practical, use all reasonable efforts to
install the appropriate headend equipment and deploy the WorldGate service in
our remaining markets. Telephone return path service is the usage of telephone
lines to connect to the Internet to transmit data or receive data. We have also
agreed to market the WorldGate service within our market areas. We pay a monthly
subscriber access fee to WorldGate based on the number of subscribers to the
WorldGate service. We have the discretion to determine what fees, if any, we
will charge our subscribers for access to the WorldGate service. We started
offering WorldGate service in 1998. For the year ended December 31, 1999, we
paid to WorldGate approximately $1,661,000. For the year ended December 31,
1998, we paid to WorldGate approximately $276,000. We charged our subscribers
approximately $263,000 for the year ended December 31, 1999, and approximately
$22,000 for the year ended December 31, 1998.
On November 24, 1997, Charter Investment, Inc. acquired 70,423 shares of
WorldGate's series B preferred stock at a purchase price of $7.10 per share.
These shares of WorldGate's series B preferred stock were assigned to Charter
Communications Holding Company upon the closing of Charter Communications Inc.'s
initial public offering. On February 3, 1999, a subsidiary of Charter Holdings
acquired 90,909 shares of series C preferred stock at a purchase price of $11.00
per share. As a result of a stock split and WorldGate's initial public offering,
each share of series B preferred stock converted into two-thirds of a share of
WorldGate's common stock, and each share of series C preferred stock converted
into two-thirds of a share of WorldGate's common stock.
WINK. Wink offers an enhanced broadcasting system that adds interactivity
and electronic commerce opportunities to traditional programming and
advertising. Viewers can, among other things, find news, weather and sports
information on-demand and order products through use of a remote control. On
October 8, 1997, Charter Investment, Inc. signed a cable affiliation agreement
with Wink to deploy this enhanced broadcasting technology in our systems.
This agreement was assigned by Charter Investment, Inc. to Charter
Communications Holding Company upon the closing of Charter Communications,
Inc.'s initial public offering. The term of the agreement is three years. Either
party has the right to terminate the agreement for the other party's failure to
comply with any of its respective material obligations under the agreement. All
of Charter Communications Holding Company's operations take place at the
subsidiary level and it is as subsidiaries of Charter Communications Holding
Company that we derive our rights and obligations with respect to Wink. Pursuant
to the agreement, Wink granted us the non-exclusive license to use their
software to deliver the enhanced broadcasting to all of our cable systems. We
pay a fixed monthly license fee to Wink. We also supply all server hardware
required for deployment of Wink services. In addition, we agreed to promote and
market the Wink service to our customers within the area of each system in which
such service is being provided. We share in the revenue Wink generates from all
fees collected by Wink for transactions generated by our customers. The amount
of revenue shared is based on the number of transactions per month. As of
December 31, 1999, no revenue or expenses have been recognized as a result of
this agreement.
On November 30, 1998, Vulcan Ventures acquired 1,162,500 shares of Wink's
series C preferred stock for approximately $9.3 million. In connection with such
acquisition, Wink issued to Vulcan
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Ventures warrants to purchase shares of common stock. Additionally, Microsoft
Corporation, of which Mr. Allen is a director, owns an equity interest in Wink.
ZDTV. ZDTV operates a cable television channel which broadcasts shows
about technology and the Internet. Pursuant to a carriage agreement which
Charter Communications Holding Company intends to enter into with ZDTV, ZDTV has
agreed to provide us with programming for broadcast via our cable television
systems at no cost. The term of the proposed carriage agreement, with respect to
each of our cable systems, is from the date of launch of ZDTV on that cable
system until April 30, 2008. The carriage agreement grants us a limited
non-exclusive right to receive and to distribute ZDTV to our subscribers in
digital or analog format. The carriage agreement does not grant us the right to
distribute ZDTV over the Internet. We pay a monthly subscriber fee to ZDTV for
the ZDTV programming based on the number of our subscribers subscribing to ZDTV.
Additionally, we agreed to use commercially reasonable efforts to publicize the
programming schedule of ZDTV in each of our cable systems that offers or will
offer ZDTV. Upon reaching a specified threshold number of ZDTV subscribers,
then, in the event ZDTV inserts any informercials, advertorials and/or home
shopping into in the ZDTV programming, we receive from ZDTV a percentage of net
product revenues resulting from our distribution of these services. ZDTV may not
offer its services to any other cable operator which serves the same or fewer
number of subscribers at a more favorable rate or on more favorable carriage
terms.
On February 5, 1999, Vulcan Programming acquired an approximate one-third
interest in ZDTV. Mr. Allen owns 100% of Vulcan Programming. Mr. Savoy is the
president and director of Vulcan Programming. The remaining approximate
two-thirds interest in ZDTV is owned by Ziff-Davis Inc. Vulcan Ventures owns
approximately 3% of the interests in Ziff-Davis. The total current investment
made by Vulcan Programming and Vulcan Ventures is $104 million. On November 19,
1999, Vulcan Ventures announced that it would acquire an additional 64% in ZDTV
for $204.8 million bringing its interest in ZDTV to 97%. The remaining 3% of
ZDTV would be owned by its management and employees. The purchase was completed
on January 21, 2000.
USA NETWORKS. USA Networks operates USA Network and The Sci-Fi Channel,
which are cable television networks. USA Networks also operates Home Shopping
Network, which is a retail sales program available via cable television systems.
On May 1, 1994, Charter Investment, Inc. signed an affiliation agreement with
USA Networks.
This agreement was assigned by Charter Investment, Inc. to Charter
Communications Holding Company upon the closing of Charter Communications,
Inc.'s initial public offering. Pursuant to this affiliation agreement, USA
Networks has agreed to provide their programming for broadcast via our cable
television systems. The term of the affiliation agreement is until December 30,
1999. The affiliation agreement grants us the nonexclusive right to cablecast
the USA Network programming service. We pay USA Networks a monthly fee for the
USA Network programming service based on the number of subscribers in each of
our systems and the number and percentage of such subscribers receiving the USA
Network programming service. Additionally, we agreed to use best efforts to
publicize the schedule of the USA Network programming service in the television
listings and program guides which we distribute. We have paid to USA Networks
for programming approximately $16,740,000 for the year ended December 31, 1999,
approximately $556,000 for the year ended December 31, 1998, approximately
$204,000 for the year ended December 31, 1997, and approximately $134,000 for
the year ended December 31, 1996. In addition, we received commissions from Home
Shopping Network for sales generated by our customers totaling approximately
$1,826,000 for the year ended December 31, 1999, approximately $121,000 for the
year ended December 31, 1998, approximately $62,000 for the year ended December
31, 1997, and approximately $35,000 for the year ended December 31, 1996.
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Mr. Allen and Mr. Savoy are also directors of USA Networks. As of April
2000, Mr. Allen owned approximately 8.3% and Mr. Savoy owned less than 1% of the
capital stock of USA Networks.
OXYGEN MEDIA, INC. Oxygen Media provides content aimed at the female
audience for distribution over the Internet and cable television systems. Vulcan
Ventures invested $50 million in 1999 in Oxygen Media. In addition, Charter
Communications Holding Company plans to enter into a carriage agreement with
Oxygen Media pursuant to which we will carry Oxygen Media programming content on
certain of our cable systems. Nancy B. Peretsman, a director of Charter
Communications, Inc., serves on the board of directors of Oxygen Media. Mr.
Allen owns an approximate 7% interest in Oxygen.
BROADBAND PARTNERS, INC. Charter Communications, Inc. has entered into a
joint venture with Vulcan Ventures and Go2Net to provide broadband portal
services. See "Business -- Products and Services." Mr. Allen owns approximately
33% of the outstanding equity of Go2Net. Mr. Savoy, a director of Charter
Communications, Inc., is also a director of Go2Net.
RCN CORPORATION. On October 1, 1999, Vulcan Ventures entered into an
agreement to purchase shares of convertible preferred stock of RCN Corporation
for an aggregate purchase price of approximately $1.65 billion. If Vulcan
Ventures immediately converts the RCN preferred stock it has agreed to purchase
into common stock, it will own 27.4% of RCN when combined with the common stock
that Vulcan Ventures already owns. None of Charter Communications, Inc., Charter
Communications Holding Company, Charter Holdings or their respective
stockholders, members or subsidiaries, other than Vulcan Ventures, has any
interest in the RCN investment and none of them is expected to have any interest
in any subsequent investment in RCN that Vulcan Ventures may make. Charter
Communications, Inc.'s certificate of incorporation and Charter Communications
Holding Company's limited liability company agreement provide that the
businesses of RCN are not deemed to be "cable transmission businesses."
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following description of our indebtedness is qualified in its entirety
by reference to the relevant credit facilities, indentures and related documents
governing the debt.
EXISTING CREDIT FACILITIES
CHARTER OPERATING CREDIT FACILITIES. On March 18, 1999, Charter Operating
entered into senior secured credit facilities arranged by Chase Securities Inc.,
NationsBanc Montgomery Securities LLC and TD Securities (USA) Inc. Obligations
under the Charter Operating credit facilities are guaranteed by Charter
Operating's parent, Charter Holdings, and by Charter Operating's subsidiaries.
The obligations under the Charter Operating credit facilities are secured by
pledges by Charter Operating of intercompany obligations and the ownership
interests of Charter Operating and its subsidiaries, but are not secured by the
other assets of Charter Operating or its subsidiaries. The obligations under the
Charter Operating credit facilities are also secured by pledges of intercompany
obligations and the ownership interests of Charter Holdings in Charter
Operating, but are not secured by the other assets of Charter Holdings or
Charter Operating.
The Charter Operating credit facilities provide for borrowings of up to
$4.7 billion consisting of:
- an eight and one-half year reducing revolving loan in the amount of $1.25
billion;
- an eight and one-half year Tranche A term loan in the amount of $1.0
billion; and
- a nine-year Tranche B term loan in the amount of $2.45 billion.
The Charter Operating credit facilities provide for the amortization of the
principal amount of the Tranche A term loan facility and the reduction of the
revolving loan facility beginning on June 30, 2002 with respect to the Tranche A
term loan and on March 31, 2004 with respect to the revolving credit facility,
with a final maturity date, in each case, of September 18, 2007. The
amortization of the principal amount of the Tranche B term loan facility is
substantially "back-ended," with more than 90% of the principal balance due in
the year of maturity. The final maturity date of the Tranche B term loan
facility is March 18, 2008. The Charter Operating credit facilities also provide
for an incremental term facility of up to $1.0 billion conditioned upon receipt
of additional new commitments from lenders. Up to 50% of the borrowings under it
may be repaid on terms substantially similar to that of the Tranche A term loan
and the remaining portion on terms substantially similar to that of the Tranche
B term loan. In March 2000, $600.0 million of the incremental term facility was
drawn down. The maturity date for this term loan is September 18, 2008.
The Charter Operating credit facilities also contain provisions requiring
mandatory loan prepayments under some circumstances, such as when significant
amounts of assets are sold and the proceeds are not promptly reinvested in
assets useful in the business of Charter Operating. In the event that any
Existing 8.250% Charter Holdings Notes remain outstanding on the date which is
six months prior to the scheduled final maturity, the term loans under the
Charter Operating credit facility will mature and the revolving credit facility
will terminate on such date.
The Charter Operating credit facilities provide Charter Operating with two
interest rate options, to which a margin is added: a base rate option, generally
the "prime rate" of interest; and an interest rate option based on the interbank
eurodollar rate. Interest rate margins for the Charter Operating credit
facilities depend upon performance measured by a leverage ratio, which is the
ratio of indebtedness to annualized operating cash flow. This leverage ratio is
based on the debt of Charter Operating and its subsidiaries, exclusive of
outstanding notes and other debt for money borrowed,
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including guarantees by Charter Operating and by Charter Holdings. The interest
rate margins for the Charter Operating credit facilities are as follows:
- with respect to the revolving loan and the Tranche A term loan, the
margin ranges from 1.5% to 2.25% for eurodollar loans and from 0.5% to
1.25% for base rate loans; and
- with respect to the Tranche B term loan, the margin ranges from 2.25% to
2.75% for eurodollar loans and from 1.25% to 1.75% for base rate loans.
The Charter Operating credit facilities contain representations and
warranties, affirmative and negative covenants, information requirements, events
of default and financial covenants. The events of default include a
cross-default provision that is triggered by the failure of Charter Operating,
Charter Holdings or Charter Operating's subsidiaries to make payment on debt
with an outstanding total principal amount exceeding $50 million, the
acceleration of debt of this amount prior to its maturity or the failure to
comply with specified covenants. The financial covenants, which are generally
tested on a quarterly basis, measure performance against standards set for
leverage, debt service coverage, and operating cash flow coverage of cash
interest expense.
The Charter Operating credit facilities also contain a change of control
provision, making it an event of default, and permitting acceleration of the
debt, in the event that either:
- Mr. Allen, including his estate, heirs and other related entities, fails
to maintain a 25% direct or indirect voting and economic interest in
Charter Operating; or
- a change of control occurs under the indentures governing the March 1999
Charter Holdings notes or the notes.
The various negative covenants place limitations on the ability of Charter
Holdings, Charter Operating and their subsidiaries to, among other things:
- incur debt;
- pay dividends or make other distributions;
- incur liens;
- make acquisitions;
- make investments or asset sales; or
- enter into transactions with affiliates.
Distributions under the Charter Operating credit facilities to Charter
Holdings to pay interest on the March 1999 Charter Holdings notes are generally
permitted. Distributions under the Charter Operating credit facilities to
Charter Holdings to pay interest on the original notes and the new notes are
generally permitted, provided Charter Operating's cash flow for the four
complete quarters preceding the distribution exceeds 1.75 times its cash
interest expense, including the amount of such distribution. In each case, such
distributions to Charter Holdings are not permitted during the existence of a
default under the Charter Operating credit facilities.
As of December 31, 1999, $2.91 billion was outstanding and $1.19 billion
was available for borrowing under the Charter Operating credit facilities.
CREDIT FACILITY TO BE ARRANGED TO FUND A PORTION OF CAPITAL EXPENDITURES
CHARTER HOLDINGS COMMITTED SENIOR BRIDGE LOAN FACILITY. Morgan Stanley
Senior Funding, Inc. has committed to provide Charter Holdings and Charter
Capital with senior increasing rate bridge loans in an aggregate principal
amount of up to $1.0 billion. The commitment to provide the
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bridge loans expires on October 14, 2000. Each bridge loan must be in a
principal amount not less than $400.0 million and the bridge loans mature one
year from the date of the initial loan.
The conditions to closing under the bridge loans include:
- execution and delivery of satisfactory documentation of the bridge loans;
- absence of various types of material adverse changes, including material
adverse changes relative to us as well as adverse changes in the
financial and capital markets;
- the absence of certain litigation;
- our having adequate availability, in Morgan Stanley's judgment, under our
existing credit facilities;
- satisfactory completion by the bridge lenders of a due diligence review
of Charter Holdings and its subsidiaries, including, among other things,
their corporate ownership structure; and
- receipt of required approvals.
Many of these conditions are outside our control. We cannot assure you that
the closing conditions will be met.
The first loan will initially bear interest at an annual rate equal to the
yield corresponding to the bid price on our 10.25% notes less 0.25%, calculated
as of the initial date of funding of the first loan. If the first loan is not
repaid within 90 days following its initial date of funding, 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. The second loan
will initially bear interest at an annual rate equal to the greater of: (a) the
interest rate on the first loan in effect on the date of funding of the second
loan, (b) the yield corresponding to the bid price on our 10.25% notes as of the
date of funding of the second loan. If the second loan is not repaid in whole by
the last day of each 90-day period following its funding, the interest rate on
the loan will increase on the last day of each 90-day period by an amount equal
to the increase in interest rate on the first loan on such day. Unless
additional default interest is assessed, the interest rate on the bridge loans
will be between 9% and 15% annually.
Charter Holdings and Charter Capital must use the net cash proceeds of any
of the following to pay back the loans in full plus any accrued and unpaid
interest:
- any direct or indirect public offering or private placement of any debt
or equity securities by Charter Holdings and Charter Capital or any
subsidiary;
- any future bank borrowings other than under any of the existing credit
facilities of Charter Holdings and Charter Capital and any subsidiary;
and
- any future asset sales by Charter Holdings and Charter Capital or any
subsidiary.
If the bridge loans have not been repaid in full by the maturity date, and
provided there is no default under the bridge loans or any material
indebtedness, the bridge loans will be automatically converted into nine-year
term loans.
FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, the
required percentage of lenders under the senior secured credit facilities of
Falcon Cable Communications agreed to amend and restate the Falcon credit
agreement, which amendment and restatement was effective as of November 12,
1999, the date that Charter Communications Holding Company closed the Falcon
acquisition. The obligations under the Falcon credit facilities are guaranteed
by the direct parent of Falcon Cable Communications, Charter Communications VII,
LLC, and by the subsidiaries of Falcon Cable Communications. The obligations
under the Falcon credit facilities are secured by
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pledges of the ownership interests and intercompany obligations of Falcon Cable
Communications and its subsidiaries, but are not secured by other assets of
Falcon Cable Communications or its subsidiaries.
The Falcon credit facilities have maximum borrowing availability of $1.251
billion consisting of the following:
- a revolving facility in the amount of approximately $646.0 million;
- a term loan B in the amount of approximately $198.0 million;
- a term loan C in the amount of approximately $297.0 million; and
- a supplemental revolving facility of $110.0 million.
In addition to the foregoing, the Falcon credit facilities provide for
supplemental credit facilities when added to the above supplemental revolving
facility not in excess of $700.0 million. These supplemental credit facilities
are available, subject to the borrower's ability to obtain additional
commitments from the lenders. The terms of such additional borrowings are
subject to certain restrictions that may be no more materially restrictive than
the provisions of the Falcon credit facilities and will be determined at the
time of borrowing.
The revolving facility and the supplemental revolving facility amortize
beginning in 2001 and 2003, respectively, and ending on December 29, 2006 and
December 31, 2007, respectively. The term loan B and term loan C facilities
amortize beginning in 1999 and ending on June 29, 2007 and December 31, 2007,
respectively.
The Falcon credit facilities also contain provisions requiring mandatory
loan prepayments under certain circumstances, such as when significant amounts
of assets are sold and the proceeds are not promptly reinvested in assets useful
in the business of Falcon Cable Communications.
The Falcon credit facilities provide Falcon Cable Communications with two
interest rate options, to which a margin is added: a base rate option, generally
the "prime rate" of interest; and an interest rate option based on the interbank
eurodollar rate. Interest rates for these credit facilities, as well as a fee
payable on unborrowed amounts available thereunder, depend upon performance
measured by a "leverage ratio" which is the ratio of indebtedness to annualized
operating cash flow. This leverage ratio is based on the debt of Falcon Cable
Communications and its subsidiaries, exclusive of the Falcon debentures
described below. The interest rate margins for the Falcon credit facilities are
as follows:
- with respect to the revolving loan facility, the margin ranges from 1.0%
to 2.0% for eurodollar loans and from 0.0% to 1.0% for base rate loans;
- with respect to Term Loan B, the margin ranges from 1.75% to 2.25% for
eurodollar loans and from 0.75% to 1.25% for base rate loans; and
- with respect to Term Loan C, the margin ranges from 2.0% to 2.5% for
eurodollar loans and from 1.0% to 1.5% for base rate loans.
The Falcon credit facilities contain representations and warranties,
affirmative and negative covenants, information requirements, events of default
and financial covenants. The events of default for the Falcon credit facilities
include a cross-default provision that is triggered by, among other things, the
failure to make payment relating to specified outstanding debt of Falcon Cable
Communications, its direct and indirect parent companies, CC VII Holdings, LLC
and Charter Communications VII, LLC, or specified subsidiary guarantors in a
total amount of principal and accrued interest exceeding $10 million, the
acceleration of debt of this amount prior to its maturity or the failure to
comply with specified covenants. The financial covenants, which are generally
tested on
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a quarterly basis, measure performance against standards set for leverage, debt
service coverage, and operating cash flow coverage of cash interest expense.
The Falcon credit facilities also contain a change of control provision,
making it an event of default, and permitting acceleration of the debt, in the
event that either:
- Mr. Allen, including his estate, heirs and other related entities, fails
to maintain a 25% direct or indirect voting and economic interest in
Falcon Cable Communications; or
- a change of control occurs under the indentures governing the Falcon
debentures or under the terms of other specified debt of Falcon.
The various negative covenants place limitations on the ability of Falcon
Cable Communications and its subsidiaries to, among other things:
- incur debt;
- pay dividends or make other distributions;
- incur liens;
- make acquisitions;
- make investments or asset sales; or
- enter into transactions with affiliates.
Distributions under the Falcon credit facilities to pay interest on the
Falcon debentures are generally permitted, except during the existence of a
default under the Falcon credit facilities.
Distributions under the Falcon credit facilities to Charter Holdings to pay
interest on the notes and the March 1999 Charter Holdings notes will not be
permitted until CC VII Holdings, LLC is merged with and into Charter Holdings,
which merger Charter Holdings intends to effect on or about the time of the
closing of the Falcon change of control offers. After the merger, distributions
to Charter Holdings to pay interest on the notes and the March 1999 Charter
Holdings notes will generally be permitted, provided Falcon Cable
Communications' cash flow for the most recent fiscal quarter preceding the
distribution exceeds 1.75 times its cash interest expense, including the amount
of such distribution. Distributions to Charter Holdings will also be permitted
if Falcon Cable Communications meets specified financial ratios. In each case,
such distributions to Charter Holdings are not permitted during the existence of
a default under the Falcon credit facilities.
As of December 31, 1999, $865.5 million was outstanding and $385.5 million
was available for borrowing under the Falcon credit facilities. However, debt
covenants limited the amount that could be borrowed to $342.0 million at
December 31, 1999.
FANCH CREDIT FACILITIES. On November 12, 1999, the Fanch acquisition was
closed and CC VI Operating Company, LLC, the parent company of the Fanch cable
systems, entered into senior secured credit facilities arranged by Chase
Securities Inc. and Banc of America Securities LLC. The obligations under the
Fanch credit facilities are guaranteed by CC VI Operating's parent, CC VI
Holdings, LLC, and by the subsidiaries of CC VI Operating. The obligations under
the Fanch credit facilities are secured by pledges of the ownership interests
and intercompany obligations of CC VI Operating and its subsidiaries, but are
not secured by other assets of CC VI Operating or its subsidiaries.
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The Fanch credit facilities have maximum borrowings of $1.2 billion,
consisting of:
- a revolving facility in the amount of approximately $350 million;
- a term loan A in the amount of approximately $450 million; and
- a term loan B in the amount of approximately $400 million.
The revolving facility amortizes beginning in 2004 and ending in May 2008.
The term loan A and term loan B facilities amortize beginning in 2003 and ending
in May 2008 and November 2008, respectively.
In addition to the foregoing, the Fanch credit facilities provide for
supplemental credit facilities in the maximum amount of $300 million. These
supplemental credit facilities may be in the form of an additional term loan or
an aggregate increase in the amount of the term loan A or the revolving
facility. These supplemental credit facilities are available, subject to the
borrower's ability to obtain additional commitments from lenders. The
amortization of the additional term loans under the supplemental credit
facilities prior to May 2009 is limited to 1% per annum of the aggregate
principal amount of such additional term loans.
The Fanch credit facilities also contain provisions requiring mandatory
loan prepayments under specific circumstances, including when significant
amounts of assets are sold and the proceeds are not promptly reinvested in
assets useful in the business of CC VI Operating.
The Fanch credit facilities provide CC VI Operating with the following two
interest rate options, to which a margin is added: a base rate option, generally
the prime rate of interest; and an interest rate option rate based on the
interbank Eurodollar rate. Interest rates for the Fanch credit facilities, as
well as a fee payable on unborrowed amounts available thereunder, depend upon
performance measured by a leverage ratio, which is the ratio of indebtedness to
annualized operating cash flow. This leverage ratio is based on the debt of CC
VI Operating and its subsidiaries. The interest rate margins for the Fanch
credit facilities are as follows:
- with respect to the revolving loan facility and term loan A, the margin
ranges from 1.0% to 2.25% for eurodollar loans and from 0.0% to 1.25% for
base rate loans; and
- with respect to term loan B, the margin ranges from 2.50% to 3.00% for
eurodollar loans and from 1.50% to 2.00% for base rate loans.
The Fanch credit facilities contain representations and warranties,
affirmative and negative covenants, information requirements, events of default
and financial covenants. The events of default for the Fanch credit facilities
include a cross-default provision that is triggered by the failure to make
payment on debt of CC VI Operating, CC VI Holdings and the subsidiaries of CC VI
Operating in a total amount of $25 million, the acceleration of debt of this
amount prior to its maturity or the failure to comply with specified covenants.
The financial covenants, which are generally tested on a quarterly basis,
measure performance against standards set for leverage, debt service coverage,
and operating cash flow coverage of cash interest expense.
The Fanch credit facilities also contain a change of control provision,
making it an event of default, and permitting acceleration of the debt, in the
event of any of the following:
- Mr. Allen, including his estate, heirs and other related entities, fails
to maintain a 25% direct or indirect voting and economic interest in CC
VI Operating;
- CC VI Operating is no longer a direct or indirect subsidiary of Charter
Communications Holding Company; or
- A change of control occurs under specified indebtedness of CC VI
Holdings, CC VI Operating or CC VI Operating's subsidiaries.
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Various negative covenants place limitations on the ability of CC VI
Operating and its subsidiaries to, among other things:
- incur debt;
- pay dividends or make other distributions;
- incur liens;
- make acquisitions;
- make investments or asset sales; or
- enter into transactions with affiliates.
Distributions under the Fanch credit facilities to Charter Holdings to pay
interest on the notes and the March 1999 Charter Holdings notes are generally
permitted, provided CC VI Operating's cash flow for the four complete quarters
preceding the distribution exceeds 1.75 times its cash interest expense,
including the amount of such distribution. Distributions to Charter Holdings
will also be permitted if CC VI Operating meets specified financial ratios. In
each case, such distributions to Charter Holdings are not permitted during the
existence of a default under the Fanch credit facilities.
As of December 31, 1999, approximately $850 million was outstanding and
$350 million was available for borrowing under the Fanch credit facilities.
AVALON CREDIT FACILITIES. On November 15, 1999 the Avalon acquisition was
closed and CC Michigan, LLC and CC New England, LLC (formerly Avalon Cable of
Michigan, Inc. and Avalon Cable of New England LLC, respectively) entered into
senior secured credit facilities arranged by Bank of Montreal. The obligations
under the Avalon credit facilities are guaranteed by the parent of the Avalon
borrowers, CC V Holdings, LLC (formerly Avalon Cable LLC) and by the
subsidiaries of the Avalon borrowers. The obligations under the Avalon credit
facilities are secured by pledges of the ownership interests and intercompany
obligations of the Avalon borrowers and their subsidiaries, but are not secured
by other assets of the Avalon borrowers or their subsidiaries. The Avalon credit
facilities are also secured by a pledge of CC V Holdings' equity interest in the
Avalon borrowers and intercompany obligations with respect to the Avalon
borrowers.
The Avalon credit facilities have maximum borrowings of $300 million,
consisting of:
- a revolving facility in the amount of approximately $175 million; and
- a term loan B in the amount of approximately $125 million.
We borrowed $165 million under the Avalon credit facilities to fund a
portion of the Avalon purchase price.
Amounts available under the revolving facility reduce annually in specified
percentages beginning in the fourth year following the closing date of the
facility. The term loan B facility amortizes beginning in the fourth year
following the closing date.
In addition to the foregoing, the Avalon credit facilities provide for
supplemental credit facilities in the maximum amount of $75 million. These
supplemental credit facilities may be in the form of an additional term loan or
an aggregate increase in the amount of the revolving facility. These
supplemental credit facilities will be available, subject to the borrowers'
ability to obtain additional commitments from lenders. These supplemental credit
facilities are available to the Avalon borrowers until December 31, 2003, and,
if borrowed, the weighted average life and final maturity will not be less than
that of the revolving facility.
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The Avalon credit facilities also contain provisions requiring mandatory
loan prepayments under specific circumstances, including when significant
amounts of assets are sold and the proceeds are not promptly reinvested in
assets useful in the business of the Avalon borrowers.
The Avalon credit facilities provide the following two interest rate
options, to which a margin is added: a base rate option, generally the "prime
rate" of interest; and an interest rate option based on the interbank eurodollar
rate. Interest rates for the Avalon credit facilities, as well as a fee payable
on unborrowed amounts available thereunder, will depend upon performance
measured by a leverage ratio, which is the ratio of indebtedness to annualized
operating cash flow. This leverage ratio is based on the debt of the Avalon
borrowers and their subsidiaries. The interest rate margins for the Avalon
credit facilities are as follows:
- with respect to the revolving loan facility, the margin ranges from 1.0%
to 1.875% for eurodollar loans and from 0.0% to 0.875% for base rate
loans; and
- with respect to term loan B, the margin ranges from 2.50% to 2.75% for
eurodollar loans and from 1.50% to 1.750% for base rate loans.
The Avalon credit facilities contain representations and warranties,
affirmative and negative covenants, information requirements, events of default
and financial covenants. The events of default for the Avalon credit facilities
include a cross-default provision that is triggered by the failure to make
payment on debt of the Avalon borrowers, CC V Holdings and specified
subsidiaries of the Avalon borrowers in a total amount of $20 million, the
acceleration of debt of this amount prior to its maturity or the failure to
comply with specified covenants. The financial covenants, which are generally
tested on a quarterly basis, measure performance against standards set for
leverage, debt service coverage, and operating cash flow coverage of cash
interest expense.
The Avalon credit facilities also contain a change of control provision,
making it an event of default, and permitting acceleration of the debt, in the
event that Mr. Allen, including his estate, heirs and other related entities,
fails to maintain a 25% direct or indirect voting and economic interest in the
Avalon borrowers.
Various negative covenants place limitations on the ability of the Avalon
borrowers and their subsidiaries to, among other things:
- incur debt;
- pay dividends or make other distributions;
- incur liens;
- make acquisitions;
- make investments or asset sales; or
- enter into transactions with affiliates.
Distributions under the Avalon credit facilities to pay interest on certain
indebtedness of CC V Holdings are generally permitted, except during the
existence of a default under the Avalon credit facilities.
Distributions under the Avalon credit facilities to Charter Holdings to pay
interest on the notes and the March 1999 Charter Holdings notes are generally
permitted, provided the Avalon borrowers' consolidated cash flow for the four
complete quarters preceding the distribution exceeds 2.1 times their combined
cash interest expense, including the amount of such distribution. Distributions
to Charter Holdings will also be permitted if the Avalon borrowers meet
specified financial ratios. In each case, such distributions to Charter Holdings
are not permitted during the existence of a default under the Avalon credit
facilities.
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As of December 31, 1999, there was approximately $170 million outstanding
and $130 million was available for borrowing under the Avalon credit facilities.
BRESNAN CREDIT FACILITIES. In connection with the Bresnan acquisition, our
subsidiary, CC VIII Operating, LLC (formerly Bresnan Telecommunications Company)
amended and restated its previous senior secured credit facilities and increased
the available borrowings under the facilities. At the closing of the Bresnan
acquisition, we borrowed approximately $601.2 million to replace the borrowings
outstanding under the previous credit facilities and an additional $30.0 million
to fund a portion of the Bresnan purchase price.
The obligations under the Bresnan credit facilities are guaranteed by the
parent company of the Bresnan borrower, CC VIII Holdings, LLC (formerly Bresnan
Communications Group LLC), and by the subsidiaries of the Bresnan borrower. The
obligations under the Bresnan credit facilities are secured by pledges of the
ownership interests and intercompany obligations of the Bresnan borrower and its
subsidiaries, but are not secured by other assets of the Bresnan borrower or its
subsidiaries. The Bresnan credit facilities are also secured by a pledge of CC
VIII Holdings' equity interest in the Bresnan borrower and intercompany
obligations with respect to the Bresnan borrower.
The Bresnan credit facilities provide for borrowings of up to $900 million,
consisting of:
- a reducing revolving loan facility in the amount of $200 million;
- a term loan A facility in the amount of $403 million; and
- a term loan B facility in the amount of $297 million.
The Bresnan credit facilities provide for the amortization of the principal
amount of the term loan A 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 loan B 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 million, which is conditioned upon receipt of
additional commitments from lenders. If the incremental facility becomes
available, it may be in the form of revolving loans or term loans, but may not
amortize more quickly than the reducing revolving loan facility or the term loan
A facility, and may not have a final maturity date earlier than six calendar
months after the maturity date of the term loan B facility.
The Bresnan credit facilities provide the following two interest rate
options, to which a margin is added: a base rate, generally the "prime rate" of
interest; and an interest rate option based on the interbank eurodollar rate.
Interest rate margins for the Bresnan credit facilities depend upon performance
measured by a leverage ratio, which is the ratio of total debt to annualized
operating cash flow. The leverage ratio is based on the debt of the Bresnan
borrower and its subsidiaries. The interest rate margins for the Bresnan credit
facilities are as follows:
- with respect to the term loan A facility and the revolving loan facility,
the margin ranges from 0.75% to 2.25% for eurodollar loans and from 0.0%
to 1.25% for base rate loans; and
- with respect to the term loan B facility, the margin ranges from 2.5% to
2.75% for eurodollar loans and from 1.5% to 1.75% for base rate loans.
The Bresnan credit facilities contain various representations and
warranties, affirmative and negative covenants, information requirements, events
of default and financial covenants. The events of default for the Bresnan credit
facilities include a cross-default provision that is triggered by, among other
things, the failure to make payment on the debt of the Bresnan borrower, its
subsidiaries and CC VIII Holdings in a total amount in excess of $25 million,
the acceleration of debt of this amount prior to its maturity or failure to
comply with specified covenants The financial covenants, which are
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generally tested on a quarterly basis, measure performance against standards set
for leverage, debt service coverage, and operating cash flow coverage of cash
interest expense.
Certain negative covenants place limitations on the ability of the Bresnan
borrower and its restricted subsidiaries to, among other things:
- incur debt;
- pay dividends or make other distributions;
- incur liens;
- make acquisitions;
- make investments or asset sales; or
- enter into transactions with affiliates.
The Bresnan credit facilities contain a change in control provision making
it an event of default permitting acceleration of the debt in the event of any
of the following:
- Mr. Allen, including his estate, heirs and related entities, fails to
maintain, directly or indirectly, at least 51% voting interest in the
Bresnan borrower, or ceases to own of record or beneficially, directly or
indirectly, at least 25% of the equity interests of the Bresnan borrower;
- a change of control or similar defined term shall occur in any agreement
governing debt of CC VIII Holding or the Bresnan borrower, and such debt
is at least in the amount of $25 million;
- Charter Communications Holding Company shall cease to own, directly or
indirectly, at least 51% of the equity interests in the borrower; or
- the Bresnan borrower shall cease to be a direct wholly owned subsidiary
of CC VIII Holdings.
Distributions under the Bresnan credit facilities to pay interest on
certain indebtedness of CC VIII Holdings are generally permitted, except during
the existence of a default.
Distributions under the Bresnan credit facilities to Charter Holdings to
pay interest on the notes and the March 1999 notes are generally permitted
provided the Bresnan borrower's consolidated cash flow for the four complete
quarters preceding the distribution exceeds 1.75 times the consolidated interest
expense of the Bresnan borrower, including the amount of such distribution. In
each case, such distributions to Charter Holdings are not permitted during the
existence of a default under the Bresnan credit facilities.
As of February 29, 2000, there was $647.9 million outstanding and $252.1
million was available for borrowing under the Bresnan credit facilities.
EXISTING PUBLIC DEBT
THE MARCH 1999 CHARTER HOLDINGS NOTES. The March 1999 Charter Holdings
notes were issued under three separate indentures, each dated as of March 17,
1999, among Charter Holdings and Charter Capital, as the issuers, and Harris
Trust and Savings Bank, as trustee. Charter Holdings and Charter Capital
recently exchanged these notes for new March 1999 Charter Holdings notes with
substantially similar terms, except that the new March 1999 Charter Holdings
notes are registered under the Securities Act and, therefore, do not bear
legends restricting their transfer.
The March 1999 Charter Holdings notes are general unsecured obligations of
the issuers. The March 1999 8.250% Charter Holdings notes mature on April 1,
2007 and as of December 31, 1999, there was $600.0 million in total principal
amount outstanding. The March 1999 8.625% Charter
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Holdings notes mature on April 1, 2009 and as of December 31, 1999, there was
$1.5 billion in total principal amount outstanding. The March 1999 9.920%
Charter Holdings notes mature on April 1, 2011 and as of December 31, 1999, the
total accreted value was $977.8 million. Cash interest on the March 1999 9.920%
Charter Holdings notes will not accrue prior to April 1, 2004.
The March 1999 Charter Holdings notes are senior debts of Charter Holdings
and Charter Capital. They rank equally with the current and future unsecured and
unsubordinated debt of Charter Holdings, including the original notes and the
new notes.
The issuers will not have the right to redeem the March 1999 8.250% Charter
Holdings notes prior to their maturity date on April 1, 2007. Before April 1,
2002, the issuers may redeem up to 35% of each of the March 1999 8.625% Charter
Holdings notes and the March 1999 9.920% Charter Holdings notes, in each case,
at a premium with the proceeds of certain offerings of equity securities. In
addition, on or after April 1, 2004, the issuers may redeem some or all of the
March 1999 8.625% Charter Holdings notes and the March 1999 9.920% Charter
Holdings notes at any time, in each case, at a premium. The optional redemption
price declines to 100% of the principal amount of March 1999 Charter Holdings
notes redeemed, plus accrued and unpaid interest, if any, for redemption on or
after April 1, 2007.
In the event of a specified change of control event, the issuers must offer
to repurchase any then outstanding March 1999 Charter Holdings notes at 101% of
their principal amount or accreted value, as applicable, plus accrued and unpaid
interest, if any.
The indentures governing the March 1999 Charter Holdings notes contain
substantially identical events of default, affirmative covenants and negative
covenants as those contained in the indentures governing the original notes and
the new notes.
RENAISSANCE NOTES. The 10% senior discount notes due 2008 were issued by
Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation, with Renaissance Media Group LLC as
guarantor and the United States Trust Company of New York as trustee.
Renaissance Media Group LLC, which is the direct or indirect parent company of
these issuers, is now a subsidiary of Charter Operating. The Renaissance 10%
notes and the Renaissance guarantee are unsecured, unsubordinated debt of the
issuers and the guarantor, respectively. In October 1998, the issuers exchanged
$163.175 million of the original issued and outstanding Renaissance 10% notes
for an equivalent value of new Renaissance 10% notes. The form and terms of the
new Renaissance 10% notes are the same in all material respects as the form and
terms of the original Renaissance 10% notes except that the issuance of the new
10% Renaissance notes was registered under the Securities Act.
There will not be any payment of interest in respect of the Renaissance 10%
notes prior to October 15, 2003. Interest on the Renaissance 10% notes shall be
paid semi-annually in cash at a rate of 10% per annum beginning on October 15,
2003. The Renaissance 10% notes are redeemable at the option of the issuer, in
whole or in part, at any time on or after April 15, 2003, initially at 105% of
their principal amount at maturity, plus accrued interest, declining to 100% of
the principal amount at maturity, plus accrued interest, on or after April 15,
2006. In addition, at any time prior to April 15, 2001, the issuers may redeem
up to 35% of the original total principal amount at maturity of the Renaissance
10% notes with the proceeds of one or more sales of equity interests at 110% of
their accreted value on the redemption date, provided that after any such
redemption at least $106 million total principal amount at maturity of
Renaissance 10% notes remains outstanding.
Our acquisition of Renaissance triggered change of control provisions of
the Renaissance 10% notes that required us to offer to purchase the Renaissance
10% notes at a purchase price equal to 101% of their accreted value on the date
of the purchase, plus accrued interest, if any. In May 1999, we made an offer to
repurchase the Renaissance 10% notes, and holders of Renaissance 10% notes
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representing 30% of the total principal amount outstanding at maturity tendered
their Renaissance 10% notes for repurchase.
The indenture governing the Renaissance 10% notes contains certain
covenants that restrict the ability of the issuers and their restricted
subsidiaries to:
- incur additional debt;
- create liens;
- engage in sale-leaseback transactions;
- pay dividends or make other distributions in respect of their equity
interests;
- redeem capital stock;
- make investments or certain other restricted payments;
- sell assets;
- issue or sell capital stock of restricted subsidiaries;
- enter into transactions with stockholders or affiliates; and
- effect a consolidation or merger.
The Renaissance 10% notes contain events of default that include a
cross-default provision triggered by the failure of Renaissance Media Group LLC
or any of its specified subsidiaries to make payment on debt at maturity with a
total principal amount of $10 million or more or the acceleration of debt of
this amount prior to maturity.
As of December 31, 1999, there was outstanding $114.4 million total
principal amount at maturity of Renaissance 10% notes, with an accreted value of
$83.0 million.
THE FALCON DEBENTURES. The Falcon debentures, consisting of 8.375% series A
senior debentures due 2010 and 9.285% Series A senior discount debentures due
2010, were issued by CC VII Holdings, LLC, formerly known as Falcon
Communications, L.P., and Falcon Funding Corporation on April 3, 1998. On August
5, 1998, the issuers commenced an exchange offer whereby the outstanding $375
million Falcon 8.375% debentures and $435.3 million Falcon 9.285% debentures
were exchanged for an equivalent value of series B senior debentures and series
B senior discount debentures. The form and terms of the new Falcon debentures
are the same as the form and terms of the corresponding original Falcon
debentures, except that the issuance of the new Falcon debentures was registered
under the Securities Act and, therefore, the new Falcon debentures do not bear
legends restricting their transfer.
In the event of specified change of control events, the holders of the
Falcon debentures have the right to require the issuers to purchase their Falcon
debentures at a price equal to 101% of their principal amount or accreted value,
as applicable, plus accrued and unpaid interest, if any, to the date of
purchase. The Falcon acquisition gave rise to this right. On December 10, 1999,
we made offers to repurchase the Falcon debentures and holders of all of the
Falcon 8.375% and 9.285% debentures tendered their debentures for repurchase.
Pursuant to the change of control offers and purchases in the "open market," all
of the 8.375% series debentures were repurchased for $388.0 million, including
unpaid and accrued interest and all of the 9.285% senior discount debentures
were repurchased for $328.1 million in February 2000.
As of December 31, 1999, there was $375 million total principal amount
outstanding on the Falcon 8.375% debentures, and the accreted value of the
Falcon 9.285% debentures was $319.1 million.
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THE AVALON 11.875% NOTES. On December 10, 1998, CC V Holdings, LLC,
formerly known as Avalon Cable LLC, and CC V Holdings Finance, Inc. (formerly
Avalon Cable Holdings Finance, Inc.) jointly issued $196 million total principal
amount at maturity of 11.875% senior discount notes due 2008. On July 22, 1999,
the issuers exchanged $196 million of the original issued and outstanding Avalon
11.875 % notes for an equivalent amount of new Avalon 11.875% notes. The form
and terms of the new Avalon 11.875% notes are substantially identical to the
original Avalon 11.875% notes except that they are registered under the
Securities Act and, therefore, are not subject to the same transfer
restrictions.
The Avalon 11.875% notes are guaranteed by certain subsidiaries of CC V
Holdings.
There will be no current payments of cash interest on the Avalon 11.875%
notes before December 1, 2003. The Avalon 11.875% notes accrete in value at a
rate of 11.875% per annum, compounded semi-annually, to an aggregate principal
amount of $196 million on December 1, 2003. After December 1, 2003, cash
interest on the Avalon 11.875% notes:
- will accrue at the rate of 11.875% per year on the principal amount at
maturity; and
- will be payable semi-annually in arrears on June 1 and December 1 of each
year, commencing June 1, 2004.
On December 1, 2003, the issuers will be required to redeem an amount equal
to $369.79 per $1,000 in principal amount at maturity of each Avalon 11.875%
note, on a pro rata basis, at a redemption price of 100% of the principal amount
then outstanding at maturity of the Avalon 11.875% notes so redeemed.
On or after December 1, 2003, the issuers may redeem the Avalon 11.875%
notes, in whole or in part, at a specified premium. The optional redemption
price declines to 100% of the principal amount of the Avalon 11.875% notes
redeemed, plus accrued and unpaid interest, if any, for redemptions on or after
December 1, 2006. Before December 1, 2001, the issuers may redeem up to 35% of
the total principal amount at maturity of the Avalon 11.875% notes with the
proceeds of one or more equity offerings and/or equity investments.
In the event of specified change of control events, holders of the Avalon
11.875% notes have the right to sell their Avalon 11.875% notes to the issuers
at 101% of:
- the accreted value of the Avalon 11.875% notes in the case of repurchases
of Avalon 11.875% notes prior to December 1, 2003; or
- the total principal amount of the Avalon 11.875% notes in the case of
repurchases of Avalon 11.875% notes on or after December 1, 2003, plus
accrued and unpaid interest and liquidated damages, if any, to the date
of purchase.
Our acquisition of Avalon triggered this right. On December 3, 1999, we
commenced a change of control repurchase offer with respect to the Avalon
11.875% notes. In January 2000, we completed change of control offers in which
we repurchased $16.3 million aggregate principal amount of the 11.875% notes at
a purchase price of 101% of accreted value as of January 28, 2000. The aggregate
repurchase price of $10.5 million was funded with proceeds of the sale of the
original notes.
Among other restrictions, the indenture governing the Avalon 11.875% notes
limits the ability of the issuers and their specified subsidiaries to:
- incur additional debt;
- pay dividends or make specified other restricted payments;
- enter into transactions with affiliates;
- make certain investments;
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- sell assets or subsidiary stock;
- engage in sale-leaseback transactions;
- create liens;
- create or permit to exist restrictions dividends or other payments from
restricted subsidiaries;
- redeem equity interests;
- merge, consolidate or sell all or substantially all of their combined
assets; and
- with respect to restricted subsidiaries, issue capital stock.
The Avalon 11.875% notes contain events of default that include a
cross-default provision triggered by the failure of CC V Operating, CC V
Holdings Finance, Inc. or any specified subsidiary to make payment on debt with
a total principal amount of $5 million or more or the acceleration of debt of
this amount prior to maturity.
As of December 31, 1999, the total accreted value of the outstanding Avalon
11.875% notes was $124.8 million. As of February 29, 2000, subsequent to the
expiration of the Avalon change of control offer for the Avalon 11.875% notes,
the total accreted value of the outstanding Avalon 11.875% notes was $116.4
million.
THE AVALON 9.375% NOTES. On December 10, 1998, CC New England, LLC,
formerly known as Avalon Cable of New England LLC, and CC V Finance Inc.,
formerly known as Avalon Cable Finance, Inc., jointly issued $150 million total
principal amount of 9.375% senior subordinated notes due December 1, 2008. On
July 22, 1999, the issuers exchanged $150 million of the Avalon 9.375% notes for
an equivalent amount of new Avalon 9.375% notes. The form and terms of the new
Avalon 9.375% notes are substantially the same as the form and terms of the
original Avalon 9.375% notes except that the new Avalon 9.375% notes are
registered under the Securities Act and do not bear a legend restricting the
transfer thereof.
Upon the occurrence of specified change of control events or the sale of
certain assets, holders of the Avalon 9.375% notes will have the opportunity to
sell their Avalon 9.375% notes to the issuers at 101% of their face amount, plus
accrued and unpaid interest and liquidated damages, if any, to the date of
purchase. Our acquisition of Avalon triggered this right. On December 3, 1999,
we commenced the Avalon change of control offer with respect to the Avalon
9.375% notes. In January 2000, we completed the change of control offer in which
we repurchased $134.0 million aggregate principal amount of the Avalon 9.375%
notes for 101% of their principal amount, plus accrued and unpaid interest
thereon through January 28, 2000. The aggregate repurchase price was $137.4
million and was funded with proceeds of the sale of the original notes.
In addition to the above change of control repurchase, we repurchased the
remaining Avalon 9.375% notes (including accrued and unpaid interest) in the
"open market" for $16.3 million, also using cash received the proceeds of the
sale of the original notes.
As of December 31, 1999, there was $150 million total principal outstanding
on the Avalon 9.375% notes.
BRESNAN NOTES. On February 2, 1999, Bresnan Communications Group LLC and
Bresnan Capital Corporation jointly issued $170 million total principal amount
of 8% series A senior notes due 2009 and $275 million total principal amount at
maturity of 9.25% series A senior discount notes due 2009. In September 1999,
the issuers of the Bresnan notes completed an exchange offer in which the
Bresnan 8% notes and the Bresnan 9.25% notes representing 100% of the principal
amount of all Bresnan notes outstanding were exchanged for new Bresnan notes.
The form and terms of the new Bresnan notes were the same in all material
respects as the form and terms of the original Bresnan notes except that the new
Bresnan notes were registered under the Securities Act and did not bear a legend
restricting their transfer.
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Upon the occurrence of specified change of control events, each holder of
Bresnan notes had the right to require the issuers to purchase all or any part
of such holder's notes at a purchase price of 101% of the principal amount, plus
accrued and unpaid interest, if any, to the purchase date, in the case of the
Bresnan 8% notes, and 101% of the accreted value thereof in the case of the
Bresnan 9.25% notes. The Bresnan acquisition triggered this right. On February
15, 2000 we commenced a change of control repurchase offer with respect to the
Bresnan notes. In March 2000, we repurchased all of the outstanding principal
amounts of the Bresnan notes plus accrued and unpaid interest or accreted value,
as applicable, for a total of $369.7 million.
As of December 31, 1999, there was $170 million total principal outstanding
on the Bresnan 8% notes and the accreted value of the outstanding Bresnan 9.25%
notes was $190.1 million.
INTERCOMPANY LOANS
For a description of certain intercompany loans made by Charter
Communications, Inc. and Charter Communications Holding Company to certain of
their subsidiaries, see "Certain Relationships and Related
Transactions -- Transactions with Management and Others -- Intercompany Loans."
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions."
The original notes were issued, and the new notes will be issued, under
three separate indentures, each dated as of January 12, 2000, among the issuers
and Harris Trust and Savings Bank, as trustee. The terms of the notes include
those stated in the indentures and those made part of the indentures by
reference to the Trust Indenture Act of 1939, as amended.
The form and terms of the new notes are the same in all material respects
to the form and terms of the original notes, except that the new notes will have
been registered under the Securities Act of 1933 and, therefore, will not bear
legends restricting the transfer thereof. The original notes have not been
registered under the Securities Act of 1933 and are subject to certain transfer
restrictions.
The following description is a summary of the material provisions of the
indentures. It does not restate the indentures in their entirety. We urge you to
read the indentures because they, and not this description, define your rights
as holders of the new notes. Copies of the indentures are available as set forth
under "Business -- Additional Information."
BRIEF DESCRIPTION OF THE NOTES
The notes:
- are general unsecured obligations of the issuers;
- are effectively subordinated in right of payment to all existing and
future secured Indebtedness of the issuers to the extent of the value of
the assets securing such Indebtedness and to all liabilities, including
trade payables, of Charter Holdings' Subsidiaries, other than Charter
Capital;
- are equal in right of payment to all existing and future unsubordinated,
unsecured Indebtedness of the issuers; and
- are senior in right of payment to any future subordinated Indebtedness of
the issuers.
At December 31, 1999, on a pro forma basis giving effect to the offering of
the notes, acquisitions closed since that date, the recent transfers to us of
the Fanch, Falcon and Avalon cable systems and the Kalamazoo transaction, the
outstanding Indebtedness of Charter Holdings and its Subsidiaries would have
totaled approximately $11.2 billion, $6.4 billion of which would have been
Indebtedness of our Subsidiaries and effectively senior to the notes.
The notes will rank equally with the senior notes and senior discount notes
of the issuers which were issued in March 1999.
As of the date of the indentures, all the Subsidiaries of Charter Holdings
will be "Restricted Subsidiaries." However, under the circumstances described
below under "-- Certain Covenants -- Investments," we will be permitted to
designate certain of our Subsidiaries as "Unrestricted Subsidiaries."
Unrestricted Subsidiaries will generally not be subject to the restrictive
covenants in the indentures.
PRINCIPAL, MATURITY AND INTEREST OF NOTES
10.00% NOTES
The 10.00% notes are limited in aggregate principal amount to $675 million,
and will be issued in denominations of $1,000 and integral multiples of $1,000.
The 10.00% notes will mature on April 1, 2009.
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Interest on the 10.00% notes will accrue at the rate of 10.00% per annum
and will be payable semi-annually in arrears on April 1 and October 1,
commencing on April 1, 2000. The issuers will make each interest payment to the
holders of record of the 10.00% notes on the immediately preceding March 15 and
September 15.
Interest on the 10.00% notes will accrue from the date of issuance of the
original notes or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
10.25% NOTES
The 10.25% notes are limited in aggregate principal amount to $325 million,
and will be issued in denominations of $1,000 and integral multiples of $1,000.
The 10.25% notes will mature on January 15, 2010.
Interest on the 10.25% notes will accrue at the rate of 10.25% per annum
and will be payable semi-annually in arrears on January 15 and July 15,
commencing on July 15, 2000. The issuers will make each interest payment to the
holders of record of the 10.25% notes on the immediately preceding January 1 and
July 1.
Interest on the 10.25% notes will accrue from the date of issuance of the
original notes or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
11.75% NOTES
The 11.75% notes are limited in aggregate principal amount at maturity to
$532 million and originally were issued at an issue price of $564.48 per $1,000
principal amount at maturity, representing a yield to maturity of 11.75%,
calculated on a semi-annual bond equivalent basis, calculated from January 12,
2000. The issuers will issue 11.75% notes, in denominations of $1,000 principal
amount at maturity and integral multiples of $1,000 principal amount at
maturity. The 11.75% notes will mature on January 15, 2010.
Cash interest on the 11.75% notes will not accrue prior to January 15,
2005. Thereafter, cash interest on the 11.75% notes will accrue at a rate of
11.75% per annum and will be payable semi-annually in arrears on January 15 and
July 15, commencing on July 15, 2005. The issuers will make each interest
payment to the holders of record of the 11.75% notes on the immediately
preceding January 1 and July 1. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
The 11.75% notes will accrete at a rate of 11.75% per year to an aggregate
amount of $532 million as of January 15, 2005. For United States federal income
tax purposes, holders of the 11.75% notes will be required to include amounts in
gross income in advance of the receipt of the cash payments to which the income
is attributable. See "Certain United States Federal Tax Considerations."
OPTIONAL REDEMPTION
10.00% NOTES
The 10.00% notes will not be redeemable at the issuers' option prior to
maturity.
10.25% NOTES
At any time prior to January 15, 2003, the issuers may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount of the 10.25%
notes on a pro rata basis or nearly as pro
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rata as practicable, at a redemption price of 110.25% of the principal amount
thereof, plus accrued and unpaid interest to the redemption date, with the net
cash proceeds of one or more Equity Offerings; provided that
(1) at least 65% of the aggregate principal amount of 10.25% notes
remains outstanding immediately after the occurrence of such redemption
excluding 10.25% notes held by Charter Holdings and its Subsidiaries; and
(2) the redemption must occur within 60 days of the date of the
closing of such Equity Offering.
Except pursuant to the preceding paragraph, the 10.25% notes will not be
redeemable at the issuers' option prior to January 15, 2005.
On or after January 15, 2005, the issuers may redeem all or a part of the
10.25% notes upon not less than 30 nor more than 60 days notice, at the
redemption prices, expressed as percentages of principal amount, set forth below
plus accrued and unpaid interest thereon, if any, to the applicable redemption
date, if redeemed during the twelve-month period beginning on January 15 of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- - - ---- ----------
<S> <C>
2005........................................................ 105.125%
2006........................................................ 103.417%
2007........................................................ 101.708%
2008 and thereafter......................................... 100.000%
</TABLE>
11.75% NOTES
At any time prior to January 15, 2003, the issuers may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount at maturity of the
11.75% notes on a pro rata basis or nearly as pro rata as practicable, at a
redemption price of 111.75% of the Accreted Value thereof, with the net cash
proceeds of one or more Equity Offerings; provided that
(1) at least 65% of the aggregate principal amount at maturity of
11.75% notes remains outstanding immediately after the occurrence of such
redemption, excluding 11.75% notes held by Charter Holdings and its
Subsidiaries; and
(2) the redemption must occur within 60 days of the date of the
closing of such Equity Offering.
Except pursuant to the preceding paragraph, the 11.75% notes will not be
redeemable at the issuers' option prior to January 15, 2005.
On or after January 15, 2005, the issuers may redeem all or a part of the
11.75% notes upon not less than 30 nor more than 60 days notice, at the
redemption prices, expressed as percentages of principal amount, set forth below
plus accrued and unpaid interest thereon, if any, to the applicable
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redemption date, if redeemed during the twelve-month period beginning on January
15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- - - ---- ----------
<S> <C>
2005........................................................ 105.875%
2006........................................................ 103.917%
2007........................................................ 101.958%
2008 and thereafter......................................... 100.000%
</TABLE>
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each holder of new notes will have the right
to require the issuers to repurchase all or any part, equal to $1,000 or an
integral multiple thereof, of that holder's new notes pursuant to a "Change of
Control Offer." In the Change of Control Offer, the issuers will offer a "Change
of Control Payment" in cash equal to
(x) with respect to the 10.00% notes and the 10.25% notes, 101% of the
aggregate principal amount thereof repurchased plus accrued and unpaid interest
thereon, if any, to the date of purchase and
(y) with respect to the 11.75% notes, 101% of the Accreted Value plus, for
any Change of Control offer occurring after the Full Accretion Date, accrued and
unpaid interest, if any, on the date of purchase.
Within ten days following any Change of Control, the issuers will mail a
notice to each holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase notes on a certain date, the
"Change of Control Payment Date", specified in such notice, pursuant to the
procedures required by the indentures and described in such notice. The issuers
will comply with the requirements of Rule 14e-1 under the Securities Exchange
Act of 1934 or any successor rules, and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the notes as a result of a Change of Control.
On the Change of Control Payment Date, the issuers will, to the extent
lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control payment in respect of all notes or portions thereof so tendered;
and
(3) deliver or cause to be delivered to the trustee the notes so
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions thereof being purchased by the
issuers.
The paying agent will promptly mail to each holder of notes so tendered the
Change of Control payment for such notes, and the trustee will promptly
authenticate and mail, or cause to be transferred by book entry, to each holder
a new note equal in principal amount or principal amount at maturity, as
applicable, to any unpurchased portion of the notes surrendered, if any;
provided that each such new note will be in a principal amount or principal
amount at maturity, as applicable, of $1,000 or an integral multiple thereof.
The provisions described above that require the issuers to make a Change of
Control offer following a Change of Control will be applicable regardless of
whether or not any other provisions of
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the indentures are applicable. Except as described above with respect to a
Change of Control, the indentures do not contain provisions that permit the
holders of the notes to require that the issuers repurchase or redeem the notes
in the event of a takeover, recapitalization or similar transaction.
The issuers will not be required to make a Change of Control offer upon a
Change of Control if a third party makes the Change of Control offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the indentures applicable to a Change of Control offer made by the issuers
and purchases all notes validly tendered and not withdrawn under such Change of
Control offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Charter Holdings and its Subsidiaries, taken as a whole, or of
a Parent and its Subsidiaries, taken as a whole. Although there is a limited
body of case law interpreting the phrase "substantially all," there is no
precise established definition of the phrase under applicable law. Accordingly,
the ability of a holder of notes to require the issuers to repurchase such notes
as a result of a sale, lease, transfer, conveyance or other disposition of less
than all of the assets of Charter Holdings and its Subsidiaries, taken as a
whole, or of a Parent and its Subsidiaries, taken as a whole, to another Person
or group may be uncertain.
ASSET SALES
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) Charter Holdings or a Restricted Subsidiary of Charter Holdings
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is determined by Charter Holdings' board of
directors and evidenced by a resolution of such board of directors set
forth in an officers' certificate delivered to the trustee; and
(3) at least 75% of the consideration therefor received by Charter
Holdings or such Restricted Subsidiary is in the form of cash, Cash
Equivalents or readily marketable securities.
For purposes of this provision, each of the following shall be deemed to be
cash:
(a) any liabilities, as shown on Charter Holdings' or such Restricted
Subsidiary's most recent balance sheet, other than contingent liabilities
and liabilities that are by their terms subordinated to the notes, that are
assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases Charter Holdings or such Restricted
Subsidiary from further liability;
(b) any securities, notes or other obligations received by Charter
Holdings or any such Restricted Subsidiary from such transferee that are
converted by Charter Holdings or such Restricted Subsidiary into cash, Cash
Equivalents or readily marketable securities within 60 days after receipt
thereof, to the extent of the cash, Cash Equivalents or readily marketable
securities received in that conversion; and
(c) Productive Assets.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Charter Holdings or a Restricted Subsidiary of Charter Holdings may apply such
Net Proceeds at its option:
(1) to repay debt under the Credit Facilities or any other
Indebtedness of the Restricted Subsidiaries, other than Indebtedness
represented by a guarantee of a Restricted Subsidiary of Charter Holdings;
or
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(2) to invest in Productive Assets; provided that any Net Proceeds
which Charter Holdings or a Restricted Subsidiary of Charter Holdings has
committed to invest in Productive Assets within 365 days of the applicable
Asset Sale may be invested in Productive Assets within two years of such
Asset Sale.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds $25 million, the issuers will make
an Asset Sale Offer to all holders of notes and all holders of other
Indebtedness that is of equal priority with the notes containing provisions
requiring offers to purchase or redeem with the proceeds of sales of assets to
purchase the maximum principal amount of notes and such other Indebtedness of
equal priority that may be purchased out of the Excess Proceeds, which amount
includes the entire amount of the Net Proceeds. The offer price in any Asset
Sale Offer will be payable in cash and equal to:
(x) with respect to the 10.00% notes and the 10.25% notes, 100% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase; and
(y) with respect to the 11.75% notes, 100% of the Accreted Value thereof
plus, after the Full Accretion Date, accrued and unpaid interest, if any, to the
date of purchase.
If any Excess Proceeds remain after consummation of an Asset Sale Offer,
Charter Holdings may use such Excess Proceeds for any purpose not otherwise
prohibited by the indentures. If the aggregate principal amount of notes and
such other Indebtedness of equal priority tendered into such Asset Sale Offer
exceeds the amount of Excess Proceeds, the applicable trustee shall select the
Notes and such other Indebtedness of equal priority to be purchased on a pro
rata basis. Upon completion of each Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
SELECTION AND NOTICE
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed, in compliance with the requirements of
the principal national securities exchange on which the notes are listed;
or
(2) if the notes are not so listed, on a pro rata basis, by lot or by
such method as the trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the original note will be issued in the name of the holder thereof upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on, or the Accreted Value ceases to increase on, as the case may be,
notes or portions of them called for redemption.
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CERTAIN COVENANTS
Set forth in this section are summaries of certain covenants contained in
the indentures. The covenants summarized are the following:
- Limitations on restricted payments by Charter Holdings and its Restricted
Subsidiaries. Restricted payments include
- dividends and other distributions on equity interests,
- purchases, redemptions on other acquisitions of equity interests, and
- purchases, redemptions, defeasance or other acquisitions of
subordinated debt.
- Limitations on restricted investments by Charter Holdings or its
Restricted Subsidiaries. Restricted investments include investments other
than
- investments in Restricted Subsidiaries, cash equivalents,
- non-cash consideration from an asset sale made in compliance with the
indenture,
- investments with the net cash proceeds of the issuance and sale of
equity interests,
- investments in productive assets not to exceed in the $150 million,
- other investments not exceeding $50 million in any person,
- investments in customers and suppliers which either generate accounts
receivable or are accepted in settlement of bona fide disputes, and
- the investment in Marcus Cable Holdings, LLC.
This covenant also limits Charter Holdings from allowing any Restricted
Subsidiary from becoming an Unrestricted Subsidiary.
- Limitations on the occurrence of Indebtedness and issuance of preferred
stock generally unless the leverage ratio is not greater than 8.75 to 1.0
on a pro forma basis. This does not prohibit the incurrence of permitted
debt which includes:
- borrowings up to $3.5 billion under the credit facilities,
- existing indebtedness,
- capital lease obligations, mortgage financings or purchase money
obligations in an aggregate amount of up to $25 million at any one
time outstanding for the purchase, construction or improvement of
productive assets,
- permitted refinancing indebtedness,
- intercompany indebtedness,
- hedging obligations,
- up to $300 million of additional indebtedness,
- additional indebtedness not exceeding 200% of the net cash proceeds
from the sale of equity interests to the extent not used to make
restricted payments or permitted investments, and
- the accretion or amortization of original issue discount and the write
up of indebtedness in accordance with purchase accounting.
- Prohibitions against the creation of liens except permitted liens.
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- Prohibitions against restrictions on the ability of any Restricted
Subsidiary to pay dividends or make other distributions on its capital
stock to Charter Holdings or any Restricted Subsidiary, make loans or
advances to Charter Holdings or its Restricted Subsidiaries or transfer
properties or assets to Charter Holdings or any of its Restricted
Subsidiaries. This covenant, however, does not prohibit restrictions
under
- existing indebtedness,
- the notes and the indentures,
- applicable law,
- the terms of indebtedness or capital stock of a person acquired by
Charter Holdings or any of its Restricted Subsidiaries,
- customary non-assignment provisions in leases,
- purchase money obligations,
- agreements for the sale or other disposition of a Restricted
Subsidiary restricting distributions pending its sale,
- permitted refinancing indebtedness,
- liens securing indebtedness permitted under the indentures,
- joint venture agreements,
- under ordinary course contracts with customers that restrict cash,
other deposits or net worth,
- indebtedness permitted under the indentures, and
- restrictions that are not materially more restrictive than customary
provisions in comparable financings which management determines will
not materially impair Charter Holdings' ability to make payments
required under the notes.
- Prohibitions against mergers, consolidations or the sale of all or
substantially all of an issuer's assets unless
- the issuer is the surviving corporation or the person formed by the
merger or consolidation or acquiring the assets is organized under the
law of the United States, any state or the District of Columbia,
- such person assumes all obligations under the notes and the
indentures,
- no default or event of default exists, and
- Charter Holdings or the person formed by the merger or consolidation
or acquiring all or substantially all the assets could incur at least
$1.00 of additional indebtedness under the leverage ratio or have a
leverage ratio after giving effect to the transaction no greater than
the leverage ratio of the issuer immediately prior to the transaction.
- Prohibitions against transactions with affiliates, unless Charter
Holdings delivers to the trustee:
- for transactions exceeding $15.0 million a resolution approved by a
majority of the board of directors certifying that the transaction
complies with the covenant; and
- for transactions exceeding $50.0 million a fairness opinion of an
accounting, appraisal or investment banking firm of national
standing.
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Certain transactions are not subject to the covenant including:
- existing employment agreements and new employment agreements
entered into in the ordinary course of business and consistent with
past practice; and
- management fees under agreements existing as of March 17, 1999 or
after March 17, 1999 if the percentage fees are not higher than
those under agreements existing on March 17, 1999.
- Limitations on sale and leaseback transactions exceeding three years.
- Limitations on issuances of guarantees of indebtedness.
- Prohibitions against consent payments to holders of notes unless paid to
all consenting holders.
During any period of time that
(a) either the 10.00% notes, the 10.25% notes or the 11.75% notes have
Investment Grade Ratings from both Rating Agencies, and
(b) no Default or Event of Default has occurred and is continuing under the
applicable indenture,
Charter Holdings and its Restricted Subsidiaries will not be subject to the
provisions of the indenture described under
- "-- Incurrence of Indebtedness and Issuance of preferred stock,"
- "-- Restricted Payments,"
- "-- Asset Sales,"
- "-- Sale and Leaseback Transactions,"
- "-- Dividend and Other Payment Restrictions Affecting Subsidiaries,"
- "-- Transactions with Affiliates,"
- "-- Investments" and
- clause (4) of the first paragraph of "-- Merger, Consolidation and
Sale of Assets."
If Charter Holdings and its Restricted Subsidiaries are not subject to
these covenants for any period of time as a result of the previous sentence and,
subsequently, one, or both, of the Rating Agencies withdraws its ratings or
downgrades the ratings assigned to the applicable notes below the required
Investment Grade Ratings or a Default or Event of Default occurs and is
continuing, then Charter Holdings and its Restricted Subsidiaries will
thereafter again be subject to these covenants. Compliance with the covenant
with respect to Restricted Payments made after the time of such withdrawal,
downgrade, Default or Event of Default will be calculated as if such covenant
had been in effect during the entire period of time from the Issue Date.
The new notes will not have Investment Grade Ratings from the Rating
Agencies when they are issued. Consequently, the covenants listed above remain
applicable to Charter Holdings and its Restricted Subsidiaries.
RESTRICTED PAYMENTS
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Charter Holdings' or any of its Restricted
Subsidiaries' Equity Interests, including, without
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limitation, any payment in connection with any merger or consolidation
involving Charter Holdings or any of its Restricted Subsidiaries, or to the
direct or indirect holders of Charter Holdings' or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such, other than
dividends or distributions payable in Equity Interests, other than
Disqualified Stock, of Charter Holdings or, in the case of Charter Holdings
and its Restricted Subsidiaries, to Charter Holdings or a Restricted
Subsidiary of Charter Holdings;
(2) purchase, redeem or otherwise acquire or retire for value,
including, without limitation, in connection with any merger or
consolidation involving Charter Holdings, any Equity Interests of Charter
Holdings or any direct or indirect parent of Charter Holdings or any
Restricted Subsidiary of Charter Holdings, other than, in the case of
Charter Holdings and its Restricted Subsidiaries, any such Equity Interests
owned by Charter Holdings or any Restricted Subsidiary of Charter Holdings;
or
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value, any Indebtedness that is
subordinated to the notes, other than the notes, except a payment of
interest or principal at the Stated Maturity thereof.
All such payments and other actions set forth in clauses (1) through (3)
above are collectively referred to as "Restricted Payments," unless, at the time
of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(2) Charter Holdings would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Leverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "-- Incurrence of Indebtedness and
Issuance of preferred stock"; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Charter Holdings and each of its
Restricted Subsidiaries after the date of the indenture, excluding
Restricted Payments permitted by clauses (2), (3), (4), (5), (6), (7) and
(8) of the next succeeding paragraph, shall not exceed, at the date of
determination, the sum of:
(a) an amount equal to 100% of the Consolidated EBITDA of Charter
Holdings since the date of the indenture to the end of Charter Holdings'
most recently ended full fiscal quarter for which internal financial
statements are available, taken as a single accounting period, less the
product of 1.2 times the combined Consolidated Interest Expense of
Charter Holdings since the date of the indenture to the end of Charter
Holdings' most recently ended full fiscal quarter for which internal
financial statements are available, taken as a single accounting period,
plus
(b) an amount equal to 100% of Capital Stock Sale Proceeds less any
such Capital Stock Sale Proceeds used in connection with
(i) an Investment made pursuant to clause (6) of the definition
of "Permitted Investments" or
(ii) the incurrence of Indebtedness pursuant to clause (10) of
the covenant described under the caption "-- Incurrence of
Indebtedness and Issuance of preferred stock," plus
(c) $100 million.
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So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the indentures;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of Charter Holdings in
exchange for, or out of the net proceeds of, the substantially concurrent
sale, other than to a Subsidiary of Charter Holdings, of Equity Interests
of Charter Holdings, other than Disqualified Stock; provided that the
amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of Charter Holdings or any of its Restricted
Subsidiaries with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
(4) regardless of whether a Default then exists, the payment of any
dividend or distribution to the extent necessary to permit direct or
indirect beneficial owners of shares of Capital Stock of Charter Holdings
to pay federal, state or local income tax liabilities that would arise
solely from income of Charter Holdings or any of its Restricted
Subsidiaries, as the case may be, for the relevant taxable period and
attributable to them solely as a result of Charter Holdings, and any
intermediate entity through which the holder owns such shares or any of its
Restricted Subsidiaries being a limited liability company, partnership or
similar entity for federal income tax purposes;
(5) regardless of whether a Default then exists, the payment of any
dividend by a Restricted Subsidiary of Charter Holdings to the holders of
its common Equity Interests on a pro rata basis;
(6) the payment of any dividend on the Helicon Preferred Stock or the
redemption, repurchase, retirement or other acquisition of the Helicon
Preferred Stock in an amount not in excess of its aggregate liquidation
value;
(7) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Charter Holdings held by any member of
Charter Holdings' management pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the
indenture; provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $10 million
in any fiscal year of Charter Holdings; and
(8) payment of fees in connection with any acquisition, merger or
similar transaction in an amount that does not exceed an amount equal to
1.25% of the transaction value of such acquisition, merger or similar
transaction.
The amount of all Restricted Payments, other than cash, shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by Charter Holdings or any of its
Restricted Subsidiaries pursuant to the Restricted Payment. The fair market
value of any assets or securities that are required to be valued by this
covenant shall be determined by the board of directors of Charter Holdings whose
resolution with respect thereto shall be delivered to the trustee. Such board of
directors' determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $100 million.
Not later than the date of making any Restricted Payment, Charter Holdings
shall deliver to the trustee an officers' certificate stating that such
Restricted Payment is permitted and setting forth the
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basis upon which the calculations required by this "Restricted Payments"
covenant were computed, together with a copy of any fairness opinion or
appraisal required by the indentures.
INVESTMENTS
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) make any Restricted Investment; or
(2) allow any Restricted Subsidiary of Charter Holdings to become an
Unrestricted Subsidiary, unless, in each case:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) Charter Holdings would, at the time of, and after giving effect
to, such Restricted Investment or such designation of a Restricted
Subsidiary as an unrestricted Subsidiary, have been permitted to incur
at least $1.00 of additional Indebtedness pursuant to the Leverage Ratio
test set forth in the first paragraph of the covenant described below
under the caption "-- Incurrence of Indebtedness and Issuance of
Preferred Stock."
An Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary
if such redesignation would not cause a Default.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
(a) Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness, including Acquired
Debt, and Charter Holdings will not issue any Disqualified Stock and will not
permit any of its Restricted Subsidiaries to issue any shares of preferred stock
unless the Leverage Ratio would have been not greater than 8.75 to 1.0
determined on a pro forma basis, including a pro forma application of the net
proceeds therefrom, as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of the
most recently ended fiscal quarter.
So long as no Default shall have occurred and be continuing or would be
caused thereby, the first paragraph of this covenant will not prohibit the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(1) the incurrence by Charter Holdings and its Restricted Subsidiaries
of Indebtedness under Credit Facilities; provided that the aggregate
principal amount of all Indebtedness of Charter Holdings and its Restricted
Subsidiaries outstanding under all Credit Facilities, after giving effect
to such incurrence, does not exceed an amount equal to $3.5 billion less
the aggregate amount of all Net Proceeds of Asset Sales applied by Charter
Holdings or any of its Subsidiaries in the case of an Asset Sale since the
date of the indenture to repay Indebtedness under a Credit Facility
pursuant to the covenant described above under the caption "-- Asset
Sales";
(2) the incurrence by Charter Holdings and its Restricted Subsidiaries
of Existing Indebtedness, other than the Credit Facilities;
(3) the incurrence on the January 12, 2000 by Charter Holdings and its
Restricted Subsidiaries of Indebtedness represented by the notes;
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(4) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case, incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement, including, without limitation, the cost of
design, development, construction, acquisition, transportation,
installation, improvement, and migration, of Productive Assets of Charter
Holdings or any of its Restricted Subsidiaries in an aggregate principal
amount not to exceed $75 million at any time outstanding;
(5) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace, in whole or
in part, Indebtedness, other than intercompany Indebtedness, that was
permitted by the indentures to be incurred under the first paragraph of
this covenant or clauses (2) or (3) of this paragraph;
(6) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among Charter Holdings
and any of its Wholly Owned Restricted Subsidiaries; provided that this
clause does not permit Indebtedness between Charter Holdings or any of its
Restricted Subsidiaries, as creditor or debtor, as the case may be, unless
otherwise permitted by the indentures; provided, further, that:
(a) if Charter Holdings is the obligor on such Indebtedness, such
Indebtedness must be expressly subordinated to the prior payment in full
in cash of all obligations with respect to the notes; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than
Charter Holdings or a Wholly Owned Restricted Subsidiary thereof and
(ii) any sale or other transfer of any such Indebtedness to a Person
that is not either Charter Holdings or a Wholly Owned Restricted
Subsidiary thereof, shall be deemed, in each case, to constitute an
incurrence of such Indebtedness by Charter Holdings or any of its
Restricted Subsidiaries that was not permitted by this clause (6);
(7) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the indentures to be
outstanding;
(8) the guarantee by Charter Holdings of Indebtedness of a Restricted
Subsidiary of Charter Holdings that was permitted to be incurred by another
provision of this covenant;
(9) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount at
any time outstanding, not to exceed $300 million;
(10) the incurrence by Charter Holdings or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal amount at
any time outstanding not to exceed 200% of the net cash proceeds received
by Charter Holdings from the sale of its Equity Interests, other than
Disqualified Stock, after the date of the indentures to the extent such net
cash proceeds have not been applied to make Restricted Payments or to
effect other transactions pursuant to the covenant described above under
the subheading "-- Restricted Payments" or to make Permitted Investments
pursuant to clause (6) of the definition thereof; and
(11) the accretion or amortization of original issue discount and the
write up of Indebtedness in accordance with purchase accounting.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness
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(a) meets the criteria of more than one of the categories of Permitted
Debt described in clauses (1) through (11) above, or
(b) is entitled to be incurred pursuant to the first paragraph of this
covenant,
Charter Holdings will be permitted to classify and from time to time to
reclassify such item of Indebtedness on the date of its incurrence in any manner
that complies with this covenant. For avoidance of doubt, Indebtedness incurred
pursuant to a single agreement, instrument, program, facility or line of credit
may be classified as Indebtedness arising in part under one of the clauses
listed above, and in part under any one or more of the clauses listed above, to
the extent that such Indebtedness satisfies the criteria for such clauses.
(b) Notwithstanding the foregoing, in no event shall any Restricted
Subsidiary of Charter Holdings consummate a Subordinated Debt Financing or a
preferred stock Financing. A "Subordinated Debt Financing" or a "preferred stock
Financing", as the case may be, with respect to any Restricted Subsidiary of
Charter Holdings shall mean a public offering or private placement, whether
pursuant to Rule 144A under the Securities Act or otherwise, of Subordinated
Notes or preferred stock, whether or not such preferred stock constitutes
Disqualified Stock, as the case may be, of such Restricted Subsidiary to one or
more purchasers, other than to one or more Affiliates of Charter Holdings.
"Subordinated Notes" with respect to any Restricted Subsidiary of Charter
Holdings shall mean Indebtedness of such Restricted Subsidiary that is
contractually subordinated in right of payment to any other Indebtedness of such
Restricted Subsidiary, including, without limitation, Indebtedness under the
Credit Facilities. The foregoing limitation shall not apply to
(i) any Indebtedness or preferred stock of any Person existing at the
time such Person is merged with or into or became a Subsidiary of Charter
Holdings; provided that such Indebtedness or preferred stock was not
incurred or issued in connection with, or in contemplation of, such Person
merging with or into, or becoming a Subsidiary of, Charter Holdings, and
(ii) any Indebtedness or preferred stock of a Restricted Subsidiary
issued in connection with, and as part of the consideration for, an
acquisition, whether by stock purchase, asset sale, merger or otherwise, in
each case involving such Restricted Subsidiary, which Indebtedness or
preferred stock is issued to the seller or sellers of such stock or assets;
provided that such Restricted Subsidiary is not obligated to register such
Indebtedness or preferred stock under the Securities Act or obligated to
provide information pursuant to Rule 144A under the Securities Act.
LIENS
Charter Holdings will not, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind securing Indebtedness, Attributable Debt or
trade payables on any asset now owned or hereafter acquired, except Permitted
Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
Charter Holdings will not, directly or indirectly, create or permit to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary of Charter Holdings to:
(1) pay dividends or make any other distributions on its Capital Stock
to Charter Holdings or any of its Restricted Subsidiaries, or with respect
to any other interest or participation in, or measured by, its profits, or
pay any Indebtedness owed to Charter Holdings or any of its Restricted
Subsidiaries;
(2) make loans or advances to Charter Holdings or any of its
Restricted Subsidiaries; or
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(3) transfer any of its properties or assets to Charter Holdings or
any of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the indentures,
including, without limitation, the Credit Facilities, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof; provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive, taken as a whole,
with respect to such dividend and other payment restrictions than those
contained in such Existing Indebtedness, as in effect on the date of the
indentures;
(2) the indentures and the notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Charter Holdings or any of its Restricted Subsidiaries as in
effect at the time of such acquisition, except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition, which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired; provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
indentures to be incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so acquired of
the nature described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary of Charter Holdings that restricts distributions by such
Restricted Subsidiary pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the
caption "-- Liens" that limit the right of Charter Holdings or any of its
Restricted Subsidiaries to dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(12) restrictions contained in the terms of Indebtedness permitted to
be incurred under the covenant described under the caption "-- Incurrence
of Indebtedness and Issuance of preferred stock"; provided that such
restrictions are no more restrictive than the terms contained in the Credit
Facilities as in effect on January 12, 2000; and
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(13) restrictions that are not materially more restrictive than
customary provisions in comparable financings and the management of Charter
Holdings determines that such restrictions will not materially impair
Charter Holdings' ability to make payments as required under the notes.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
Neither of the issuers may, directly or indirectly:
(1) consolidate or merge with or into another Person, whether or not
such Issuer is the surviving corporation; or
(2) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of its properties or assets, in one or more related
transactions, to another Person; unless:
(A) either:
(1) such issuer is the surviving corporation; or
(2) the Person formed by or surviving any such consolidation or
merger, if other than such Issuer, or to which such sale, assignment,
transfer, conveyance or other disposition shall have been made is a
Person organized or existing under the laws of the United States, any
state thereof or the District of Columbia, provided that if the Person
formed by or surviving any such consolidation or merger with either
Issuer is a limited liability company or other Person other than a
corporation, a corporate co-issuer shall also be an obligor with respect
to the notes;
(B) the Person formed by or surviving any such consolidation or
merger, if other than Charter Holdings, or the Person to which such
sale, assignment, transfer, conveyance or other disposition shall have
been made assumes all the obligations of Charter Holdings under the
notes and the indentures pursuant to agreements reasonably satisfactory
to the trustee;
(C) immediately after such transaction no Default or Event of
Default exists; and
(D) Charter Holdings or the Person formed by or surviving any such
consolidation or merger, if other than Charter Holdings, will, on the
date of such transaction after giving pro forma effect thereto and any
related financing transactions as if the same had occurred at the
beginning of the applicable four-quarter period, either
(1) be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Leverage Ratio test set forth in the
first paragraph of the covenant described above under the caption
"-- Incurrence of Indebtedness and Issuance of preferred stock" or
(2) have a Leverage Ratio immediately after giving effect to
such consolidation or merger no greater than the Leverage Ratio
immediately prior to such consolidation or merger.
In addition, Charter Holdings may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation, or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among Charter Holdings and any of its
Wholly Owned Subsidiaries.
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TRANSACTIONS WITH AFFILIATES
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable
to Charter Holdings or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by Charter Holdings or
such Restricted Subsidiary with an unrelated Person; and
(2) Charter Holdings delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$15 million, a resolution of the board of directors of Charter Holdings
set forth in an officers' certificate certifying that such Affiliate
Transaction complies with this covenant and that such Affiliate
Transaction has been approved by a majority of the members of the board
of directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$50 million, an opinion as to the fairness to the holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any existing employment agreement entered into by Charter Holdings
or any of its Subsidiaries and any employment agreement entered into by
Charter Holdings or any of its Restricted Subsidiaries in the ordinary
course of business and consistent with the past practice of Charter
Holdings or such Restricted Subsidiary;
(2) transactions between or among Charter Holdings and/or its
Restricted Subsidiaries;
(3) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of Charter Holdings, and customary indemnification and
insurance arrangements in favor of directors, regardless of affiliation
with Charter Holdings or any of its Restricted Subsidiaries;
(4) payment of management fees pursuant to management agreements
either
(A) existing on January 12, 2000 or
(B) entered into after January 12, 2000,
to the extent that such management agreements provide for percentage
fees no higher than the percentage fees existing under the management
agreements existing on January 12, 2000;
(5) Restricted Payments that are permitted by the provisions of the
covenant described above under the caption "-- Restricted Payments" and
Restricted Investments that are permitted by the provisions of the
indentures described above under the caption "Restricted Payments --
Investments"; and
(6) Permitted Investments.
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SALE AND LEASEBACK TRANSACTIONS
Charter Holdings will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
Charter Holdings may enter into a sale and leaseback transaction if:
(1) Charter Holdings could have
(a) incurred Indebtedness in an amount equal to the Attributable
Debt relating to such sale and leaseback transaction under the Leverage
Ratio test in the first paragraph of the covenant described above under
the caption "-- Incurrence of Additional Indebtedness and Issuance of
preferred stock" and
(b) incurred a Lien to secure such Indebtedness pursuant to the
covenant described above under the caption "-- Liens"; and
(2) the transfer of assets in that sale and leaseback transaction is
permitted by, and Charter Holdings applies the proceeds of such transaction
in compliance with, the covenant described above under the caption
"-- Asset Sales."
The foregoing restrictions do not apply to a sale and leaseback transaction
if the lease is for a period, including renewal rights, of not in excess of
three years.
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
Charter Holdings will not permit any of its Restricted Subsidiaries,
directly or indirectly, to Guarantee or pledge any assets to secure the payment
of any other Indebtedness of Charter Holdings, except in respect of the Credit
Facilities (the "Guaranteed Indebtedness") unless
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for the Guarantee (a "Subsidiary Guarantee") of
the payment of the notes by such Restricted Subsidiary, and
(2) until one year after all the notes have been paid in full in cash, such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against Charter Holdings or any other Restricted
Subsidiary of Charter Holdings as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall
not be applicable to any Guarantee or any Restricted Subsidiary that existed at
the time such Person became a Restricted Subsidiary and was not incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary.
If the Guaranteed Indebtedness is subordinated to the notes, then the
Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the notes.
PAYMENTS FOR CONSENT
Charter Holdings will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any holder of notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the indentures or the notes
unless such consideration is offered to be paid and is paid to all holders of
the notes that consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
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REPORTS
Whether or not required by the Securities and Exchange Commission, so long
as any notes are outstanding, Charter Holdings will furnish to the holders of
notes, within the time periods specified in the Securities and Exchange
Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Securities and Exchange
Commission on Forms 10-Q and 10-K if Charter Holdings were required to file
such forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section and, with respect to the
annual information only, a report on the annual financial statements by
Charter Holdings' independent public accountants; and
(2) all current reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if Charter Holdings were
required to file such reports.
If Charter Holdings has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of Charter
Holdings and its Restricted Subsidiaries separate from the financial condition
and results of operations of the Unrestricted Subsidiaries of Charter Holdings.
In addition, whether or not required by the Securities and Exchange
Commission, Charter Holdings will file a copy of all of the information and
reports referred to in clauses (1) and (2) above with the Securities and
Exchange Commission for public availability within the time periods specified in
the Securities and Exchange Commission's rules and regulations, unless the
Securities and Exchange Commission will not accept such a filing, and make such
information available to securities analysts and prospective investors upon
request.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default with respect to the notes of
each series:
(1) default for 30 days in the payment when due of interest on the
notes;
(2) default in payment when due of the principal of or premium, if
any, on the notes;
(3) failure by Charter Holdings or any of its Restricted Subsidiaries
to comply with the provisions described under the captions "-- Change of
Control" or "-- Merger, Consolidation, or Sale of Assets";
(4) failure by Charter Holdings or any of its Restricted Subsidiaries
for 30 days after written notice thereof has been given to Charter Holdings
by the trustee or to Charter Holdings and the trustee by holders of at
least 25% of the aggregate principal amount of the notes outstanding to
comply with any of their other covenants or agreements in the indentures;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Charter Holdings or any of its
Restricted Subsidiaries, or the payment of which is guaranteed by Charter
Holdings or any of its Restricted Subsidiaries, whether such Indebtedness
or guarantee now exists, or is created after the date of the indentures, if
that default:
(a) is caused by a failure to pay at final stated maturity the
principal amount on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
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(b) results in the acceleration of such Indebtedness prior to its
express maturity, and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $100 million or
more;
(6) failure by Charter Holdings or any of its Restricted Subsidiaries
to pay final judgments which are non-appealable aggregating in excess of
$100 million, net of applicable insurance which has not been denied in
writing by the insurer, which judgments are not paid, discharged or stayed
for a period of 60 days; and
(7) Charter Holdings or any of its Significant Subsidiaries pursuant
to or within the meaning of bankruptcy law:
(a) commences a voluntary case,
(b) consents to the entry of an order for relief against it in an
involuntary case,
(c) consents to the appointment of a custodian of it or for all or
substantially all of its property, or
(d) makes a general assignment for the benefit of its creditors; or
(8) a court of competent jurisdiction enters an order or decree under
any bankruptcy law that:
(a) is for relief against Charter Holdings or any of its
Significant Subsidiaries in an involuntary case;
(b) appoints a custodian of Charter Holdings or any of its
Significant Subsidiaries or for all or substantially all of the property
of Charter Holdings or any of its Significant Subsidiaries; or
(c) orders the liquidation of Charter Holdings or any of its
Significant Subsidiaries;
and the order or decree remains unstayed and in effect for 60 consecutive
days.
In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to Charter Holdings, all outstanding
notes will become due and payable immediately without further action or notice.
If any other Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding notes of
each series may declare their respective notes to be due and payable
immediately.
Holders of the notes may not enforce the indentures or the notes except as
provided in the indentures. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding notes of each series may
direct the trustee in its exercise of any trust or power. The trustee may
withhold from holders of the notes notice of any continuing Default or Event of
Default, except a Default or Event of Default relating to the payment of
principal or interest, if it determines that withholding notice is in their
interest.
The holders of a majority in aggregate principal amount of the notes of
each series then outstanding by notice to the trustee may on behalf of the
holders of all of the notes waive any existing Default or Event of Default and
its consequences under the indentures except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the notes.
Charter Holdings will be required to deliver to the trustee annually a
statement regarding compliance with the indentures. Upon becoming aware of any
Default or Event of Default, Charter Holdings will be required to deliver to the
trustee a statement specifying such Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, MEMBERS AND
STOCKHOLDERS
No director, officer, employee, incorporator, member or stockholder of
Charter Holdings, as such, shall have any liability for any obligations of
Charter Holdings under the notes or the indentures, or for any claim based on,
in respect of, or by reason of, such obligations or their creation. Each holder
of notes by accepting a note waives and releases all such liability. The waiver
and release will be part of the consideration for issuance of the notes. The
waiver may not be effective to waive liabilities under the federal securities
laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Charter Holdings may, at its option and at any time, elect to have all of
its obligations discharged with respect to the outstanding notes ("Legal
Defeasance") except for:
(1) the rights of holders of outstanding Notes to receive payments in
respect of the Accreted Value or principal of, premium, if any, and
interest on such Notes when such payments are due from the trust referred
to below;
(2) Charter Holdings' obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and Charter Holdings' obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indentures.
In addition, Charter Holdings may, at its option and at any time, elect to
have the obligations of Charter Holdings released with respect to certain
covenants that are described in the indentures ("Covenant Defeasance") and
thereafter any omission to comply with those covenants shall not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events, not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events, described under "Events of
Default" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Charter Holdings must irrevocably deposit with the trustee, in
trust, for the benefit of the holders of the notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest on the outstanding notes on the stated maturity or on
the applicable redemption date, as the case may be, and Charter Holdings
must specify whether the notes are being defeased to maturity or to a
particular redemption date;
(2) in the case of Legal Defeasance, Charter Holdings shall have
delivered to the trustee an opinion of counsel reasonably acceptable to the
trustee confirming that
(a) Charter Holdings has received from, or there has been published
by, the Internal Revenue Service a ruling or
(b) since the date of the indentures, there has been a change in
the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income tax on
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the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Charter Holdings shall have
delivered to the trustee an opinion of counsel reasonably acceptable to the
trustee confirming that the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing either:
(a) on the date of such deposit, other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit; or
(b) insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument, other than the indentures, to which Charter
Holdings or any of its Restricted Subsidiaries is a party or by which
Charter Holdings or any of its Restricted Subsidiaries is bound;
(6) Charter Holdings must have delivered to the trustee an opinion of
counsel to the effect that after the 91st day, assuming no intervening
bankruptcy, that no holder is an insider of Charter Holdings following the
deposit and that such deposit would not be deemed by a court of competent
jurisdiction a transfer for the benefit of either issuer in its capacity as
such, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally;
(7) Charter Holdings must deliver to the trustee an officers'
certificate stating that the deposit was not made by Charter Holdings with
the intent of preferring the holders of notes over the other creditors of
Charter Holdings with the intent of defeating, hindering, delaying or
defrauding creditors of Charter Holdings or others; and
(8) Charter Holdings must deliver to the trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent relating to the Legal Defeasance or the Covenant Defeasance have
been complied with.
Notwithstanding the foregoing, the opinion of counsel required by clause
(2) above with respect to a Legal Defeasance need not be delivered if all notes
not theretofore delivered to the trustee for cancellation
(a) have become due and payable or
(b) will become due and payable on the maturity date within one year under
arrangements satisfactory to the trustee for the giving of notice of redemption
by the trustee in the name, and at the expense, of the issuers.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided below, the indentures or the notes of each series may be
amended or supplemented with the consent of the holders of at least a majority
in aggregate principal amount, in the case of the 10.00% notes and the 10.25%
notes, and aggregate principal amount at maturity, in the case of the 11.75%
notes, of the then outstanding notes of each series. This includes consents
obtained in connection with a purchase of notes, a tender offer for notes, or an
exchange offer for notes. Any existing Default or compliance with any provision
of the indentures or the notes may be
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waived with the consent of the holders of a majority in aggregate principal
amount, in the case of the 10.00% notes and the 10.25% notes, and aggregate
principal amount at maturity, in the case of the 11.75% notes, of the then
outstanding notes of each series. This includes consents obtained in connection
with a purchase of notes, a tender offer for notes, or an exchange offer for
notes. Without the consent of each holder affected, an amendment or waiver may
not, with respect to any notes held by a non-consenting holder:
(1) reduce the principal amount of notes whose holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the payment provisions with respect to the redemption of the
notes, other than provisions relating to the covenants described above
under the caption "-- Repurchase at the Option of Holders";
(3) reduce the rate of or extend the time for payment of interest on
any note;
(4) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the notes, except a rescission of
acceleration of the notes by the holders of at least a majority in
aggregate principal amount of the notes and a waiver of the payment default
that resulted from such acceleration;
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the indentures relating to
waivers of past Defaults or the rights of holders of notes to receive
payments of Accreted Value or principal of, or premium, if any, or interest
on the notes;
(7) waive a redemption payment with respect to any note, other than a
payment required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders";
(8) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any holder of notes,
the issuers and the trustee may amend or supplement the indentures or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of either issuer's obligations to
holders of notes in the case of a merger or consolidation or sale of all or
substantially all of such issuer's assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of notes or that does not adversely affect the
legal rights under the indentures of any such holder; or
(5) to comply with requirements of the Securities and Exchange
Commission in order to effect or maintain the qualification of the
indentures under the Trust Indenture Act or otherwise as necessary to
comply with applicable law.
GOVERNING LAW
The indentures and the notes will be governed by the laws of the State of
New York.
CONCERNING THE TRUSTEE
If the trustee becomes a creditor of Charter Holdings, the indentures limit
its right to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such
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claim as security or otherwise. The trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Securities and Exchange Commission
for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indentures provide that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indentures at the request of any
holder of notes, unless such holder shall have offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this prospectus may obtain a copy of the indentures
without charge by writing to Charter Communications Holdings, LLC, 12444
Powerscourt Drive, Suite 100, St. Louis, Missouri 63131, Attention: Corporate
Secretary.
BOOK-ENTRY, DELIVERY AND FORM
The notes will initially be issued in the form of global securities held in
book-entry form. The notes will be deposited with the trustee as custodian for
the Depository Trust Company, and the Depository Trust Company or its nominee
will initially be the sole registered holder of the notes for all purposes under
the indentures. Unless it is exchanged in whole or in part for debt securities
in definitive form as described below, a global security may not be transferred.
However, transfers of the whole security between the Depository Trust Company
and its nominee or their respective successors are permitted.
Upon the issuance of a global security, the Depository Trust Company or its
nominee will credit on its internal system the principal amount at maturity of
the individual beneficial interest represented by the global security acquired
by the persons in sale of the original notes. Ownership of beneficial interests
in a global security will be limited to persons that have accounts with the
Depository Trust Company or persons that hold interests through participants.
Ownership of beneficial interests will be shown on, and the transfer of that the
Depository Trust Company or its nominee relating to interests of participants
and the records of participants relating to interests of persons other than
participants. The laws of some jurisdictions require that some purchasers of
securities take physical delivery of the securities in definitive form. These
limits and laws may impair the ability to transfer beneficial interests in a
global security.
Principal and interest payments on global securities registered in the name
of the Depository Trust Company's nominee will be made in immediate available
funds to the Depository Trust Company's nominee as the registered owner of the
global securities. The issuers and the trustee will treat the Depository Trust
Company's nominee as the owner of the global securities for all other purposes
as well. Accordingly, the issuers, the trustee, any paying agent and the initial
purchasers will have no direct responsibility or liability for any aspect of the
records relating to payments made on account of beneficial interests in the
global securities or for maintaining, supervising or reviewing any records
relating to these beneficial interests. It is the Depository Trust Company's
current practice, upon receipt of any payment of principal or interest, to
credit direct participants' accounts on the payment date according to their
respective holdings of beneficial interests in the global securities. These
payments will be the responsibility of the direct and indirect participants and
not of the Depository Trust Company, the issuers, the trustee or the initial
purchasers.
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So long as the Depository Trust Company or its nominee is the registered
owner or holder of the global security, the Depository Trust Company or its
nominee, as the case may be, will be considered the sole owner or holder of the
notes represented by the global security for the purposes of:
(1) receiving payment on the notes;
(2) receiving notices; and
(3) for all other purposes under the indentures and the notes.
Beneficial interests in the notes will be evidenced only by, and transfers of
the notes will be effected only through, records maintained by the Depository
Trust Company and its participants.
Except as described above, owners of beneficial interests in a global
security will not be entitled to receive physical delivery of certificated notes
in definitive form and will not be considered the holders of the global security
for any purposes under the indentures. Accordingly, each person owning a
beneficial interest in a global security must rely on the procedures of the
Depository Trust Company. And, if that person is not a participant, the person
must rely on the procedures of the participant through which that person owns
its interest, to exercise any rights of a holder under the indentures. Under
existing industry practices, if the issuers request any action of holders or an
owner of a beneficial interest in a global security desires to take any action
under the indentures, the Depository Trust Company would authorize the
participants holding the relevant beneficial interest to take that action. The
participants then would authorize beneficial owners owning through the
participants to take the action or would otherwise act upon the instructions of
beneficial owners owning through them.
The Depository Trust Company has advised the issuers that it will take any
action permitted to be taken by a holder of notes only at the direction of one
or more participants to whose account with the Depository Trust Company
interests in the global security are credited. Further, the Depository Trust
Company will take action only as to the portion of the aggregate principal
amount at maturity of the notes as to which the participant or participants has
or have given the direction.
Although the Depository Trust Company has agreed to the procedures
described above in order to facilitate transfers of interests in global
securities among participants of the Depository Trust Company, it is under no
obligation to perform these procedures, and the procedures may be discontinued
at any time. None of the issuers, the trustee, any agent of the issuers or the
initial purchasers will have any responsibility for the performance by the
Depository Trust Company or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
The Depository Trust Company has provided the following information to us.
The Depository Trust Company is a:
(1) limited-purpose trust company organized under the New York Banking Law;
(2) a banking organization within the meaning of the New York Banking Law;
(3) a member of the United States Federal Reserve System;
(4) a clearing corporation within the meaning of the New York Uniform
Commercial Code; and
(5) a clearing agency registered under the provisions of Section 17A of the
Securities Exchange Act.
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CERTIFICATED NOTES
Notes represented by a global security are exchangeable for certificated
notes only if:
(1) the Depository Trust Company notifies the issuers that it is unwilling
or unable to continue as depository or if the Depository Trust Company
ceases to be a registered clearing agency, and a successor depository
is not appointed by the issuers within 90 days;
(2) the issuers determine not to require all of the notes to be represented
by a global security and notifies the trustee of its decision; or
(3) an Event of Default or an event which, with the giving of notice or
lapse of time, or both, would constitute an Event of Default relating
to the notes represented by the global security has occurred and is
continuing.
Any global security that is exchangeable for certificated notes in
accordance with the preceding sentence will be transferred to, and registered
and exchanged for, certificated notes in authorized denominations and registered
in the names as the Depository Trust Company or its nominee may direct. However,
a global security is only exchangeable for a global security of like
denomination to be registered in the name of the Depository Trust Company or its
nominee. If a global security becomes exchangeable for certificated notes:
(1) certificated notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples of $1,000;
(2) payment of principal, premium, if any, and interest on the certificated
notes will be payable, and the transfer of the certificated notes will
be registrable, at the office or agency of the issuers maintained for
these purposes; and
(3) no service charge will be made for any issuance of the certificated
notes, although the issuers may require payment of a sum sufficient to
cover any tax or governmental charge imposed in connection with the
issuance.
CERTAIN DEFINITIONS
This section sets forth certain defined terms used in the indentures.
Reference is made to the indentures for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
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"ACCRETED VALUE" is defined to mean, for any Specific Date, the amount
calculated pursuant to (1), (2), (3) or (4) for each $1,000 of principal amount
at maturity of the 11.75% notes:
(1) if the Specified Date occurs on one or more of the following dates
(each a "Semi-Annual Accrual Date") the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL
ACCRUAL DATE ACCRETED VALUE
- - - ------------ --------------
<S> <C>
Issue Date............................................... $ 564.48
January 15, 2000......................................... 565.02
July 15, 2000............................................ 598.21
January 15, 2001......................................... 633.36
July 15, 2001............................................ 670.57
January 15, 2002......................................... 709.96
July 15, 2002............................................ 751.67
January 15, 2003......................................... 795.84
July 15, 2003............................................ 842.59
January 15, 2004......................................... 892.09
July 15, 2004............................................ 944.51
January 15, 2005......................................... $1,000.00
</TABLE>
(2) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of
(a) $564.48 and
(b) an amount equal to the product of
(x) the Accreted Value for the first Semi-Annual Accrual Date
less $564.48 multiplied by
(y) a fraction, the numerator of which is the number of days
from the Issue Date to the Specified Date, using a 360-day year of
twelve 30-day months, and the denominator of which is the number of
days elapsed from the Issue Date to the first Semi-Annual Accrual
Date, using a 360-day year of twelve 30-day months;
(3) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of
(a) the Accreted Value for the Semi-Annual Accrual Date immediately
preceding such Specified Date and
(b) an amount equal to the product of
(1) the Accreted Value for the immediately following Semi-Annual
Accrual Date less the Accreted Value for the immediately preceding
Semi-Annual Accrual Date multiplied by
(2) a fraction, the numerator of which is the number of days
from the immediately preceding Semi-Annual Accrual Date to the
Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180; or
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(4) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"ACQUIRED DEBT" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control",
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"ASSET ACQUISITION" means
(a) an Investment by Charter Holdings or any of its Restricted Subsidiaries
in any other Person pursuant to which such Person shall become a Restricted
Subsidiary of Charter Holdings or any of its Restricted Subsidiaries or shall be
merged with or into Charter Holdings or any of its Restricted Subsidiaries, or
(b) the acquisition by Charter Holdings or any of its Restricted
Subsidiaries of the assets of any Person which constitute all or substantially
all of the assets of such Person, any division or line of business of such
Person or any other properties or assets of such Person other than in the
ordinary course of business.
"ASSET SALE" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of business
consistent with past practices; provided that the sale, conveyance or other
disposition of all or substantially all of the assets of Charter Holdings
and its Subsidiaries, taken as a whole, will be governed by the provisions
of the indentures described above under the caption "-- Change of Control"
and/or the provisions described above under the caption "-- Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset
Sale covenant; and
(2) the issuance of Equity Interests by any of Charter Holdings'
Restricted Subsidiaries or the sale of Equity Interests in any of Charter
Holdings' Restricted Subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that:
(a) involves assets having a fair market value of less than $100
million; or
(b) results in net proceeds to Charter Holdings and its Restricted
Subsidiaries of less than $100 million;
(2) a transfer of assets between or among Charter Holdings and its
Restricted Subsidiaries;
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(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary of Charter Holdings to Charter Holdings or to another Wholly
Owned Restricted Subsidiary of Charter Holdings;
(4) a Restricted Payment that is permitted by the covenant described
above under the caption "-- Certain Covenants -- Restricted Payments" and a
Restricted Investment that is permitted by the covenant described above
under the caption "-- Certain Covenants -- Investments"; and
(5) the incurrence of Permitted Liens and the disposition of assets
related to such Permitted Liens by the secured party pursuant to a
foreclosure.
"ASSET SALE OFFER" means a situation in which the issuers commence an offer
to all holders to purchase notes pursuant to Section 4.11 of the indentures.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessee, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"BENEFICIAL OWNER" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person," as such term is used in Section 13(d)(3)
of the Exchange Act, such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire, whether such
right is currently exercisable or is exercisable only upon the occurrence of a
subsequent condition.
"CABLE RELATED BUSINESS" means the business of owning cable television
systems and businesses ancillary, complementary and related thereto.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents, however
designated, of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests, whether general or limited; and
(4) any other interest, other than any debt obligation, or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"CAPITAL STOCK SALE PROCEEDS" means the aggregate net cash proceeds,
including the fair market value of the non-cash proceeds, as determined by an
independent appraisal firm, received by Charter Holdings since the date of the
indentures
(x) as a contribution to the common equity capital or from the issue
or sale of Equity Interests of Charter Holdings, other than Disqualified
Stock or
(y) from the issue or sale of convertible or exchangeable Disqualified
Stock or convertible or exchangeable debt securities of Charter Holdings
that have been converted into or exchanged
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for such Equity Interests other than Equity Interests, or Disqualified
Stock or debt securities, sold to a Subsidiary of Charter Holdings.
"CASH EQUIVALENTS" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof,
provided that the full faith and credit of the United States is pledged in
support thereof, having maturities of not more than twelve months from the
date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of twelve months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any domestic commercial bank having combined
capital and surplus in excess of $500 million and a Thompson Bank Watch
Rating at the time of acquisition of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having a rating of at least "P-1" from Moody's or
at least "A-1" from S&P and in each case maturing within twelve months
after the date of acquisition;
(6) corporate debt obligations maturing within twelve months after the
date of acquisition thereof, rated at the time of acquisition at least
"Aaa" or "P-1" by Moody's or "AAA" or "A-1" by S&P;
(7) auction-rate preferred stocks of any corporation maturing not
later than 45 days after the date of acquisition thereof, rated at the time
of acquisition at least "Aaa" by Moody's or "AAA" by S&P;
(8) securities issued by any state, commonwealth or territory of the
United States, or by any political subdivision or taxing authority thereof,
maturing not later than six months after the date of acquisition thereof,
rated at the time of acquisition at least "A" by Moody's or S&P; and
(9) money market or mutual funds at least 90% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (1) through
(8) of this definition.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) the sale, transfer, conveyance or other disposition, other than by
way of merger or consolidation, in one or a series of related transactions,
of all or substantially all of the assets of Charter Holdings and its
Subsidiaries, taken as a whole, or of a Parent and its Subsidiaries, taken
as a whole, to any "person," as such term is used in Section 13(d)(3) of
the Exchange Act, other than Paul G. Allen or a Related Party;
(2) the adoption of a plan relating to the liquidation or dissolution
of Charter Holdings or a Parent;
(3) the consummation of any transaction, including, without
limitation, any merger or consolidation, the result of which is that any
"person," as defined above, other than Paul G. Allen and Related Parties,
becomes the Beneficial Owner, directly or indirectly, of more than 35% of
the Voting Stock of Charter Holdings or a Parent, measured by voting power
rather than the number of shares, unless Paul G. Allen or a Related Party
Beneficially Owns, directly or indirectly, a greater percentage of Voting
Stock of Charter Holdings or such Parent, as the case may be, measured by
voting power rather than the number of shares, than such person;
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(4) after the date of the indentures, the first day on which a
majority of the members of the board of directors of Charter Holdings or a
Parent are not Continuing Directors; or
(5) Charter Holdings or a Parent consolidates with, or merges with or
into, any Person, or any Person consolidates with, or merges with or into,
Charter Holdings or a Parent, in any such event pursuant to a transaction
in which any of the outstanding Voting Stock of Charter Holdings or such
Parent is converted into or exchanged for cash, securities or other
property, other than any such transaction where the Voting Stock of Charter
Holdings or such Parent outstanding immediately prior to such transaction
is converted into or exchanged for Voting Stock, other than Disqualified
Stock, of the surviving or transferee Person constituting a majority of the
outstanding shares of such Voting Stock of such surviving or transferee
Person immediately after giving effect to such issuance.
"CONSOLIDATED EBITDA" means with respect to any Person, for any period, the
net income of such Person and its Restricted Subsidiaries for such period plus,
to the extent such amount was deducted in calculating such net income:
(1) Consolidated Interest Expense;
(2) income taxes;
(3) depreciation expense;
(4) amortization expense;
(5) all other non-cash items, extraordinary items, nonrecurring and
unusual items and the cumulative effects of changes in accounting
principles reducing such net income, less all non-cash items, extraordinary
items, nonrecurring and unusual items and cumulative effects of changes in
accounting principles increasing such net income, all as determined on a
consolidated basis for such Person and its Restricted Subsidiaries in
conformity with GAAP;
(6) amounts actually paid during such period pursuant to a deferred
compensation plan; and
(7) for purposes of the covenant described under the caption
"-- Certain Covenants -- Incurrence of Indebtedness and Issuance of
Preferred Stock" only, Management Fees;
provided that Consolidated EBITDA shall not include:
(x) the net income, or net loss, of any Person that is not a
Restricted Subsidiary ("Other Person"), except
(i) with respect to net income, to the extent of the amount of
dividends or other distributions actually paid to such Person or any
of its Restricted Subsidiaries by such Other Person during such
period and
(ii) with respect to net losses, to the extent of the amount of
investments made by such Person or any Restricted Subsidiary of such
Person in such Other Person during such period;
(y) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (3) of the covenant
described under the subheading "-- Certain Covenants -- Restricted
Payments," and in such case, except to the extent includable pursuant to
clause (x) above, the net income, or net loss, of any Other Person
accrued prior to the date it becomes a Restricted Subsidiary or is
merged into or consolidated with such Person or any Restricted
Subsidiaries or all or substantially all of the property and assets of
such Other Person are acquired by such Person or any of its Restricted
Subsidiaries; and
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(z) the net income of any Restricted Subsidiary to the extent that
the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary, other than any agreement or
instrument evidencing Indebtedness or preferred stock outstanding on the
date of the indentures or incurred or issued thereafter in compliance
with the covenant described under the caption "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of preferred
stock," provided that
(a) the terms of any such agreement restricting the declaration
and payment of dividends or similar distributions apply only in the
event of a default with respect to a financial covenant or a covenant
relating to payment, beyond any applicable period of grace, contained
in such agreement or instrument,
(b) such terms are determined by such Person to be customary in
comparable financings and
(c) such restrictions are determined by the Charter Holdings not
to materially affect the issuers' ability to make principal or
interest payments on the notes when due.
"CONSOLIDATED INDEBTEDNESS" means, with respect to any Person as of any
date of determination, the sum, without duplication, of:
(1) the total amount of outstanding Indebtedness of such Person and
its Restricted Subsidiaries, plus
(2) the total amount of Indebtedness of any other Person, that has
been Guaranteed by the referent Person or one or more of its Restricted
Subsidiaries, plus
(3) the aggregate liquidation value of all Disqualified Stock of such
Person and all preferred stock of Restricted Subsidiaries of such Person,
in each case, determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, without duplication, the sum of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
including, without limitation, amortization or original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net payments, if any, pursuant to Hedging Obligations; and
(2) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, and
(3) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon;
excluding, however, any amount of such interest of any Restricted Subsidiary if
the net income of such Restricted Subsidiary is excluded in the calculation of
Consolidated EBITDA pursuant to clause (z) of the definition thereof, but only
in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Consolidated EBITDA pursuant to clause (z) of
the definition thereof, in each case, on a consolidated basis and in accordance
with GAAP.
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"CONTINUING DIRECTORS" means, as of any date of determination, any member
of the board of directors of Charter Holdings who:
(1) was a member of such board of directors on the date of the
indentures; or
(2) was nominated for election or elected to such board of directors
with the approval of a majority of the Continuing Directors who were
members of such board of directors at the time of such nomination or
election or whose election or appointment was previously so approved.
"CREDIT FACILITIES" means, with respect to Charter Holdings and/or its
Restricted Subsidiaries, one or more debt facilities or commercial paper
facilities, in each case with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing, including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables, or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DISPOSITION" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person, whether or not such Person
is the Surviving Person, or the sale, assignment, or transfer, lease conveyance
or other disposition of all or substantially all of such Person's assets or
Capital Stock.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms, or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof, or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require Charter Holdings to repurchase such
Capital Stock upon the occurrence of a change of control or an asset sale shall
not constitute Disqualified Stock if the terms of such Capital Stock provide
that Charter Holdings may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies with
the covenant described above under the caption "-- Certain Covenants --
Restricted Payments."
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock, but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock.
"EQUITY OFFERING" means any private or underwritten public offering of
Qualified Capital Stock of Charter Holdings of which the gross proceeds to
Charter Holdings are at least $25 million.
"EXISTING INDEBTEDNESS" means Indebtedness of Charter Holdings and its
Restricted Subsidiaries in existence on the date of the indentures, until such
amounts are repaid.
"FULL ACCRETION DATE" means January 15, 2005, the first date on which the
Accreted Value of the 11.75% notes has accreted to an amount equal to the
principal amount at maturity of the 11.75% notes.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on January 12, 2000.
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"GUARANTEE" or "GUARANTEE" means a guarantee other than by endorsement of
negotiable instruments for collection in the ordinary course of business, direct
or indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness, measured as the lesser of the
aggregate outstanding amount of the Indebtedness so guaranteed and the face
amount of the guarantee.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements;
(2) interest rate option agreements, foreign currency exchange
agreements, foreign currency swap agreements; and
(3) other agreements or arrangements designed to protect such Person
against fluctuations in interest and currency exchange rates.
"HELICON PREFERRED STOCK" means the preferred limited liability company
interest of Charter-Helicon LLC with an aggregate liquidation value of $25
million.
"INDEBTEDNESS" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit, or reimbursement agreements in respect thereof;
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) in respect of the balance deferred and unpaid of the purchase
price of any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing the notional amount of any Hedging Obligations,
if and to the extent any of the preceding items, other than letters of credit
and Hedging Obligations, would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person, whether or not such Indebtedness is assumed by
the specified Person, and, to the extent not otherwise included, the guarantee
by such Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount; and
(2) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness.
"INVESTMENT GRADE RATING" means a rating equal to or higher than Baa3 (or
the equivalent) by Moody's and BBB- (or the equivalent) by S&P.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons, including Affiliates, in the forms of direct or
indirect loans, including guarantees of Indebtedness or other obligations,
advances or capital contributions, excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business, and
purchases or
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other acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP.
"LEVERAGE RATIO" means, as of any date, the ratio of:
(1) the Consolidated Indebtedness of Charter Holdings on such date to
(2) the aggregate amount of Consolidated EBITDA for Charter Holdings
for the most recently ended fiscal quarter for which internal financial
statements are available multiplied by four (the "Reference Period").
In addition to the foregoing, for purposes of this definition,
"Consolidated EBITDA" shall be calculated on a pro forma basis after giving
effect to
(1) the issuance of the notes;
(2) the incurrence of the Indebtedness or the issuance of the
Disqualified Stock or other preferred stock of a Restricted Subsidiary, and
the application of the proceeds therefrom, giving rise to the need to make
such calculation and any incurrence or issuance, and the application of the
proceeds therefrom, or repayment of other Indebtedness or Disqualified
Stock or other preferred stock of a Restricted Subsidiary, other than the
incurrence or repayment of Indebtedness for ordinary working capital
purposes, at any time subsequent to the beginning of the Reference Period
and on or prior to the date of determination, as if such incurrence, and
the application of the proceeds thereof, or the repayment, as the case may
be, occurred on the first day of the Reference Period;
(3) any Dispositions or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted
Subsidiaries, including any person that becomes a Restricted Subsidiary as
a result of such Asset Acquisition, incurring, assuming or otherwise
becoming liable for or issuing Indebtedness, Disqualified Stock or
preferred stock, made on or subsequent to the first day of the Reference
Period and on or prior to the date of determination, as if such Disposition
or Asset Acquisition, including the incurrence, assumption or liability for
any such Indebtedness, Disqualified Stock or preferred stock and also
including any Consolidated EBITDA associated with such Asset Acquisition,
including any cost savings adjustments in compliance with Regulation S-X
promulgated by the Securities and Exchange Commission, had occurred on the
first day of the Reference Period.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code, or equivalent statutes, of any jurisdiction.
"MANAGEMENT FEES" means the fees payable to Charter Communications, Inc.
pursuant to the management agreements between Charter Communications, Inc. and
Charter Communications Operating, LLC and between Charter Communications, Inc.
and Restricted Subsidiaries of Charter Holdings, including any Person that
becomes a Restricted Subsidiary of Charter Holdings in connection with the
acquisition of Bresnan Communications Company Limited Partnership, as such
agreements exist on the January 12, 2000, or on the date of such acquisition in
the case of the aforementioned Bresnan acquisition, including any amendment or
replacement thereof, provided that any such amendment or replacement is not more
disadvantageous to the holders of the notes in any material respect from such
management agreements existing on the January 12, 2000.
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"MARCH 1999 NOTES ISSUE DATE" means March 17, 1999.
"MOODY'S" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
"NET PROCEEDS" means the aggregate cash proceeds received by Charter
Holdings or any of its Restricted Subsidiaries in respect of any Asset Sale,
including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale, net of the
direct costs relating to such Asset Sale, including, without limitation, legal,
accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result thereof or taxes paid or payable as a
result thereof, including amounts distributable in respect of owners', partners'
or members' tax liabilities resulting from such sale, in each case after taking
into account any available tax credits or deductions and any tax sharing
arrangements and amounts required to be applied to the repayment of
Indebtedness.
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither Charter Holdings nor any of its Restricted
Subsidiaries
(a) provides credit support of any kind, including any undertaking,
agreement or instrument that would constitute Indebtedness,
(b) is directly or indirectly liable as a guarantor or otherwise,
or
(c) constitutes the lender;
(2) no default with respect to which, including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary, would permit upon notice, lapse of time or both any holder of
any other Indebtedness, other than the notes, of Charter Holdings or any of
its Restricted Subsidiaries to declare a default on such other Indebtedness
or cause the payment thereof to be accelerated or payable prior to its
stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of Charter Holdings or
any of its Restricted Subsidiaries.
"PARENT" means Charter Communications, Inc. and/or Charter Communications
Holding Company, LLC, as applicable, and any successor Person or any Person
succeeding to the direct or indirect ownership of Charter Holdings.
"PERMITTED INVESTMENTS" means:
(1) any Investment by Charter Holdings in a Restricted Subsidiary of
Charter Holdings or any Investment by a Restricted Subsidiary of Charter
Holdings in Charter Holdings;
(2) any Investment in Cash Equivalents;
(3) any Investment by Charter Holdings or any Restricted Subsidiary of
Charter Holdings in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of Charter
Holdings; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, Charter Holdings or a Restricted Subsidiary of Charter
Holdings;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales";
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(5) any Investment made out of the net cash proceeds of the issue and
sale since the Existing Notes Issue Date, other than to a Subsidiary of
Charter Holdings, of Equity Interests, other than Disqualified Stock, of
Charter Holdings to the extent that
(a) such net cash proceeds have not been applied to make a
Restricted Payment or to effect other transactions pursuant to the
covenant described above under the caption "--Restricted Payments," or
(b) such net cash proceeds have not been used to incur Indebtedness
pursuant to clause (10) of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of preferred stock";
(6) Investments in Productive Assets having an aggregate fair market
value, measured on the date each such Investment was made and without
giving effect to subsequent changes in value, when taken together with all
other Investments made pursuant to this clause (6) since the March 1999
Charter Holdings notes issue date, not to exceed $150 million; provided
that either Charter Holdings or any of its Restricted Subsidiaries, after
giving effect to such Investments, will own at least 20% of the Voting
Stock of such Person;
(7) other Investments in any Person having an aggregate fair market
value, measured on the date each such Investment was made and without
giving effect to subsequent changes in value, when taken together with all
other Investments made pursuant to this clause (7) since the March 1999
Charter Holdings notes issue date, not to exceed $50 million; and
(8) Investments in customers and suppliers in the ordinary course of
business which either
(A) generate accounts receivable, or
(B) are accepted in settlement of bona fide disputes.
"PERMITTED LIENS" means:
(1) Liens on the assets of Charter Holdings securing Indebtedness and
other Obligations under clause (1) of the covenant "--Incurrence of
Indebtedness and Issuance of preferred stock";
(2) Liens in favor of Charter Holdings;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Charter Holdings; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with Charter Holdings;
(4) Liens on property existing at the time of acquisition thereof by
Charter Holdings; provided that such Liens were in existence prior to the
contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) purchase money mortgages or other purchase money liens, including
without limitation any Capitalized Lease Obligations, incurred by Charter
Holdings upon any fixed or capital assets acquired after the Issue Date or
purchase money mortgages, including without limitation Capitalized Lease
Obligations, on any such assets, whether or not assumed, existing at the
time of acquisition of such assets, whether or not assumed, so long as
(a) such mortgage or lien does not extend to or cover any of the
assets of Charter Holdings, except the asset so developed, constructed,
or acquired, and directly related assets
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such as enhancements and modifications thereto, substitutions,
replacements, proceeds, including insurance proceeds, products, rents
and profits thereof, and
(b) such mortgage or lien secures the obligation to pay the
purchase price of such asset, interest thereon and other charges, costs
and expenses, including, without limitation, the cost of design,
development, construction, acquisition, transportation, installation,
improvement, and migration, and incurred in connection therewith, or the
obligation under such Capitalized Lease Obligation, only;
(7) Liens existing on the date of the indentures, other than in
connection with the Credit Facilities;
(8) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(9) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(10) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(11) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligation, bankers'
acceptance, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business, exclusive of obligations for the payment
of borrowed money;
(12) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of Charter
Holdings or any of its Restricted Subsidiaries;
(13) Liens of franchisors or other regulatory bodies arising in the
ordinary course of business;
(14) Liens arising from filing Uniform Commercial Code financing
statements regarding leases or other Uniform Commercial Code financing
statements for precautionary purposes relating to arrangements not
constituting Indebtedness;
(15) Liens arising from the rendering of a final judgment or order
against Charter Holdings or any of its Restricted Subsidiaries that does
not give rise to an Event of Default;
(16) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(17) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case,
securing Indebtedness under Hedging Obligations and forward contracts,
options, future contracts, future options or similar agreements or
arrangements designed solely to protect Charter Holdings or any of its
Restricted Subsidiaries from fluctuations in interest rates, currencies or
the price of commodities;
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(18) Liens consisting of any interest or title of licensor in the
property subject to a license;
(19) Liens on the Capital Stock of Unrestricted Subsidiaries;
(20) Liens arising from sales or other transfers of accounts
receivable which are past due or otherwise doubtful of collection in the
ordinary course of business;
(21) Liens incurred in the ordinary course of business of Charter
Holdings, with respect to obligations which in the aggregate do not exceed
$50 million at any one time outstanding;
(22) Liens in favor of the trustee arising under the provisions in the
indentures under the subheading "-- Compensation and Indemnity"; and
(23) Liens in favor of the trustee for its benefit and the benefit of
holders of the Notes, as their respective interests appear.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of Charter
Holdings or any of its Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Charter Holdings or any of its Restricted
Subsidiaries, other than intercompany Indebtedness; provided that unless
permitted otherwise by the indentures, no Indebtedness of Charter Holdings or
any of its Restricted Subsidiaries may be issued in exchange for, or the net
proceeds of are used to extend, refinance, renew, replace, defease or refund
Indebtedness of Charter Holdings or any of its Restricted Subsidiaries;
provided, further, that:
(1) the principal amount, or accreted value, if applicable, of such
Permitted Refinancing Indebtedness does not exceed the principal amount of,
or accreted value, if applicable, plus accrued interest and premium, if
any, on, the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded, plus the amount of reasonable expenses incurred in
connection therewith;
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
notes on terms at least as favorable to the holders of notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by Charter Holdings or by any
of its Restricted Subsidiaries who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
association, limited liability company, joint stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof or any other entity.
"PRODUCTIVE ASSETS" means assets, including assets of a referent Person
owned directly or indirectly through ownership of Capital Stock, of a kind used
or useful in the Cable Related Business.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Stock.
"RATING AGENCIES" means Moody's and S&P.
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"RELATED PARTY" means:
(1) the spouse or an immediate family member, estate or heir of Paul
G. Allen; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of Paul G.
Allen and/or such other Persons referred to in the immediately preceding
clause (1).
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED PAYMENTS" are set forth above under the caption "Certain
Covenants- Restricted Payments."
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Service, a division of the
McGraw-Hill Companies, Inc. or any successor to the rating agency business
thereof.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of Charter
Holdings which is a "Significant Subsidiary" as defined in Rule 1-02(w) of
Regulation S-X under the Securities Act.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the documentation governing
such Indebtedness on the January 12, 2000, or, if none, the original
documentation governing such Indebtedness, and shall not include any contingent
obligations to repay, redeem or repurchase any such interest or principal prior
to the date originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any Person:
(1) any corporation, association or other business entity of which at
least 50% of the total voting power of shares of Capital Stock entitled
without regard to the occurrence of any contingency, to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person or a combination thereof, and, in the
case of any such entity of which 50% of the total voting power of shares of
Capital Stock is so owned or controlled by such Person or one or more of
the other Subsidiaries of such Person, such Person and its Subsidiaries
also has the right to control the management of such entity pursuant to
contract or otherwise; and
(2) any partnership
(a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person, or
(b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person, or any combination thereof.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of Charter Holdings that is
designated by the board of directors of Charter Holdings as an Unrestricted
Subsidiary pursuant to a board resolution, but only to the extent that such
Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with Charter Holdings or any Restricted Subsidiary of Charter
Holdings unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to Charter Holdings or any Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of Charter Holdings unless such terms constitute
Investments permitted by the covenant described above under the caption
"-- Certain Covenants -- Investments";
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(3) is a Person with respect to which neither Charter Holdings nor any
of its Restricted Subsidiaries has any direct or indirect obligation
(a) to subscribe for additional Equity Interests or
(b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Charter Holdings or any of its
Restricted Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of Charter Holdings or any of its Restricted
Subsidiaries or has at least one executive officer that is not a director
or executive officer of Charter Holdings or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of Charter Holdings as an Unrestricted
Subsidiary shall be evidenced to the trustee by filing with the trustee a
certified copy of the board resolution giving effect to such designation and an
officers' certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "Certain Covenants -- Investments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the indentures and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of Charter Holdings as of such
date and, if such Indebtedness is not permitted to be incurred as of such date
under the covenant described under the caption "Certain Covenants -- Incurrence
of Indebtedness and Issuance of preferred stock", Charter Holdings shall be in
default of such covenant. The board of directors of Charter Holdings may at any
time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of Charter Holdings of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if:
(1) such Indebtedness is permitted under the covenant described under
the caption "Certain Covenants -- Incurrence of Indebtedness and Issuance
of preferred stock," calculated on a pro forma basis as if such designation
had occurred at the beginning of the four-quarter reference period; and
(2) no Default or Event of Default would be in existence following
such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the board of
directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by
(b) the number of years, calculated to the nearest one-twelfth,
that will elapse between such date and the making of such payment; by
(2) the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which, other than directors' qualifying shares, shall at
the time be owned by such Person and/or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following sets forth the opinion of Paul, Hastings, Janofsky & Walker
LLP, our legal counsel, as to the material United States federal income tax
consequences of
(1) the exchange offer relevant to U.S. holders, and
(2) the ownership and disposition of the new notes relevant to U.S. holders
and, in certain circumstances, non-U.S. holders.
The following deals only with notes held as capital assets within the
meaning of section 1221 of the Internal Revenue Code of 1986, as amended. The
following does not address special situations, such as those of broker-dealers,
tax-exempt organizations, individual retirement accounts and other tax deferred
accounts, financial institutions, insurance companies, or persons holding notes
as part of a hedging or conversion transaction, a straddle or a constructive
sale. Furthermore, the following is based upon the provisions of the Internal
Revenue Code and regulations, rulings and judicial decisions promulgated under
the Internal Revenue Code and judicial decisions as of the date hereof. Such
authorities may be repealed, revoked, or modified, possibly with retroactive
effect, so as to result in United States federal income tax consequences
different from those discussed below. In addition, except as otherwise
indicated, the following does not consider the effect of any applicable foreign,
state, local or other tax laws or estate or gift tax considerations.
We have not sought, and will not seek, any rulings from the IRS with
respect to the positions discussed below. There can be no assurance that the IRS
will not take a different position concerning the tax consequences of the
exchange offer and ownership or disposition of the original notes or new notes,
or that any such position would not be sustained.
As used herein, a "United States person" is
(1) a citizen or resident of the U.S.,
(2) a corporation, partnership or other entity created or organized in or
under the laws of the U.S. or any political subdivision thereof,
(3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source,
(4) a trust if
(A) a United States court is able to exercise primary supervision over
the administration of the trust, and
(B) one or more United States persons have the authority to control
all substantial decisions of the trust,
(5) a certain type of trust in existence on August 20, 1996, which was
treated as a United States person under the Internal Revenue Code in effect
immediately prior to such date and which has made a valid election to be treated
as a United States person under the Internal Revenue Code, and
(6) any person otherwise subject to U.S. federal income tax on a net income
basis in respect of its worldwide taxable income.
A U.S. holder is a beneficial owner of a note who is a United States
person. A non-U.S. holder is a beneficial owner of a note that is not a U.S.
holder.
THE EXCHANGE OFFER
Pursuant to the exchange offer, holders are entitled to exchange the
original notes for new notes that will be substantially identical in all
material respects to the original notes, except that the new
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notes will be registered with the Securities and Exchange Commission and
therefore will not be subject to transfer restrictions. The exchange pursuant to
the exchange offer as described above will not result in a taxable event.
Accordingly,
(1) no gain or loss will be realized by a U.S. holder upon receipt of a new
note,
(2) the holding period of the new note will include the holding period of
the original note exchanged therefor and
(3) the adjusted tax basis of the new notes will be the same as the
adjusted tax basis of the original notes exchanged at the time of such exchange.
UNITED STATES FEDERAL INCOME TAXATION OF U.S. HOLDERS
PAYMENTS OF INTEREST ON THE 10.00% NOTES AND THE 10.25% NOTES
Interest on a 10.00% note or a 10.25% note, as the case may be, will be
taxable to a U.S. Holder as ordinary income from domestic sources at the time it
is paid or accrued in accordance with the U.S. Holder's regular method of
accounting for tax purposes.
ORIGINAL ISSUE DISCOUNT ON THE 11.75% NOTES
The 11.75% notes will be issued with original issue discount. Such notes
will be issued with original issue discount because they will be issued at an
issue price which is substantially less than their stated principal amount at
maturity, and because interest on such notes will not be payable until July 15,
2005. Each U.S. Holder will be required to include in income in each year, in
advance of receipt of cash payments on such Senior Discount Notes to which such
income is attributable, original issue discount income as described below.
The amount of original issue discount with respect to the 11.75% notes will
be equal to the excess of
(1) note's "stated redemption price at maturity" over
(2) its "issue price."
The issue price of the 11.75% notes will be equal to the price to the
public, at which a substantial amount of such notes is initially sold for money
excluding any sales to a bond house, broker or similar person or organization
acting in the capacity of an underwriter, placement agent or wholesaler. The
stated redemption price at maturity of such a note is the total of all payments
provided by the 11.75% note, including stated interest payments.
A U.S. holder of such a note is required to include in gross income for
U.S. federal income tax purposes an amount equal to the sum of the "daily
portions" of such original issue discount for all days during the taxable year
on which the holder holds such note. The daily portions of original issue
discount required to be included in such holder's gross income in a taxable year
will be determined on a constant yield basis. A pro rata portion of the original
issue discount on such note which is attributable to the "accrual period" in
which such day is included will be allocated to each day during the taxable year
in which the holder holds the 11.75% notes. Accrual periods with respect to such
a note may be of any length and may vary in length over the term of the 11.75%
notes as long as
(1) no accrual period is longer than one year, and
(2) each scheduled payment of interest or principal on such note occurs on
either the first or final day of an accrual period.
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The amount of original issue discount attributable to each accrual period
will be equal to the product of
(1) the "adjusted issue price" at the beginning of such accrual period, and
(2) the "yield to maturity" of the instrument, stated in a manner
appropriately taking into account the length of the accrual period.
The yield to maturity is the discount rate that, when used in computing the
present value of all payments to be made under the 11.75% notes, produces an
amount equal to the issue price of such notes. The adjusted issue price of such
a note at the beginning of an accrual period is generally defined as the issue
price of such note plus the aggregate amount of original issue discount that
accrued in all prior accrual periods, less any cash payments made on the 11.75%
notes. Accordingly, a U.S. holder of such a note will be required to include
original issue discount in gross income for United States federal income tax
purposes in advance of the receipt of cash attributable to such income. The
amount of original issue discount allocable to an initial short accrual period
may be computed using any reasonable method if all other accrual periods, other
than a final short accrual period, are of equal length. The amount of original
issue discount allocable to the final accrual period at maturity of a 11.75%
note is the difference between
(A) the amount payable at the maturity of such note, and
(B) such note's adjusted issue price as of the beginning of the final
accrual period.
Payments on the 11.75% notes, including principal and stated interest
payments, are not separately included in a U.S. holder's income. Such payments
are treated first as payments of accrued original issue discount to the extent
of such accrued original issue discount and the excess as payments of principal,
which reduce the U.S. holder's adjusted tax basis in such notes.
EFFECT OF MANDATORY AND OPTIONAL REDEMPTION ON ORIGINAL ISSUE DISCOUNT
In the event of a change of control, we will be required to offer to redeem
all of the notes, at redemption prices specified elsewhere in this prospectus.
If we receive net proceeds from one or more equity offerings, we may, at our
option, use all or a portion of such net proceeds to redeem in the aggregate up
to 35% of the aggregate principal amount at maturity of the 10.25% notes and up
to 35% of the aggregate principal amount at maturity of the 11.75% notes at
redemption prices specified elsewhere herein, provided that at least 65% of the
aggregate principal amount at maturity of the 10.25% notes and the 11.75% notes,
respectively, remains outstanding after each such redemption. Computation of the
yield and maturity of the notes is not affected by such redemption rights and
obligations if, based on all the facts and circumstances as of January 12, 2000,
the stated payment schedule of the notes, that does not reflect the change of
control event or equity offering event, is significantly more likely than not to
occur. We have determined that, based on all of the facts and circumstances as
of the issue date, it is significantly more likely than not that the notes will
be paid according to their stated schedule.
We may redeem the 10.25% notes and the 11.75% notes, in whole or in part,
at any time on or after February 1, 2005, at redemption prices specified
elsewhere herein plus accrued and unpaid stated interest, if any, on the notes
so redeemed but excluding the date of redemption. The United States Treasury
Regulations contain rules for determining the "maturity date" and the stated
redemption price at maturity of an instrument that may be redeemed prior to its
stated maturity date at the option of the issuer. Under United States Treasury
Regulations, solely for the purposes of the accrual of original issue discount,
it is assumed that an issuer will exercise any option to redeem a debt
instrument if such exercise would lower the yield to maturity of the debt
instrument. We will not be presumed to redeem the notes prior to their stated
maturity under these rules because the exercise of such options would not lower
the yield to maturity of the notes.
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U.S. Holders may wish to consult their own tax advisors regarding the
treatment of such contingencies.
APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS
Because the 11.75% notes constitute "applicable high yield discount
obligations", referred to as "AHYDOs", the portion of each 11.75% note that is
allocable to beneficial owners of Charter Holdings that are C corporations, such
as Charter Communications, Inc., will be treated as an AHYDO for U.S. federal
income tax purposes. The 11.75% notes constitute AHYDOs because they have a
yield to maturity that is at least five percentage points above the applicable
federal rate at the time of issuance of the 11.75% notes and the 11.75% notes
are issued with "significant original issue discount." An 11.75% note is treated
as having significant original issue discount because the aggregate amount that
will be includable in gross income with respect to such 11.75% note for periods
before the close of any accrual period ending after the date that is five years
after the date of issue exceeds the sum of (1) the aggregate amount of interest
to be paid in cash under the 11.75% note before the close of such accrual period
and (2) the product of the initial issue price of such 11.75% note and its yield
to maturity.
Because the 11.75% notes constitute AHYDOs, to the extent that the 11.75%
notes are allocable to beneficial owners of Charter Holdings that are C
corporations, such as Charter Communications, Inc.,
(1) the "disqualified portion" of the original issue discount that accrues
on the 11.75% notes allocable to beneficial owners of Charter Holdings that are
C corporations, such as Charter Communications, Inc., may be treated as a
dividend generally eligible for the dividends received deduction in the case of
corporate U.S. Holders,
(2) beneficial owners of Charter Holdings that are C corporations, such as
Charter Communications, Inc., will not be entitled to deduct their distributive
share of the disqualified portion of original issue discount that accrues on the
11.75% notes, and
(3) beneficial owners of Charter Holdings that are C corporations, such as
Charter Communications, Inc., will be allowed to deduct the remainder of their
distributive share of original issue discount only when Charter Holdings pays
amounts attributable to such original issue discount in cash.
The disqualified portion of original issue discount is equal to the lesser
of the amount of original issue discount or the portion of the "total return"
with respect to the 11.75% notes in excess of the applicable federal rate plus
six percentage points. The total return is the excess of all payments to be made
with respect to a 11.75% note over its issue price.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Upon the sale, exchange, retirement or other taxable disposition of a note,
the holder will recognize gain or loss in an amount equal to the difference
between
(1) the amount of cash and the fair market value of other property received
in the exchange and
(2) the holder's adjusted tax basis in such note.
Amounts attributable to accrued but unpaid interest on the 10.00% notes and
the 10.25% notes will be treated as ordinary interest income. A holder's
adjusted tax basis in a note will equal the purchase price paid by such holder
for the note increased by the amount of any market discount, and in the case of
a 11.75% note by any original issue discount previously included in income by
such holder with respect to such note and decreased by the amount of any
amortizable bond premium
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applied to reduce interest on the notes and, in the case of a 11.75% note, by
any payments received thereon.
Gain or loss realized on the sale, exchange, retirement or other taxable
disposition of a note will be capital gain or loss and will be long-term capital
gain or loss if at the time of sale, exchange, retirement, or other taxable
disposition, the note has been held for more than 12 months. The maximum rate of
tax on long-term capital gains with respect to notes held by an individual is
20%. The deductibility of capital losses is subject to certain limitations.
MARKET DISCOUNT
A holder receives a "market discount" when he/she
(1) purchases a 10.00% note or a 10.25% note for an amount below the issue
price, or
(2) purchases a 11.75% note for an amount below the adjusted issue price on
the date of purchase, as determined in accordance with the original issue
discount rules above.
Under the market discount rules, a U.S. holder will be required to treat
any partial principal payment on, or any gain on the sale, exchange, retirement
or other disposition of, a note as ordinary income to the extent of the market
discount which has not previously been included in income and is treated as
having accrued on such note at the time of such payment or disposition. In
addition, the U.S. holder may be required to defer, until the maturity of the
note or its earlier disposition in a taxable transaction, the deduction of a
portion of the interest expense on any indebtedness incurred or continued to
purchase or carry such notes.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the note, unless the U.S.
holder elects to accrue such discount on a constant interest rate method. A U.S.
holder may elect to include market discount in income currently as it accrues,
on either a ratable or constant interest rate method. If this election is made,
the holder's basis in the note will be increased to reflect the amount of income
recognized and the rules described above regarding deferral of interest
deductions will not apply. This election to include market discount in income
currently, once made, applies to all market discount obligations acquired on or
after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service.
AMORTIZABLE BOND PREMIUM; ACQUISITION PREMIUM
A U.S. holder that
(1) purchases a 10.00% note or a 10.25% note for an amount in excess of the
principal amount, or
(2) purchases a 11.75% note for an amount in excess of the stated
redemption price will be considered to have purchased such note with
"amortizable bond premium." A U.S. holder generally may elect to amortize the
premium over the remaining term of the note on a constant yield method as
applied with respect to each accrual period of the note, and allocated ratably
to each day within an accrual period in a manner substantially similar to the
method of calculating daily portions of original issue discount, as described
above. However, because the notes may be optionally redeemed for an amount that
is in excess of their principal amount, special rules apply that could result in
a deferral of the amortization of bond premium until later in the term of the
note. The amount amortized in any year will be treated as a reduction of the
U.S. holder's interest income, including original issue discount income, from
the note. Bond premium on a note held by a U.S. holder that does not make such
an election will decrease the gain or increase the loss otherwise recognized
upon disposition of the note. The election to amortize premium on a constant
yield method, once made, applies to all
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debt obligations held or subsequently acquired by the electing U.S. holder on or
after the first day of the first taxable year to which the election applies and
may not be revoked without the consent of the Internal Revenue Service.
A U.S. Holder that purchases a 11.75% note for an amount that is greater
than the adjusted issue price of the 11.75% note on the date of purchase, as
determined in accordance with the original issue discount rules, above, will be
considered to have purchased such 11.75% note at an "acquisition premium." A
holder of a 11.75% note that is purchased at an acquisition premium may reduce
the amount of the original issue discount otherwise includible in income with
respect to the 11.75% note by the "acquisition premium fraction." The
acquisition premium fraction is that fraction the numerator of which is the
excess of the holder's adjusted tax basis in the 11.75% note immediately after
its acquisition over the adjusted issue price of the 11.75% note and the
denominator of which is the excess of the sum of all amounts payable on the
11.75% note after the purchase date over the adjusted issue price of the 11.75%
note. Alternatively, a holder of a 11.75% note that is purchased at an
acquisition premium may elect to compute the original issue discount accrual on
the 11.75% note by treating the purchase as a purchase of the 11.75% note at
original issuance, treating the purchase price as the issue price, and applying
the original issue discount rules thereto using a constant yield method.
UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
The payment to a non-U.S. holder of interest on a note, will not be subject
to U.S. federal withholding tax pursuant to the "portfolio interest exception,"
provided that
(1) the non-U.S. holder does not actually or constructively own 10% or more
of the capital or profits interest in the issuers and is not a controlled
foreign corporation that is related to the issuers within the meaning of the
Code and
(2) either
(A) the beneficial owner of the notes certifies to the issuers or their
agent, under penalties of perjury, that it is not a U.S. holder and provides its
name and address on U.S. Treasury Form W-8, or a suitable substitute form, or
(B) a securities clearing organization, bank or other financial institution
that holds the notes on behalf of such non-U.S. holder in the ordinary course of
its trade or business certifies under penalties of perjury that such Form W-8,
or suitable substitute form, has been received from the beneficial owner by it
or by a financial institution between it and the beneficial owner and furnishes
the payor with a copy thereof.
Recently adopted Treasury Regulations that will be effective January 1,
2001, provide alternative methods for satisfying the certification requirement
described in (2) above. These regulations will generally require, in the case of
notes held by a foreign partnership, that the certificate described in (2) above
be provided by the partners rather than by the foreign partnership, and that the
partnership provide certain information including a U.S. tax identification
number. For purposes of the United States federal withholding tax, payment of
interest includes the amount of any payment that is attributable to original
issue discount that accrued while such non-U.S. holder held the note.
If a non-U.S. holder cannot satisfy the requirements of the portfolio
interest exception described above, payments of interest, including the amount
of any payment that is attributable to original issue discount that accrued
while such non-U.S. holder held the note, made to such non-U.S. holder will
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be subject to a 30% withholding tax, unless the beneficial owner of the note
provides us or our paying agent, as the case may be, with a properly executed
(1) Internal Revenue Service Form 1001, or successor form, claiming an
exemption from or reduction in the rate of withholding under the benefit of a
tax treaty or
(2) Internal Revenue Service Form 4224, or successor form, stating that
interest paid on the note is not subject to withholding tax because it is
effectively connected with the beneficial owner's conduct of a trade or business
in the United States.
If a non-U.S. holder of a note is engaged in a trade or business in the
United States and interest on the note is effectively connected with the conduct
of such trade or business, such non-U.S. holder, will be subject to U.S. federal
income tax on such interest, including original issue discount, in the same
manner as if it were a U.S. holder. In addition, if such non-U.S. holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30% of
its effectively connected earnings and profits, subject to adjustment, for that
taxable year unless it qualifies for a lower rate under an applicable income tax
treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a person other than a U.S. holder generally
will not be subject to U.S. federal income tax provided
(1) such gain is not effectively connected with the conduct by such holder
of a trade or business in the United States,
(2) in the case of gains derived by an individual, such individual is not
present in the United States for 183 days or more in the taxable year of the
disposition and certain other conditions are met and
(3) the non-U.S. holder is not subject to tax pursuant to the provisions of
U.S. federal income tax law applicable to certain expatriates.
FEDERAL ESTATE TAX
Subject to applicable estate tax treaty provisions, notes held by an
individual who is not a citizen or resident of the United States for federal
estate tax purposes at the time of his or her death will not be subject to U.S.
federal estate tax if the interest on the notes qualifies for the portfolio
interest exemption from U.S. federal income tax under the rules described above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding and information reporting requirements may apply to
certain payments of principal, premium, if any, and interest, and accruals of
original issue discount, on a note, and to the proceeds of the sale or
redemption of a note before maturity. We, our agent, a broker, the trustee or
the paying agent, as the case may be, will be required to withhold from any
payment that is subject to backup withholding a tax equal to 31% of such payment
if a U.S. holder fails to furnish his taxpayer identification number, certify
that such number is correct, certify that such holder is not subject to backup
withholding or otherwise comply with the applicable backup withholding rules.
Certain U.S. holders, including all corporations, are not subject to backup
withholding and information reporting requirements.
Non-U.S. holders other than corporations may be subject to backup
withholding and information reporting requirements. However, backup withholding
and information reporting requirements do not apply to payments of portfolio
interest, including original issue discount, made by us or a paying agent to
non-U.S. holders if the appropriate certification is received, provided that the
payor does not have actual knowledge that the holder is a U.S. holder. If any
payments of principal and interest are made
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to the beneficial owner of a note by or through the foreign office of a foreign
custodian, foreign nominee or other foreign agent of such beneficial owner, or
if the foreign office of a foreign "broker", as defined in the applicable
Treasury Regulations, pays the proceeds of the sale, redemption or other
disposition of note or a coupon to the seller thereof, backup withholding and
information reporting requirements will not apply. Information reporting
requirements, but not backup withholding, will apply, however, to a payment by a
foreign office of a broker that is a United States person or is a foreign person
that derives 50% of more of its gross income for certain period from the conduct
of a trade or business in the United States, or that is a "controlled foreign
corporation", that is, a foreign corporation controlled by certain U.S.
shareholders, with respect to the United States unless the broker has
documentary evidence in its records that the holder is a non-U.S. holder and
certain other conditions are met or the holder otherwise establishes an
exemption. Payment by a U.S. office of a broker is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies under penalties of perjury that it is a non-U.S. holder or otherwise
establishes an exemption.
In October 1997, Treasury regulations were issued which alter the foregoing
rules in certain respects and which generally will apply to any payments in
respect of a note or proceeds from the sale of a note that are made after
December 31, 2000. Among other things, such regulations expand the number of
foreign intermediaries that are potentially subject to information reporting and
address certain documentary evidence requirements relating to exemption from the
backup withholding requirements. Holders of the notes should consult their tax
advisers concerning the possible application of such regulations to any payments
made on or with respect to the notes.
Any amounts withheld under the backup withholding rules from a payment to a
holder of the notes will be allowed as a refund or a credit against such
holder's United States federal income tax liability, provided that the required
information is furnished to the IRS.
We must report annually to the IRS and to each non-U.S. holder any interest
that is subject to withholding, or that is exempt from United States withholding
tax pursuant to a tax treaty, or interest that is exempt from United States
federal withholding tax under the portfolio interest exception. Copies of these
information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which the
non-U.S. holder resides.
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of original notes that were acquired for
the account of such broker-dealer as a result of market-making or other trading
activities, other than original notes acquired directly from us or any of our
affiliates may exchange such original notes for new notes pursuant to the
exchange offer. This is true so long as each broker-dealer that receives new
notes for its own account in exchange for original notes, where such original
notes were acquired by such broker-dealer as a result of market-making or other
trading activities acknowledges that it will deliver a prospectus in connection
with any resale of such new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for original notes where such
original notes were acquired as a result of market-making activities or other
trading activities. We have agreed that for a period of 180 days after
consummation of the exchange offer or such time as any broker-dealer no longer
owns any registrable securities, we will make this prospectus, as it may be
amended or supplemented from time to time, available to any broker-dealer for
use in connection with any such resale. All dealers effecting transactions in
the new notes will be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers or any other holder of new notes. New notes received by
broker-dealers for their own account in the exchange
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<PAGE> 209
offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such new notes. Any broker-dealer that resells new notes that
were received by it for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such new notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of new notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The letter of transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
For a period of 180 days after consummation of the exchange offer or until
such time as any broker-dealer no longer owns any registrable securities, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer and to our performance of, or compliance with, the registration
rights agreements (other than commissions or concessions of any brokers or
dealers) and will indemnify the holders of the notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The legality of the notes offered in this prospectus and other matters will
be passed upon for us by Paul, Hastings, Janofsky & Walker LLP, New York, New
York.
EXPERTS
The consolidated financial statements of Charter Communications Holdings,
LLC and subsidiaries, the combined financial statements of CCA Group, the
consolidated financial statements of CharterComm Holdings, L.P. and
subsidiaries, the combined financial statements of Greater Media Cablevision
Systems, the financial statements of Sonic Communications Cable Television
Systems and Long Beach Acquisition Corp., the combined financial statements of
Helicon Partners I, L.P. and affiliates for the seven months ended July 30,
1999, the consolidated financial statements of Marcus Cable Holdings, LLC and
subsidiaries for the three months ended March 31, 1999 and the consolidated
financial statements of CC V Holdings, LLC and subsidiaries, included in this
prospectus, to the extent and for the periods indicated in their reports, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included in this
prospectus in reliance upon the authority of said firm as experts in giving said
reports.
The combined financial statements of TCI Falcon Systems as of September 30,
1998 and December 31, 1997 and for the nine-month period ended September 30,
1998, and for each of the years in the two-year period ended December 31, 1997,
the consolidated financial statements of Bresnan Communications Group LLC as of
December 31, 1998 and 1999, and for each of the years in the three-year period
ended December 31, 1999, the consolidated financial statements of Marcus Cable
Holdings, LLC and subsidiaries as of December 31, 1998 and 1997, and for each of
the years in the three-year period ended December 31, 1998, and the combined
financial statements of Helicon Partners I, L.P. and affiliates as of December
31, 1997 and 1998 and for each of the years in the three-year period ended
December 31, 1998, have been included herein in reliance upon the reports
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of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Renaissance Media Group LLC, the
combined financial statements of the Picayune, MS, LaFourche, LA, St. Tammany,
LA, St. Landry, LA, Pointe Coupee, LA, and Jackson, TN cable television systems,
the financial statements of Indiana Cable Associates, Ltd. as of December 31,
1997 and 1998 and for each of the years in the three-year period ended December
31, 1998, the consolidated financial statements of R/N South Florida Cable
Management Limited Partnership as of December 31, 1997 and 1998 and for each of
the years in the three-year period ended December 31, 1998, the combined
financial statements of Fanch Cable Systems Sold to Charter Communications, Inc.
and the consolidated financial statements of Falcon Communications, L.P.
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein, and are included in reliance upon such reports given
on the authority of such firm as experts in accounting and auditing.
The audited combined financial statements of InterMedia Cable Systems
(comprised of components of InterMedia Partners and InterMedia Capital Partners
IV, L.P.), the audited financial statements of Rifkin Cable Income Partners
L.P., the audited consolidated financial statements of Rifkin Acquisition
Partners, L.L.L.P., the audited financial statements of Indiana Cable
Associates, Ltd. as of September 13, 1999 and for the period from January 1,
1999 to September 13, 1999, the audited consolidated financial statements of R/N
South Florida Cable Management Limited Partnership as of September 13, 1999 and
for the period from January 1, 1999 to September 13, 1999 the audited
consolidated financial statements of Avalon Cable of Michigan Holdings, Inc. and
subsidiaries, the audited consolidated financial statements of Cable Michigan
Inc. and subsidiaries, the audited consolidated financial statements of Avalon
Cable LLC and subsidiaries, the audited financial statements of Amrac Clear
View, a Limited Partnership as of May 28, 1998 and for the period from January
1, 1998 through May 28, 1998, the audited combined financial statements of The
Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the
Massachusetts Operations of Pegasus Cable Television, Inc., included in this
registration statement, have been audited by PricewaterhouseCoopers LLP,
independent accountants. The entities and periods covered by these audits are
indicated in their reports. The financial statements have been so included in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of Amrac Clear View, a Limited Partnership as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, included in this prospectus, have been so included in
reliance on the report of Greenfield, Altman, Brown, Berger & Katz, P.C.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
$1,532,000,000
OFFER TO PURCHASE
10.00% SENIOR NOTES DUE 2009,
10.25% SENIOR NOTES DUE 2010, AND
11.75% SENIOR DISCOUNT NOTES DUE 2010,
FOR ANY AND ALL OUTSTANDING
10.00% SENIOR NOTES DUE 2009,
10.25% SENIOR NOTES DUE 2010, AND
11.75% SENIOR DISCOUNT NOTES DUE 2010,
RESPECTIVELY, OF
CHARTER COMMUNICATIONS
HOLDINGS, LLC
AND
CHARTER COMMUNICATIONS
HOLDINGS CAPITAL CORPORATION
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS
AN OFFER TO ISSUE ONLY THE NEW NOTES OFFERED HEREBY, BUT ONLY UNDER
CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION
CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
<PAGE> 212
INDEX TO FINANCIAL STATEMENTS
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-8
Consolidated Balance Sheets as of December 31, 1999 and
1998.................................................... F-9
Consolidated Statements of Operations for the Year ended
December 31, 1999, and for the Period from December 24,
1998, through December 31, 1998......................... F-10
Consolidated Statements of Changes in Member's Equity for
the Year ended December 31, 1999, and for the Period
from December 24, 1998, through December 31, 1998....... F-11
Consolidated Statements of Cash Flows for the Year ended
December 31, 1999, and for the Period from December 24,
1998, through December 31, 1998......................... F-12
Notes to Consolidated Financial Statements................ F-13
Report of Independent Public Accountants.................. F-33
Consolidated Statements of Operations for the Period from
January 1, 1998, through December 23, 1998 and for the
Year ended December 31, 1997............................ F-34
Consolidated Statements of Changes in Shareholder's
Investment for the Period from January 1, 1998, through
December 23, 1998 and for the Year ended December 31,
1997.................................................... F-35
Consolidated Statements of Cash Flows for the Period from
January 1, 1998, through December 23, 1998 and for the
Year ended December 31, 1997............................ F-36
Notes to Consolidated Financial Statements................ F-37
CCA GROUP:
Report of Independent Public Accountants.................. F-44
Combined Balance Sheet as of December 31, 1997............ F-45
Combined Statements of Operations for the Period from
January 1, 1998, through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996.................. F-46
Combined Statements of Shareholders' Deficit for the
Period from January 1, 1998, through December 23, 1998
and for the Years Ended December 31, 1997 and 1996...... F-47
Combined Statements of Cash Flows for the Period from
January 1, 1998, through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996.................. F-48
Notes to Combined Financial Statements.................... F-49
CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-63
Consolidated Balance Sheet as of December 31, 1997........ F-64
Consolidated Statements of Operations for the Period from
January 1, 1998, through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996.................. F-65
Consolidated Statements of Partners' Capital for the
Period from January 1, 1998, through December 23, 1998
and for the Years Ended December 31, 1997 and 1996...... F-66
Consolidated Statements of Cash Flows for the Period from
January 1, 1998, through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996.................. F-67
Notes to Consolidated Financial Statements................ F-68
</TABLE>
F-1
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MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-81
Consolidated Statement of Operations for the Three Months
Ended March 31, 1999.................................... F-82
Consolidated Statement of Members' Deficit for the Three
Months Ended March 31, 1999............................. F-83
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1999.................................... F-84
Notes to Consolidated Financial Statements................ F-85
Independent Auditors' Report.............................. F-91
Consolidated Balance Sheets as of December 31, 1998 and
1997.................................................... F-92
Consolidated Statements of Operations for Each of the
Years in the Three-Year Period Ended December 31,
1998.................................................... F-93
Consolidated Statements of Members' Equity/Partners'
Capital for Each of the Years in the Three-Year Period
Ended December 31, 1998................................. F-94
Consolidated Statements of Cash Flows for Each of the
Years in the Three-Year Period Ended December 31,
1998.................................................... F-95
Notes to Consolidated Financial Statements................ F-96
RENAISSANCE MEDIA GROUP LLC:
Report of Independent Auditors............................ F-107
Consolidated Balance Sheet as of April 30, 1999........... F-108
Consolidated Statement of Operations for the Four Months
Ended April 30, 1999.................................... F-109
Consolidated Statement of Changes in Members' Equity for
the Four Months Ended April 30, 1999.................... F-110
Consolidated Statement of Cash Flows for the Four Months
Ended April 30, 1999.................................... F-111
Notes to Consolidated Financial Statements................ F-112
Report of Independent Auditors............................ F-120
Consolidated Balance Sheet as of December 31, 1998........ F-121
Consolidated Statement of Operations for the Year Ended
December 31, 1998....................................... F-122
Consolidated Statement of Changes in Members' Equity for
the Year Ended December 31, 1998........................ F-123
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1998....................................... F-124
Notes to Consolidated Financial Statements for the Year
Ended December 31, 1998................................. F-125
PICAYUNE, MS, LAFOURCHE, LA, ST. TAMMANY, LA, ST. LANDRY,
LA, POINTE COUPEE, LA AND JACKSON, TN CABLE TELEVISION
SYSTEMS:
Report of Independent Auditors............................ F-135
Combined Balance Sheet as of April 8, 1998................ F-136
Combined Statement of Operations for the Period from
January 1, 1998 through April 8, 1998................... F-137
Combined Statement of Changes in Net Assets for the Period
from January 1, 1998 through April 8, 1998.............. F-138
Combined Statement of Cash Flows for the Period from
January 1, 1998 through April 8, 1998................... F-139
Notes to Combined Financial Statements.................... F-140
Report of Independent Auditors............................ F-147
Combined Balance Sheets as of December 31, 1996 and
1997.................................................... F-148
Combined Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997........................ F-149
Combined Statements of Changes in Net Assets for the Years
Ended December 31, 1996 and 1997........................ F-150
Combined Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997........................ F-151
Notes to Combined Financial Statements.................... F-152
</TABLE>
F-2
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GREATER MEDIA CABLEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-159
Combined Statement of Income for the Nine Months Ended
June 30, 1999........................................... F-160
Combined Statement of Changes in Net Assets for the Nine
Months Ended June 30, 1999.............................. F-161
Combined Statement of Cash Flows for the Nine Months Ended
June 30, 1999........................................... F-162
Notes to Combined Financial Statements.................... F-163
Report of Independent Public Accountants.................. F-167
Combined Balance Sheets as of September 30, 1998 and
1997.................................................... F-168
Combined Statements of Income for the Years Ended
September 30, 1996, 1997 and 1998....................... F-169
Combined Statements of Changes in Net Assets for the Years
Ended September 30, 1996, 1997 and 1998................. F-170
Combined Statements of Cash Flows for the Years Ended
September 30, 1996, 1997 and 1998....................... F-171
Notes to Combined Financial Statements.................... F-172
HELICON PARTNERS I, L.P. AND AFFILIATES:
Report of Independent Public Accountants.................. F-178
Combined Statement of Operations for the Seven Months
Ended July 30, 1999..................................... F-179
Combined Statement of Changes in Partners' Deficit for the
Seven Months Ended July 30, 1999........................ F-180
Combined Statement of Cash Flows for the Seven Months
Ended July 30, 1999..................................... F-181
Notes to Combined Financial Statements.................... F-182
Independent Auditors' Report.............................. F-187
Combined Balance Sheets as of December 31, 1997 and
1998.................................................... F-188
Combined Statements of Operations for Each of the Years in
the Three-Year Period Ended December 31, 1998........... F-189
Combined Statements of Changes in Partners' Deficit for
Each of the Years in the Three-Year Period Ended
December 31, 1998....................................... F-190
Combined Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1998........... F-191
Notes to Combined Financial Statements.................... F-192
RIFKIN CABLE INCOME PARTNERS L.P.:
Report of Independent Accountants......................... F-204
Balance Sheet as of September 13, 1999.................... F-205
Statement of Operations for the period January 1, 1999 to
September 13, 1999...................................... F-206
Statement of Equity for the period January 1, 1999 to
September 13, 1999...................................... F-207
Statement of Cash Flows for the period January 1, 1999 to
September 13, 1999...................................... F-208
Notes to Financial Statements............................. F-209
Report of Independent Accountants......................... F-213
Balance Sheet at December 31, 1997 and 1998............... F-214
Statement of Operations for Each of the Three Years in the
Period Ended December 31, 1998.......................... F-215
Statement of Partners' Equity (Deficit) for Each of the
Three Years in the Period Ended December 31, 1998....... F-216
Statement of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998.......................... F-217
Notes to Financial Statements............................. F-218
</TABLE>
F-3
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RIFKIN ACQUISITION PARTNERS, L.L.L.P.:
Report of Independent Accountants......................... F-222
Consolidated Balance Sheet as of September 13, 1999....... F-223
Consolidated Statement of Operations for the period
January 1, 1999 through September 13, 1999.............. F-224
Consolidated Statement of Partners' Capital for the period
January 1, 1999 through September 13, 1999.............. F-225
Consolidated Statement of Cash Flows for the period
January 1, 1999 through September 13, 1999.............. F-226
Notes to Consolidated Financial Statements................ F-227
Report of Independent Accountants......................... F-236
Consolidated Balance Sheet at December 31, 1998 and
1997.................................................... F-237
Consolidated Statement of Operations for Each of the Three
Years in the Period Ended December 31, 1998............. F-238
Consolidated Statement of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998............. F-239
Consolidated Statement of Partners' Capital (Deficit) for
Each of the Three Years in the Period Ended December 31,
1998.................................................... F-240
Notes to Consolidated Financial Statements................ F-241
INDIANA CABLE ASSOCIATES, LTD.:
Report of Independent Accountants......................... F-255
Balance Sheet as of September 13, 1999.................... F-256
Statement of Operations for the period January 1, 1999 to
September 13, 1999...................................... F-257
Statement of Equity for the period January 1, 1999 to
September 13, 1999...................................... F-258
Statement of Cash Flows for the period January 1, 1999 to
September 13, 1999...................................... F-259
Notes to Financial Statements............................. F-260
Report of Independent Auditors............................ F-264
Balance Sheet as of December 31, 1997 and 1998............ F-265
Statement of Operations for the Years Ended December 31,
1996, 1997 and 1998..................................... F-266
Statement of Partners' Deficit for the Years Ended
December 31, 1996, 1997 and 1998........................ F-267
Statement of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998..................................... F-268
Notes to Financial Statements............................. F-269
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP:
Report of Independent Accountants......................... F-273
Consolidated Balance Sheet as of September 13, 1999....... F-274
Consolidated Statement of Operations for the period
January 1, 1999 to September 13, 1999................... F-275
Consolidated Statement of Equity for the period January 1,
1999 to September 13, 1999.............................. F-276
Consolidated Statement of Cash Flows for the period
January 1, 1999 to September 13, 1999................... F-277
Notes to Consolidated Financial Statements................ F-278
Report of Independent Auditors............................ F-282
Consolidated Balance Sheet as of December 31, 1997 and
1998.................................................... F-283
Consolidated Statement of Operations for the Years Ended
December 31, 1996, 1997 and 1998........................ F-284
Consolidated Statement of Partners' Equity (Deficit) for
the Years Ended December 31, 1996, 1997 and 1998........ F-285
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998........................ F-286
Notes to Consolidated Financial Statements................ F-287
</TABLE>
F-4
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INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF
INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV,
L.P.):
Report of Independent Accountants......................... F-291
Combined Balance Sheets as of September 30, 1999 and
December 31, 1998....................................... F-292
Combined Statements of Operations for the Nine Months
Ended September 30, 1999 and for the Years ended
December 31, 1998 and 1997.............................. F-293
Combined Statements of Changes in Equity for the Nine
Months Ended September 30, 1999 and for the Years ended
December 31, 1998 and 1997.............................. F-294
Combined Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and for the Years ended
December 31, 1998 and 1997.............................. F-295
Notes to Combined Financial Statements.................... F-296
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-307
Statement of Operations and Changes in Net Assets for the
Period from April 1, 1998, through May 20, 1998......... F-308
Statement of Cash Flows for the Period from April 1, 1998,
through May 20, 1998.................................... F-309
Notes to Financial Statements............................. F-310
LONG BEACH ACQUISITION CORP.:
Report of Independent Public Accountants.................. F-313
Statement of Operations for the Period from April 1, 1997,
through May 23, 1997.................................... F-314
Statement of Stockholder's Equity for the Period from
April 1, 1997, through May 23, 1997..................... F-315
Statement of Cash Flows for the Period from April 1, 1997,
through May 23, 1997.................................... F-316
Notes to Financial Statements............................. F-317
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.:
Report of Independent Auditors............................ F-321
Report of Independent Auditors............................ F-322
Report of Independent Auditors............................ F-323
Report of Independent Auditors............................ F-324
Combined Balance Sheets as of November 11, 1999 and
December 31, 1998....................................... F-325
Combined Statements of Operations for the Period from
January 1, 1999 to November 11, 1999 and for the Years
Ended December 31, 1998 and 1997........................ F-326
Combined Statements of Net Assets for the Period from
January 1, 1999 to November 11, 1999 and for the Years
Ended December 31, 1998 and 1997........................ F-327
Combined Statements of Cash Flows for the Period from
January 1, 1999 to November 11, 1999 and for the Years
Ended December 31, 1998 and 1997........................ F-328
Notes to Combined Financial Statements.................... F-329
FALCON COMMUNICATIONS, L.P.:
Report of Independent Auditors............................ F-334
Consolidated Balance Sheets as of December 31, 1998 and
November 12, 1999....................................... F-335
Consolidated Statements of Operations for each of the two
years in the period ended December 31, 1998 and for the
Period from January 1, 1999 to November 12, 1999........ F-336
Consolidated Statements of Partners' Equity (Deficit) for
the each of the two years in the period ended December
31, 1998 and for the Period from January 1, 1999 to
November 12, 1999....................................... F-337
Consolidated Statements of Cash Flows for each of the two
years in the period ended December 31, 1998 and for the
Period from January 1, 1999 to November 12, 1999........ F-338
Notes to Consolidated Financial Statements................ F-340
</TABLE>
F-5
<PAGE> 217
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
TCI FALCON SYSTEMS:
Independent Auditors' Report.............................. F-360
Combined Balance Sheets at September 30, 1998 and December
31, 1997................................................ F-361
Combined Statements of Operations and Parent's Investment
for the period from January 1, 1998 through September
30, 1998 and for the years ended December 31, 1997 and
1996.................................................... F-362
Combined Statements of Cash Flows for the period from
January 1, 1998 through September 30, 1998 and for the
years ended December 31, 1997 and 1996.................. F-363
Notes to Combined Financial Statements for the period from
January 1, 1998 through September 30, 1998 and for the
years ended December 31, 1997 and 1996.................. F-364
CC V HOLDINGS, LLC AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-371
Consolidated Balance Sheet as of December 31, 1999........ F-372
Consolidated Statements of Operations for the Period from
November 15, 1999, through December 31, 1999, and for
the Period from January 1, 1999, through November 14,
1999.................................................... F-373
Consolidated Statement of Changes in Shareholders' Equity
for the Period from January 1, 1999, through November
14, 1999................................................ F-374
Consolidated Statements of Cash Flows for the Period from
November 15, 1999, through December 31, 1999, and for
the Period from January 1, 1999, through November 14,
1999.................................................... F-375
Notes to Consolidated Financial Statements................ F-376
AVALON CABLE LLC AND SUBSIDIARIES:
Report of Independent Accountants......................... F-388
Consolidated Balance Sheet as of December 31, 1998 and
1997.................................................... F-389
Consolidated Statement of Operations for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997.............. F-390
Consolidated Statement of Changes in Members' Interest
from September 4, 1997 (inception) through December 31,
1998.................................................... F-391
Consolidated Statement of Cash Flows for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997.............. F-392
Notes to Consolidated Financial Statements................ F-393
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES:
Report of Independent Accountants......................... F-407
Consolidated Balance Sheet as of December 31, 1998 and
1997.................................................... F-408
Consolidated Statements of Operations for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997.............. F-409
Consolidated Statement of Changes in Shareholders' Equity
for the period from September 4, 1997 (inception)
through December 31, 1998............................... F-410
Consolidated Statement of Cash Flows for the year ended
December 31, 1998 and for the period from September 4,
1997 (inception) through December 31, 1997.............. F-411
Notes to Consolidated Financial Statements................ F-412
CABLE MICHIGAN, INC. AND SUBSIDIARIES:
Report of Independent Accountants......................... F-425
Consolidated Balance Sheets as of December 31, 1997 and
November 5, 1998........................................ F-426
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1997 and for the period from
January 1, 1998 to November 5, 1998..................... F-427
Consolidated Statements of Changes in Shareholders'
Deficit for the years ended December 31, 1996 and 1997
and for the period from January 1, 1998 to November 5,
1998.................................................... F-428
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1997 and for the period from
January 1, 1998 to November 5, 1998..................... F-429
Notes to Consolidated Financial Statements................ F-430
</TABLE>
F-6
<PAGE> 218
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP:
Report of Independent Accountants......................... F-444
Balance Sheet as of May 28, 1998.......................... F-445
Statement of Operations for the period from January 1,
1998 through May 28, 1998............................... F-446
Statement of Changes in Partners' Equity (Deficit) for the
period from January 1, 1998 through May 28, 1998........ F-447
Statement of Cash Flows for the period from January 1,
1998 through May 28, 1998............................... F-448
Notes to Financial Statements............................. F-449
Independent Auditors' Report.............................. F-453
Balance Sheets at December 31, 1996 and 1997.............. F-454
Statements of Net Earnings for the years ended December
31, 1995, 1996 and 1997................................. F-455
Statements of Changes in Partners' Equity (Deficit) for
the years ended December 31, 1995, 1996 and 1997........ F-456
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997..................................... F-457
Notes to Financial Statements............................. F-458
PEGASUS CABLE TELEVISION, INC.:
Report of Independent Accountants......................... F-461
Combined Balance Sheets as of December 31, 1996 and 1997
and June 30, 1998....................................... F-462
Combined Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1998..................................... F-463
Combined Statements of Changes in Stockholder's Deficit
for the three years ended December 31, 1997 and for the
six months ended June 30, 1998.......................... F-464
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1998..................................... F-465
Notes to Combined Financial Statements.................... F-466
BRESNAN COMMUNICATIONS GROUP LLC:
Independent Auditors' Report.............................. F-472
Consolidated Balance Sheets as of December 31, 1998 and
1999.................................................... F-473
Consolidated Statements of Operations and Members' Equity
(Deficit) for the Years Ended December 31, 1997, 1998
and 1999................................................ F-474
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999........................ F-475
Notes to Consolidated Financial Statements................ F-476
</TABLE>
F-7
<PAGE> 219
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying consolidated balance sheets of Charter
Communications Holdings, LLC and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, changes in member's
equity and cash flows for the year ended December 31, 1999, and for the period
from December 24, 1998, through December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Charter Communications
Holdings, LLC and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the year ended December 31, 1999,
and for the period from December 24, 1998, through December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 16, 2000
F-8
<PAGE> 220
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 84,305 $ 9,573
Accounts receivable, net of allowance for doubtful
accounts of $8,604 and $1,728, respectively............ 68,522 15,108
Receivables from manager of cable systems -- related
parties................................................ 14,500 --
Prepaid expenses and other................................ 15,082 2,519
----------- ----------
Total current assets................................... 182,409 27,200
----------- ----------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment............................. 2,525,854 716,242
Franchises................................................ 9,162,331 3,590,054
----------- ----------
11,688,185 4,306,296
----------- ----------
OTHER ASSETS................................................ 134,603 2,031
----------- ----------
$12,005,197 $4,335,527
=========== ==========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ -- $ 10,450
Accounts payable and accrued expenses..................... 553,174 127,586
Payables to manager of cable systems -- related parties... 6,713 4,334
----------- ----------
Total current liabilities.............................. 559,887 142,370
----------- ----------
LONG-TERM DEBT, less current maturities..................... 6,065,612 1,991,756
----------- ----------
LOANS PAYABLE -- RELATED PARTIES............................ 906,000 --
----------- ----------
DEFERRED MANAGEMENT FEES -- RELATED PARTIES................. 19,831 15,561
----------- ----------
OTHER LONG-TERM LIABILITIES................................. 109,605 38,461
----------- ----------
MEMBER'S EQUITY
Member's equity (217,585,246 and 100 units issued and
outstanding at December 31, 1999 and 1998,
respectively).......................................... 4,342,046 2,147,379
Accumulated other comprehensive income.................... 2,216 --
----------- ----------
Total member's equity.................................. 4,344,262 2,147,379
----------- ----------
$12,005,197 $4,335,527
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE> 221
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
REVENUES.................................................... $1,325,830 $13,713
---------- -------
OPERATING EXPENSES:
Operating, general and administrative..................... 683,646 7,134
Depreciation and amortization............................. 675,786 8,318
Option compensation expense............................... 79,979 845
Corporate expense charges -- related parties.............. 48,158 473
---------- -------
1,487,569 16,770
---------- -------
Loss from operations................................... (161,739) (3,057)
---------- -------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (434,995) (2,353)
Interest income........................................... 18,821 133
Other, net................................................ (217) --
---------- -------
(416,391) (2,220)
---------- -------
Loss before extraordinary item......................... (578,130) (5,277)
EXTRAORDINARY ITEM -- Loss from early extinguishment of
debt...................................................... (7,794) --
---------- -------
Net loss............................................... $ (585,924) $(5,277)
========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-10
<PAGE> 222
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
MEMBER'S COMPREHENSIVE MEMBER'S
EQUITY INCOME EQUITY
---------- ------------- ----------
<S> <C> <C> <C>
BALANCE, December 24, 1998.......................... $2,151,811 $ -- $2,151,811
Option compensation expense....................... 845 -- 845
Net loss.......................................... (5,277) -- (5,277)
---------- ------ ----------
BALANCE, December 31, 1998.......................... 2,147,379 -- 2,147,379
Capital contributions............................. 2,710,682 -- 2,710,682
Distributions to Charter Investment and Charter... (10,070) -- (10,070)
Option compensation expense....................... 79,979 -- 79,979
Net loss.......................................... (585,924) -- (585,924)
Unrealized gain on marketable securities available
for sale....................................... -- 2,216 2,216
---------- ------ ----------
BALANCE, December 31, 1999.......................... $4,342,046 $2,216 $4,344,262
========== ====== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-11
<PAGE> 223
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (585,924) $ (5,277)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization.......................... 675,786 8,318
Option compensation expense............................ 79,979 845
Noncash interest expense............................... 93,073 --
Loss from early extinguishment of debt................. 7,794 --
Changes in assets and liabilities, net of effects from
acquisitions-
Accounts receivable.................................... (24,478) (8,753)
Prepaid expenses and other............................. (3,672) (211)
Accounts payable and accrued expenses.................. 136,016 10,227
Receivables from and payables to manager of cable
systems, including deferred management fees.......... 4,891 473
Other operating activities................................ (1,245) 2,022
----------- ---------
Net cash provided by operating activities............ 382,220 7,644
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (709,731) (13,672)
Payments for acquisitions, net of cash acquired........... (3,560,241) --
Loan to Marcus Cable Holdings............................. (1,680,142) --
Other investing activities................................ (12,583) --
----------- ---------
Net cash used in investing activities................ (5,962,697) (13,672)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt, including proceeds from
Charter Holdings Notes................................. 9,237,188 14,200
Repayments of long-term debt.............................. (5,515,125) --
Borrowings from related parties........................... 906,000 --
Payments for debt issuance costs.......................... (107,562) --
Capital contributions..................................... 1,144,290 --
Distributions to Charter Investment and Charter........... (10,070) --
Other financing activities................................ 488 --
----------- ---------
Net cash provided by financing activities............ 5,655,209 14,200
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 74,732 8,172
CASH AND CASH EQUIVALENTS, beginning of period.............. 9,573 1,401
----------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 84,305 $ 9,573
=========== =========
CASH PAID FOR INTEREST...................................... $ 307,255 $ 5,538
=========== =========
NONCASH TRANSACTIONS:
Transfer of operating subsidiaries to the Company......... $ 1,252,370 $ --
Transfer of equity interests to the Company............... 314,022 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-12
<PAGE> 224
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
GENERAL
Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited
liability company, owns and operates cable systems serving approximately 6.1
million (unaudited) customers, including cable systems acquired and transferred
to the Company (see Note 17). Charter Holdings offers a full range of
traditional cable television services and has begun to offer digital cable
television services, interactive video programming and high-speed Internet
access. Charter Holdings is a subsidiary of Charter Communications Holding
Company, LLC (Charter Holdco), which is a subsidiary of Charter Communications,
Inc. (Charter). In November 1999, Charter completed an initial public offering
of the sale for 195.5 million shares of Class A common stock. Proceeds from the
offering were used by Charter to purchase membership units in Charter Holdco,
which used the funds received from Charter for the acquisition of additional
cable television systems.
ORGANIZATION AND BASIS OF PRESENTATION
Charter Holdings was formed in February 1999 as a wholly owned subsidiary
of Charter Investment, Inc. (Charter Investment). Charter Investment, through
its wholly owned subsidiary, Charter Communications Properties Holdings, LLC
(CCPH), commenced operations with the acquisition of a cable system on September
30, 1995.
Effective December 23, 1998, through a series of transactions, Paul G.
Allen acquired approximately 94% of Charter Investment for an aggregate purchase
price of $2.2 billion, excluding $2.0 billion in debt assumed (the "Paul Allen
Transaction"). In conjunction with the Paul Allen Transaction, Charter
Investment acquired, for fair value from unrelated third parties, all of the
interests it did not already own in CharterComm Holdings, LLC (CharterComm
Holdings) and CCA Group (comprised of CCA Holdings Corp., CCT Holdings Corp. and
Charter Communications Long Beach, Inc.), all cable operating companies, for
$2.0 billion, excluding $1.8 billion in debt assumed. Charter Investment
previously managed and owned minority interests in these companies. These
acquisitions were accounted for using the purchase method of accounting, and
accordingly, results of operations of CharterComm Holdings and CCA Group are
included in the consolidated financial statements from the date of acquisition.
In February 1999, Charter Investment transferred all of its cable operating
subsidiaries to Charter Communications Operating, LLC (Charter Operating), a
wholly owned subsidiary of Charter Holdings. This transfer was accounted for as
a reorganization of entities under common control similar to a pooling of
interests.
As a result of the change in ownership of CCPH, CharterComm Holdings and
CCA Group, Charter Holdings has applied push-down accounting in the preparation
of its consolidated financial statements. Accordingly, on December 23, 1998,
Charter Holdings increased its member's equity by $2.2 billion to reflect the
amounts paid by Mr. Allen and Charter Investment. The purchase price was
allocated to assets acquired and liabilities assumed based on their relative
fair values, including amounts assigned to franchises of $3.6 billion.
On April 23, 1998, Mr. Allen and a company controlled by Mr. Allen,
(collectively, the "Mr. Allen Companies") purchased substantially all of the
outstanding partnership interests in Marcus Cable Company, L.L.C. (Marcus Cable)
for $1.4 billion, excluding $1.8 billion in assumed liabilities. The owner of
the remaining partnership interest retained voting control of Marcus Cable. In
February 1999, Marcus Cable Holdings, LLC (Marcus Holdings) was formed and
F-13
<PAGE> 225
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on
March 15, 1999. On March 31, 1999, Mr. Allen purchased the remaining partnership
interests in Marcus Cable, including voting control. On April 7, 1999, Marcus
Holdings was merged into Charter Holdings and Marcus Cable was transferred to
Charter Holdings. For financial reporting purposes, the merger was accounted for
as an acquisition of Marcus Cable effective March 31, 1999, the date Mr. Allen
obtained voting control of Marcus Cable. Accordingly, the results of operations
of Marcus Cable have been included in the consolidated financial statements from
April 1, 1999. The assets and liabilities of Marcus Cable have been recorded in
the consolidated financial statements using historical carrying values reflected
in the accounts of the Mr. Allen Companies. Total member's equity increased by
$1.3 billion as a result of the Marcus Cable acquisition. Previously, on April
23, 1998, the Mr. Allen Companies recorded the assets acquired and liabilities
assumed of Marcus Cable based on their relative fair values.
The consolidated financial statements of Charter Holdings include the
accounts of Charter Operating and CCPH, the accounts of CharterComm Holdings and
CCA Group and their subsidiaries since December 23, 1998 (date acquired by
Charter Investment), and the accounts of Marcus Cable since March 31, 1999, and
are collectively referred to as the "Company" herein. All subsidiaries are,
directly or indirectly, wholly owned by Charter Holdings. All material
intercompany transactions and balances have been eliminated.
Pursuant to a membership interests purchase agreement, as amended, Vulcan
Cable III Inc. (Vulcan), a company controlled by Mr. Allen, contributed $500
million in cash in August 1999 to Charter Holdco, contributed an additional
$180.7 million in certain equity interests acquired in connection with Charter
Holdings' acquisition of Rifkin Acquisitions Partners, L.L.L.P. and InterLink
Communications Partners, LLLP (collectively, "Rifkin") in September 1999, and
contributed $644.3 million in cash in September 1999 to Charter Holdco. All
funds and equity interests were contributed by Charter Holdco to Charter
Holdings to finance certain acquisitions. In addition, certain Rifkin sellers
received $133.3 million of the purchase price in the form of preferred equity in
Charter Holdco.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. These investments are
carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installations. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, while equipment replacement and betterments are
capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems.................................. 3-15 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3-5 years
</TABLE>
F-14
<PAGE> 226
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable systems represent management's estimate
of fair value and are generally amortized using the straight-line method over a
period of 15 years. The period of 15 years is management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Company. Accumulated
amortization related to franchises was $598.4 million and $5.3 million, as of
December 31, 1999 and 1998, respectively. Amortization expense related to
franchises for the year ended December 31, 1999, and for the period from
December 24, 1998, through December 31, 1998, was $467.9 million and $5.3
million, respectively.
DEFERRED FINANCING COSTS
Costs related to borrowings are deferred and amortized to interest expense
using the effective interest method over the terms of the related borrowings. As
of December 31, 1999, other assets include $114.8 million of deferred financing
costs, net of accumulated amortization of $10.2 million.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted net cash flows
related to the asset over its remaining life, the carrying value of such asset
is reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable system. As of December 31, 1999 and 1998, no installation revenue has been
deferred, as direct selling costs have exceeded installation revenue.
Local governmental authorities impose franchise fees on the Company ranging
up to a federally mandated maximum of 5.0% of gross revenues. Such fees are
collected on a monthly basis from the Company's customers and are periodically
remitted to local franchise authorities. Franchise fees collected and paid are
reported as revenues and expenses.
CHANNEL LAUNCH PAYMENTS
The Company receives upfront payments from certain programmers to launch
and promote new cable television channels. A portion of these payments
represents reimbursement of advertising costs paid by the Company to promote the
new channels. These reimbursements have been immaterial. The remaining portion
is being amortized as an offset to programming expense over the respective terms
of the program agreements, which range from one to 20 years. For the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998, the Company amortized and recorded as a reduction of
F-15
<PAGE> 227
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
programming costs $3.4 million and $12, respectively. As of December 31, 1999,
the unamortized portion of payments received totaled $13.4 million and is
included in other long-term liabilities.
DIRECT RESPONSE ADVERTISING
The Company expenses the production costs of advertising as incurred,
except for direct response advertising, which is deferred and amortized over its
expected period of future benefits. Direct response advertising consists
primarily of direct mailings and radio, newspaper and cross-channel television
advertisements that include a phone number for use in ordering the Company's
products and services. The deferred advertising costs are amortized to
advertising expense over the periods during which the future benefits are
expected to be received. These periods range from two to four years depending on
the type of service the customer subscribes to and represents the period the
customer is expected to remain connected to the cable system. As of December 31,
1999, $700 of deferred advertising costs is included in other assets.
Advertising expense was $29.7 million for the year ended December 31, 1999,
including amortization of deferred advertising costs totaling $87.
INVESTMENTS AND OTHER COMPREHENSIVE INCOME
Investments in equity securities are accounted for in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. The
Company owns common stock of WorldGate Communications, Inc. (WorldGate) that is
classified as "available for sale" and reported at market value with unrealized
gains and losses recorded as accumulated other comprehensive income. Based on
quoted market prices, the investment was valued at $3.2 million as of December
31, 1999 and is included in other assets. Comprehensive loss for the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998, is $583.7 million and $5.3 million, respectively.
INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
INCOME TAXES
Income taxes are the responsibility of the individual member and are not
provided for in the accompanying consolidated financial statements. In addition,
certain subsidiaries are corporations subject to income taxes but have no
operations and, therefore, no material income tax liabilities or assets.
F-16
<PAGE> 228
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SEGMENTS
In 1998, the Company adopted SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. Segments have been identified based upon
management responsibility. The individual segments have been aggregated into one
segment, cable services.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. ACQUISITIONS:
During 1999, the Company acquired cable systems in eight separate
transactions for an aggregate purchase price of $3.6 billion, net of cash
acquired, excluding debt assumed of $354.0 million and equity issued of $314.0
million. In connection with the Rifkin acquisition, Charter Holdco issued equity
interests totaling $133.3 million to certain sellers. In addition, Vulcan
purchased $180.7 million of equity interests Rifkin and then contributed the
equity interests to Charter Holdings. The purchase prices were allocated to
assets acquired and liabilities assumed based on their relative fair values,
including amounts assigned to franchises of $3.9 billion. The allocation of the
purchase prices for these acquisitions are based, in part, on preliminary
information, which is subject to adjustment upon obtaining complete valuation
information. Management believes that finalization of the purchase prices and
allocations will not have a material impact on the consolidated results of
operations or financial position of the Company.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of acquisition.
Unaudited pro forma operating results as though the acquisitions discussed
above, including the Paul Allen Transaction and the acquisition of Marcus
Holdings, and the March 1999 refinancing discussed herein, had occurred on
January 1, 1998, with adjustments to give effect to amortization of franchises,
interest expense and certain other adjustments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $1,843,986 $1,657,353
Loss from operations........................................ (218,189) (204,189)
Loss before extraordinary item.............................. (771,780) (776,710)
</TABLE>
The unaudited pro forma financial information has been presented for
comparative purposes and does not purport to be indicative of the results of
operations had these transactions been completed as of the assumed date or which
may be obtained in the future.
F-17
<PAGE> 229
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts is summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
FOR THE YEAR 1998, THROUGH
ENDED DECEMBER
DECEMBER 31, 31,
1999 1998
------------ -------------
<S> <C> <C>
Balance, beginning of period................................ $ 1,728 $1,702
Acquisitions of cable systems............................... 4,414 --
Charged to expense.......................................... 19,384 26
Uncollected balances written off, net of recoveries......... (16,922) --
-------- ------
Balance, end of period...................................... $ 8,604 $1,728
======== ======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Cable distribution systems.................................. $2,591,527 $661,749
Land, buildings and leasehold improvements.................. 74,812 26,670
Vehicles and equipment...................................... 144,521 30,590
---------- --------
2,810,860 719,009
Less -- Accumulated depreciation............................ (285,006) (2,767)
---------- --------
$2,525,854 $716,242
========== ========
</TABLE>
For the year ended December 31, 1999, and for the period from December 24,
1998, through December 31, 1998, depreciation expense was $207.9 million and
$2.8 million, respectively.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accounts payable............................................ $ 94,450 $ 7,439
Liability for pending transfer of cable system.............. 88,200 --
Accrued interest............................................ 68,004 30,809
Capital expenditures........................................ 66,713 15,560
Programming costs........................................... 41,966 11,856
Accrued general and administrative.......................... 38,753 6,688
Franchise fees.............................................. 34,689 12,534
Accrued income taxes........................................ 4,381 15,205
Other accrued liabilities................................... 116,018 27,495
-------- --------
$553,174 $127,586
======== ========
</TABLE>
The liability for pending transfer of cable system represents the fair
value of a cable system to be transferred upon obtaining necessary regulatory
approvals in connection with the transaction with InterMedia Capital Partners IV
L. P., InterMedia Partners and their affiliates.
F-18
<PAGE> 230
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Such approvals were subsequently obtained and the system assets were transferred
subsequent to December 31, 1999.
7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Charter Holdings:
Credit Agreements (including CCPH, CCA Group and
CharterComm Holdings).................................. $ -- $1,726,500
14.000% Senior Secured Discount Debentures................ -- 109,152
11.250% Senior Notes...................................... -- 125,000
8.250% Senior Notes....................................... 600,000 --
8.625% Senior Notes....................................... 1,500,000 --
9.920% Senior Discount Notes.............................. 1,475,000 --
Charter Operating Credit Facilities......................... 2,906,000 --
Renaissance:
10.000% Senior Discount Notes............................. 114,413 --
Rifkin:
11.125% Senior Subordinated Notes......................... 900 --
---------- ----------
6,596,313 1,960,652
Current maturities........................................ -- (10,450)
Unamortized net (discount) premium........................ (530,701) 41,554
---------- ----------
$6,065,612 $1,991,756
========== ==========
</TABLE>
In March 1999, the Company extinguished substantially all existing
long-term debt, excluding borrowings of the Company under its credit agreements,
and refinanced substantially all existing credit agreements at various
subsidiaries with a new credit agreement entered into by Charter Operating (the
"Charter Operating Credit Facilities"). The excess of the amount paid over the
carrying value, net of deferred financing costs, of the Company's long-term debt
of $7.8 million was recorded as an extraordinary item-loss from early
extinguishment of debt in the accompanying consolidated statements of
operations.
CHARTER HOLDINGS NOTES
In March 1999, the Company issued $600.0 million 8.250% Senior Notes due
2007 (the "8.250% Senior Notes") for net proceeds of $598.4 million, $1.5
billion 8.625% Senior Notes due 2009 (the "8.625% Senior Notes") for net
proceeds of $1,495.4 million, and $1,475.0 million 9.920% Senior Discount Notes
due 2011 (the "9.920% Senior Discount Notes") for net proceeds of $905.5
million, (collectively with the 8.250% Senior Notes and the 8.625% Senior Notes,
referred to as the "Charter Holdings Notes").
The 8.250% Senior Notes are not redeemable prior to maturity. Interest is
payable semiannually in arrears on April 1 and October 1, beginning October 1,
1999 until maturity.
The 8.625% Senior Notes are redeemable at the option of the Company at
amounts decreasing from 104.313% to 100% of par value beginning on April 1,
2004, plus accrued and unpaid interest, to the date of redemption. At any time
prior to April 1, 2002, the Company may redeem up to 35% of the aggregate
principal amount of the 8.625% Senior Notes at a redemption price of 108.625% of
the principal amount under certain conditions. Interest is payable semi-
annually in arrears on April 1 and October 1, beginning October 1, 1999, until
maturity.
F-19
<PAGE> 231
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The 9.920% Senior Discount Notes are redeemable at the option of the
Company at amounts decreasing from 104.960% to 100% of accreted value beginning
April 1, 2004. At any time prior to April 1, 2002, the Company may redeem up to
35% of the aggregate principal amount of the 9.920% Senior Discount Notes at a
redemption price of 109.920% of the accreted value under certain conditions. No
interest will be payable until April 1, 2004. Thereafter, cash interest is
payable semi-annually in arrears on April 1 and October 1 beginning April 1,
2004, until maturity. The discount on the 9.920% Senior Discount Notes is being
accreted using the effective interest method. The unamortized discount was
$497.2 million at December 31, 1999.
The Charter Holdings Notes rank equally with current and future unsecured
and unsubordinated indebtedness (including accounts payables of the Company).
The Company is required to make an offer to repurchase all of the Charter
Holdings Notes, at a price equal to 101% of the aggregate principal or 101% of
the accreted value, together with accrued and unpaid interest, upon a change of
control of the Company, as defined.
RENAISSANCE NOTES
In connection with the acquisition of Renaissance Media Group LLC
(Renaissance) during the second quarter of 1999, the Company assumed $163.2
million principal amount at maturity of senior discount notes due April 2008
(the "Renaissance Notes"). As a result of the change in control of Renaissance,
the Company was required to make an offer to repurchase the Renaissance Notes at
101% of their accreted value. In May 1999, the Company made an offer to
repurchase the Renaissance Notes pursuant to this requirement, and the holders
of the Renaissance Notes tendered an amount representing 30% of the total
outstanding principal amount at maturity for repurchase. These notes were
repurchased using a portion of the proceeds from the Charter Holdings Notes.
As of December 31, 1999, $114.4 million aggregate principal amount at
maturity of Renaissance Notes with a carrying value of $86.5 million remain
outstanding. Interest on the Renaissance Notes shall be paid semi-annually at a
rate of 10% per annum beginning on October 15, 2003.
The Renaissance Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after April 15, 2003, initially at 105% of their
principal amount at maturity, plus accrued and unpaid interest, declining to
100% of the principal amount at maturity, plus accrued and unpaid interest, on
or after April 15, 2006. In addition, at any time prior to April 15, 2001, the
Company may redeem up to 35% of the original principal amount at maturity with
the proceeds of one or more sales of membership units at 110% of their accreted
value, plus accrued and unpaid interest on the redemption date, provided that
after any such redemption, at least $106 million aggregate principal amount at
maturity remains outstanding.
RIFKIN NOTES
The Company acquired Rifkin in September 1999 and assumed Rifkin's 11.125%
Senior Subordinated Notes due 2006 together with a $3.0 million promissory note
payable to Monroe Rifkin, (the "Rifkin Notes"). Interest on the Rifkin Notes is
payable semi-annually on January 15 and July 15 of each year. In September 1999,
the Company commenced an offer to repurchase any and all of the outstanding
Rifkin Notes, for cash at a premium over the principal amounts. In conjunction
with this tender offer, the Company sought and obtained the consent of a
majority in principal amount of the note holders of the outstanding Rifkin Notes
to proposed amendments to the indenture governing the Rifkin Notes, which
eliminated substantially all of the restrictive covenants. In October 1999, the
Company repurchased a portion of the Rifkin Notes with a total
F-20
<PAGE> 232
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
outstanding principal amount of $124.1 million for a total of $140.6 million,
including a consent fee to the holders who delivered timely consents amending
the indenture, and repurchased the promissory note issued to Monroe Rifkin for
$3.4 million. These notes were paid using borrowings from the Charter Operating
Credit Facilities. At December 31, 1999, $900 aggregate principal of Rifkin
Notes remain outstanding.
HELICON NOTES
The Company acquired Helicon I, L.P. and affiliates (collectively,
"Helicon") in July 1999 and assumed Helicon's 11% Senior Secured Notes due 2003
(the "Helicon Notes"). On November 1, 1999, the Company redeemed all of the
Helicon Notes at a purchase price equal to 103% of their principal amount, plus
accrued and unpaid interest, for $124.8 million using borrowings from the
Charter Operating Credit Facilities.
CHARTER OPERATING CREDIT FACILITIES
The Charter Operating Credit Facilities provide for two term facilities,
one with a principal amount of $1.0 billion that matures September 2007 (Term
A), and the other with the principal amount of $1.85 billion that matures March
2008 (Term B). The Charter Operating Credit Facilities also provides for a $1.25
billion revolving credit facility with a maturity date of September 2007 and at
the option of the lenders, supplemental credit facilities, in the amount of
$500.0 million available until March 18, 2002. Amounts under the Charter
Operating Credit Facilities bear interest at the Base Rate or the Eurodollar
rate, as defined, plus a margin of up to 2.75%. The variable interest rates
ranged from 8.22% to 9.25% at December 31, 1999. A quarterly commitment fee of
between 0.25% and 0.375% per annum is payable on the unborrowed balance of Term
A and the revolving credit facility. As of December 31, 1999, the unused
availability was $1.2 billion. In March 2000, the credit agreement was 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 (the "Incremental Term Loan") was drawn down. The Incremental Term Loan
maturity date is September 18, 2008.
The indentures governing the debt agreements require the Company and/or its
subsidiaries to comply with various financial and other covenants, including the
maintenance of certain operating and financial ratios. These debt instruments
also contain substantial limitations on, or prohibitions of distributions,
additional indebtedness, liens, asset sales and certain other items. As a result
of limitations and prohibitions of distributions, substantially all of the net
assets of the consolidated subsidiaries are restricted for distribution to
Charter Holdings, the parent company.
F-21
<PAGE> 233
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Based upon outstanding indebtedness at December 31, 1999, the amortization
of term loans, scheduled reductions in available borrowings of the revolving
credit facility, and the maturity dates for all senior and subordinated notes,
aggregate future principal payments on the total borrowings under all debt
agreements at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- - - ---- ----------
<S> <C>
2000...................................................... $ --
2001...................................................... --
2002...................................................... 88,875
2003...................................................... 156,000
2004...................................................... 168,500
Thereafter................................................ 6,182,938
----------
$6,596,313
==========
</TABLE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1999, is as follows:
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
---------- ---------- ----------
<S> <C> <C> <C>
DEBT
8.250% Senior Notes................................ $ 598,557 $ -- $ 558,000
8.625% Senior Notes................................ 1,495,787 -- 1,395,000
9.920% Senior Discount Notes....................... 977,807 -- 881,313
Charter Operating Credit Facilities................ 2,906,000 -- 2,906,000
Loans payable to related parties................... 906,000 -- 906,000
Renaissance:
10.000% Senior Discount Notes.................... 86,507 -- 79,517
Rifkin:
11.125% Senior Subordinated Notes................ 954 -- 990
</TABLE>
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST RATE HEDGE AGREEMENTS
Swaps.............................................. $ 15,554 $3,315,000 $ (17,951)
Collars............................................ 1,361 240,000 (199)
</TABLE>
F-22
<PAGE> 234
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of debt and the related interest rate hedge agreements at
December 31, 1998, is as follows:
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
---------- ---------- ----------
<S> <C> <C> <C>
DEBT
Credit Agreements (including CCPH, CCA Group and
CharterComm Holdings)............................ $1,726,500 $ -- $1,726,500
14.000% Senior Secured Discount Debentures......... 138,102 -- 138,102
11.250% Senior Notes............................... 137,604 -- 137,604
INTEREST RATE HEDGE AGREEMENTS
Swaps.............................................. $ 23,216 $1,105,000 $ 23,216
Caps............................................... -- 15,000 --
Collars............................................ 4,174 310,000 4,174
</TABLE>
As the long-term debt under the credit facilities bears interest at current
market rates, their carrying amount approximates market value at December 31,
1999 and 1998. The fair values of the notes are based on quoted market prices.
The weighted average interest pay rate for the Company's interest rate swap
agreements was 8.35% and 7.66% at December 31, 1999 and 1998, respectively.
During 1999, the cap interest rate agreements expired and were not renewed. At
December 31, 1998, the weighted average interest rate for the cap interest
agreements was 8.55%. The weighted average interest rate for the Company's
interest rate collar agreements were 9.13% and 7.74%, for the cap and floor
components, respectively, at December 31, 1999, and 8.61% and 7.31%,
respectively, at December 31, 1998.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would (receive) or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's credit facilities, thereby reducing the exposure to
credit loss. The Company has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the Company's
consolidated financial position or results of operations.
F-23
<PAGE> 235
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. REVENUES:
Revenues consist of the following:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Basic....................................................... $ 927,726 $ 9,347
Premium..................................................... 117,396 1,415
Pay-per-view................................................ 26,627 260
Digital video............................................... 7,664 10
Advertising sales........................................... 67,918 493
Cable modem................................................. 9,991 55
Other....................................................... 168,508 2,133
---------- -------
$1,325,830 $13,713
========== =======
</TABLE>
10. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating, general and administrative expenses consist of the following:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Programming................................................. $304,103 $ 3,137
General and administrative.................................. 222,283 2,377
Service..................................................... 89,969 847
Advertising................................................. 29,683 344
Marketing................................................... 22,504 225
Other....................................................... 15,104 204
-------- --------
$683,646 $ 7,134
======== ========
</TABLE>
11. RELATED PARTY TRANSACTIONS:
Charter Investment and Charter provide management services to the Company
including centralized customer billing services, data processing and related
support, benefits administration and coordination of insurance coverage and
self-insurance programs for medical, dental and workers' compensation claims.
Certain costs for services are billed and charged directly to the Company's
operating subsidiaries and are included in operating costs. These billings are
allocated based on the number of basic customers. Such costs totaled $16.1
million and $128 for the year ended December 31, 1999, and for the period from
December 24, 1998, through December 31, 1998, respectively. All other costs
incurred by Charter Investment and Charter on behalf of the Company are recorded
as expenses in the accompanying consolidated financial statements and are
included in corporate expense charges-related parties. Management believes that
costs incurred by Charter Investment and Charter on the Company's behalf and
included in the accompanying financial statements are not materially different
than costs the Company would have incurred as a stand-alone entity.
F-24
<PAGE> 236
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company pays certain costs on behalf of Charter Investment and Charter.
These costs are reimbursed by Charter Investment and Charter and are recorded as
receivables from manager of cable systems-related parties in the accompanying
consolidated financial statements.
Charter Investment utilizes a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to the Company as determined by independent actuaries
at the present value of the actuarially computed present and future liabilities
for such benefits. Medical coverage provides for $1.0 million aggregate stop
loss protection and a loss limitation of $100 per person per year. Workers'
compensation coverage provides for $1.0 million aggregate stop loss protection
and a loss limitation of $250 per person per year.
The Company is charged a management fee as stipulated in the management
agreements between Charter Investment, Charter and the Company. As of December
31, 1999 and 1998, management fees currently payable of $5.6 million and $473,
respectively, are included in payables to manager of cable television
systems-related parties. To the extent management fees charged to the Company
are greater (less) than the corporate expenses incurred by Charter Investment
and Charter, the Company will record distributions to (capital contributions
from) Charter Investment and Charter. For the year ended December 31, 1999, the
Company recorded distributions of $10.1 million. For the period from December
24, 1998, through December 31, 1998, the management fee charged to the Company
approximated the corporate expenses incurred by Charter Investment and Charter
on behalf of the Company. The Charter Operating Credit Facilities and notes
outstanding prohibit payments of management fees in excess of 3.5% of revenues
until repayment of the outstanding indebtedness. Any amount in excess of 3.5% of
revenues owed to Charter Investment or Charter based on the management agreement
is recorded as deferred management fees-related parties.
Charter, Mr. Allen and certain affiliates of Mr. Allen own equity interests
or warrants to purchase equity interests in various entities that provide
services or programming to the Company, including High Speed Access Corp. (High
Speed Access), WorldGate, Wink Communications, Inc. (Wink), ZDTV, LLC (ZDTV),
USA Networks, Inc. (USA Networks) and Oxygen Media Inc. (Oxygen Media). In
addition, certain officers of the Company or directors of Charter also serve as
directors of High Speed Access and USA Networks. The Company and its affiliates
do not hold controlling interests in any of these companies.
Certain of the Company's cable customers receive cable modem-based Internet
access through High Speed Access and TV-based Internet access through WorldGate.
For the year ended December 31, 1999, and for the period from December 24, 1998,
through December 31, 1998, revenues attributable to these services were less
than 1% of total revenues.
The Company receives or will receive programming and certain interactive
features embedded into the programming for broadcast via its cable systems from
Wink, ZDTV, USA Networks and Oxygen Media. The Company pays a fee for the
programming service generally based on the number of subscribers receiving the
service. Such fees for the year ended December 31, 1999, and for the period from
December 24, 1998, through December 31, 1998, were approximately 1% of total
operating costs. In addition, the Company receives commissions from USA Networks
for home shopping sales generated by its customers. Such revenues for the year
ended December 31, 1999, and for the period from December 24, 1998, through
December 31, 1998, were less than 1% of total revenues.
In the second quarter of 1999, Charter Holdings loaned $50 million to
Charter Holdco. The promissory note bears interest at 7.5% compounded annually.
For the year ended December 31,
F-25
<PAGE> 237
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1999, Charter Holdings recognized $1.2 million of interest income pertaining to
this promissory note. This note was repaid in November 1999.
In connection with the issuance of the Charter Holdings Notes in March
1999, the Company extinguished substantially all existing long-term debt
including debt at Marcus Cable. Prior to the merger with Marcus Cable in March
1999, the Company loaned Marcus Cable $1.7 billion. In April 1999, the loan was
repaid.
During November 1999, the Company received $906 million from Charter and
Charter Holdco that was used to pay down the Charter Operating Credit
Facilities. The Company recorded the funds as loans payable-related parties. The
loans will be repaid with additional long-term borrowings made in connection
with the Bresnan acquisition (See Note 17) and accordingly, the loans have been
classified as long-term. The loans carry interest rates from 7.82% to 7.91%.
Interest expense on the loans totaled $11.6 million for the year ended December
31, 1999.
12. OPTION PLAN:
In accordance with an employment agreement between Charter Investment and
the President and Chief Executive Officer of Charter and a related option
agreement with the President and Chief Executive Officer, an option to purchase
7,044,127 Charter HoldCo membership interests, was issued to the President and
Chief Executive Officer. The option vests over a four year period from the date
of grant and expires ten years from the date of grant.
In February 1999, Charter Holdings adopted an option plan providing for the
grant of options. The plan was assumed by Charter Holdco. The option plan
provides for grants of options to employees, officers and directors of Charter
Holdco and its affiliates and consultants who provide services to Charter
Holdco. Options granted vest over five years from the grant date, commencing 15
months after the date of grant. Options not exercised accumulate and are
exercisable, in whole or in part, in any subsequent period, but not later than
ten years from the date of grant.
Membership units received upon exercise of the options are automatically
exchanged for shares of Class A common stock of Charter on a one-for-one basis.
F-26
<PAGE> 238
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of the activity for the Company's option plan for the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
----------- -------- ---------- --------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
period.................................. 7,044,127 $20.00 -- $ --
Granted:
December 23, 1998....................... -- -- 7,044,127 20.00
February 9, 1999........................ 9,111,681 20.00 -- --
April 5, 1999........................... 473,000 20.73 -- --
November 8, 1999........................ 4,741,400 19.00 -- --
Cancelled................................. (612,600) 19.95 -- --
----------- ------ ---------- ------
Options outstanding, end of period........ 20,757,608 $19.79 7,044,127 $20.00
=========== ====== ========== ======
Weighted Average Remaining Contractual
Life.................................... 9.2 years 10.0 years
=========== ==========
Options Exercisable, end of period........ 2,091,032 $19.90 1,761,032 $20.00
=========== ====== ========== ======
Weighted average fair value of options
granted................................. $ 12.59 $ 12.50
=========== ==========
</TABLE>
In February 2000, the Company granted 5.7 million options at $19.47 per
share.
The Company uses the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to
account for the option plans. Option compensation expense of $80.0 million and
$845 for the year ended December 31, 1999, and for the period from December 24,
1998, to December 31, 1998, respectively, has been recorded in the consolidated
financial statements since the exercise prices were less than the estimated fair
values of the underlying membership interests on the date of grant. Estimated
fair values were determined by the Company using the valuation inherent in the
Paul Allen Transaction and valuations of public companies in the cable
television industry adjusted for factors specific to the Company. Compensation
expense is being recorded over the vesting period of each grant that varies from
four to five years. As of December 31, 1999, deferred compensation remaining to
be recognized in future periods totaled $79.4 million. No option compensation
expense was recorded for the options granted on November 8, 1999, since the
exercise price is equal to the estimated fair value of the underlying membership
interests on the date of grant. Since the membership units are exchangeable into
Class A common stock of Charter on a one-for-one basis, the estimated fair value
was equal to the initial offering price of Class A common stock.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), requires pro forma disclosure of the impact
on earnings as if the compensation costs for these plans had been determined
consistent with the fair value
F-27
<PAGE> 239
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
methodology of this statement. The Company's net loss would have been increased
to the following unaudited pro forma amounts under SFAS 123:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Net loss:
As reported............................................... $(585,924) $(5,277)
Pro forma (unaudited)..................................... (610,258) (5,495)
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants during the year ended December 31, 1999, and
for the period from December 24, 1998, through December 31, 1998, respectively:
risk-free interest rates of 5.5% and 4.8%; expected volatility of 43.8% and
43.7%; and expected lives of 10 years. The valuations assume no dividends are
paid.
13. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense for the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998, were $10.3 million and $70, respectively. As of December 31, 1999,
future minimum lease payments are as follows:
<TABLE>
<S> <C>
2000........................................................ $6,132
2001........................................................ 4,614
2002........................................................ 2,511
2003........................................................ 1,921
2004........................................................ 1,441
Thereafter.................................................. 5,379
</TABLE>
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
year ended December 31, 1999, and for the period from December 24, 1998, through
December 31, 1998, was $13.3 million and $137, respectively.
LITIGATION
The Company is a party to lawsuits and claims that arose in the ordinary
course of conducting its business. In the opinion of management, after
consulting with legal counsel, the outcome of these lawsuits and claims will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and
F-28
<PAGE> 240
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
regulation of cable television systems. The Federal Communications Commission
(FCC) has principal responsibility for implementing the policies of the Cable
Acts. Many aspects of such regulation are currently the subject of judicial
proceedings and administrative or legislative proposals. Legislation and
regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. During 1999, the
amounts refunded by the Company have been insignificant. The Company may be
required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. As of
December 31, 1999, approximately 18% of the Company's local franchising
authorities are certified to regulate basic tier rates. The Company is unable to
estimate at this time the amount of refunds, if any, that may be payable by the
Company in the event certain of its rates are successfully challenged by
franchising authorities or found to be unreasonable by the FCC. The Company does
not believe that the amount of any such refunds would have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulated rates on the cable
programming service tier (CPST). The FCC has taken the position that it will
still adjudicate pending CPST complaints but will strictly limit its review, and
possible refund orders, to the time period predating the sunset date, March 31,
1999. The Company does not believe any adjudications regarding their pre-sunset
complaints will have a material adverse effect on the Company's consolidated
financial position or results of operations.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
14. EMPLOYEE BENEFIT PLANS:
The Company's employees may participate in 401(k) plans (the "401(k)
Plans"). Employees that qualify for participation can contribute up to 15% of
their salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matches 50% of the first
5% of participant contributions. The Company made contributions to the 401(k)
Plans totaling $2.9 million and $20 for the year ended December 31, 1999, and
for the period from December 24, 1998, through December 31, 1998, respectively.
F-29
<PAGE> 241
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
The Company is required to adopt Statement of Financial Accounting
Standards Board No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133) on January 1, 2001. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The Company has not yet quantified
the impact of adopting SFAS No. 133 on the consolidated financial statements nor
has the Company determined the timing of the adoption of SFAS No. 133. However,
SFAS No. 133 could increase the volatility in earnings (losses).
16. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
As the result of limitations on and prohibition of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, the parent company. The
following parent company only financial statements of Charter Holdings account
for the investment in Charter Operating under the equity method of accounting.
The financial statements should be read in conjunction with the consolidated
financial statements of the Company and notes thereto.
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 9,762 $ --
Investment in Charter Operating............................. 7,387,183 2,147,379
Other assets................................................ 69,793 --
---------- ----------
$7,466,738 $2,147,379
========== ==========
LIABILITIES AND MEMBER'S EQUITY
Current liabilities......................................... $ 47,365 $ --
Payables to manager of cable systems -- related parties..... 2,960 --
Long-term debt.............................................. 3,072,151 --
Member's equity............................................. 4,344,262 2,147,379
---------- ----------
$7,466,738 $2,147,379
========== ==========
</TABLE>
F-30
<PAGE> 242
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Interest expense............................................ $(221,925) $ --
Interest income............................................. 11,833 --
Equity in loss of Charter Operating......................... (375,832) (5,277)
--------- -------
Net loss.................................................. $(585,924) $(5,277)
========= =======
</TABLE>
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (585,924) $(5,277)
Noncash interest expense.................................. 78,473 --
Equity in losses of Charter Operating..................... 375,832 5,277
Changes in assets and liabilities......................... 48,825 --
----------- -------
Net cash used in operating activities.................. (82,794) --
----------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Charter Operating........................... (1,730,466) --
Loans to Marcus Cable Holdings, LLC....................... (1,680,142)
Repayment of debt on behalf of Charter Operating.......... (663,259)
Distributions received from Charter Operating............. 96,748 --
----------- -------
Net cash used in investing activities.................. (3,977,119) --
----------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from debt offering........................... 2,999,385 --
Payments for debt issuance costs.......................... (74,000) --
Capital contributions..................................... 1,144,290 --
----------- -------
Net cash used in financing activities.................. 4,069,675 --
----------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 9,762 --
CASH AND CASH EQUIVALENTS, beginning of period.............. -- --
----------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 9,762 $ --
=========== =======
</TABLE>
F-31
<PAGE> 243
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
17. SUBSEQUENT EVENTS:
On January 1, 2000, Charter Holdco and Charter Holdings effected a number
of transactions in which cable systems acquired by Charter Holdco in November
1999 were contributed to Charter Holdings (the "Transferred Systems"). The
Company intends to account for the contribution of the Transferred Systems to
Charter Holdings as a reorganization of entities under common control in a
manner similar to pooling of interests effective January 1, 2000. Charter
Holdings will revise its financial statements as of and for the year ended
December 31, 1999, to reflect the reorganization. The accounts of the
Transferred Systems will be included in Charter Holdings' financial statements
from the date the Transferred Systems were acquired by Charter Holdco. This
revision will occur in connection with the filing of Charter Holdings' Quarterly
Report on Form 10-Q for the quarter ending March 31, 2000.
On January 6, 2000, Charter Holdings 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 the above transfers and the Bresnan acquisition (as defined below).
On February 14, 2000, Charter Holdco and Charter Holdings completed the
acquisition of Bresnan Communications Company Limited Partnership (Bresnan).
Prior to the acquisition, Charter Holdco assigned a portion of its rights to
purchase Bresnan to Charter Holdings. Charter Holdco and Charter Holdings
purchased 52% of Bresnan from certain sellers for cash and certain sellers
contributed 18% of Bresnan to Charter Holdco for 14.8 million Class C common
membership units of Charter Holdco, an approximate 2.6% equity interest in
Charter Holdco. Charter Holdco then transferred its ownership interest to
Charter Holdings. Thereafter, Charter Holdings and certain sellers contributed
all of the outstanding interests in Bresnan to CC VIII, LLC (CC VIII), a
subsidiary of Charter Holdings and Bresnan was dissolved. In exchange for the
contribution of their interests in Bresnan, the sellers received approximately
24.2 million Class A preferred membership units in CC VIII representing 30% of
the equity of CC VIII and are entitled to a 2% annual return on their preferred
membership units. The purchase price for Bresnan was approximately $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, respectively, and
approximately $1.0 billion in assumed debt. All the membership units received by
the sellers are exchangeable on a one-for-one basis for Class A common stock of
Charter. The Bresnan cable systems acquired are located in Michigan, Minnesota,
Wisconsin and Nebraska, and serve approximately 686,000 (unaudited) customers.
Subsequent to the completion of the Bresnan acquisition, Charter
repurchased all of the outstanding Bresnan 9.25% Senior Discount Notes Due 2009
with an accreted value of $192.1 million and Bresnan 8.00% Senior Notes Due 2009
with a principal amount of $170.0 million for a total of $369.7 million. The
notes were repurchased using a portion of the proceeds of the January 2000
Charter Holdings Notes.
F-32
<PAGE> 244
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying consolidated statements of operations,
changes in shareholder's investment and cash flows of Charter Communications
Holdings, LLC and subsidiaries for the period from January 1, 1998, through
December 23, 1998, and for the year ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of the operations and the cash flows of
Charter Communications Holdings, LLC and subsidiaries for the period from
January 1, 1998, through December 23, 1998, and for the year ended December 31,
1997, in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
F-33
<PAGE> 245
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998, THROUGH
DECEMBER YEAR ENDED
23, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
REVENUES.................................................... $ 49,731 $18,867
-------- -------
OPERATING EXPENSES:
Operating, general and administrative..................... 25,952 11,767
Depreciation and amortization............................. 16,864 6,103
Corporate expense allocation -- related party............. 6,176 566
-------- -------
48,992 18,436
-------- -------
Income from operations................................. 739 431
-------- -------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (17,277) (5,120)
Interest income........................................... 44 41
Other, net................................................ (728) 25
-------- -------
(17,961) (5,054)
-------- -------
Net loss............................................... $(17,222) $(4,623)
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-34
<PAGE> 246
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S INVESTMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996........................ $-- $ 5,900 $ (3,252) $ 2,648
Net loss........................................ -- -- (4,623) (4,623)
-- ------- -------- --------
BALANCE, December 31, 1997........................ -- 5,900 (7,875) (1,975)
Capital contributions........................... -- 10,800 -- 10,800
Net loss........................................ -- -- (17,222) (17,222)
-- ------- -------- --------
BALANCE, December 23, 1998........................ $-- $16,700 $(25,097) $ (8,397)
== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-35
<PAGE> 247
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998, THROUGH YEAR ENDED
DECEMBER 23, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (17,222) $ (4,623)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization........................ 16,864 6,103
Noncash interest expense............................. 267 123
Loss on sale of cable system......................... -- 1,363
(Gain) loss on disposal of property, plant and
equipment........................................... (14) 130
Changes in assets and liabilities, net of effects from
acquisition --
Receivables............................................ 10 (227)
Prepaid expenses and other............................. (125) 18
Accounts payable and accrued expenses.................. 16,927 894
Payables to manager of cable systems-related party..... 5,288 (153)
Other operating activities............................. 569 --
--------- --------
Net cash provided by operating activities......... 22,564 3,628
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (15,364) (7,880)
Payment for acquisition, net of cash acquired............. (167,484) --
Proceeds from sale of cable system........................ -- 12,528
Other investing activities................................ (486) --
--------- --------
Net cash (used in) provided by investing
activities...................................... (183,334) 4,648
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 217,500 5,100
Repayments of long-term debt.............................. (60,200) (13,375)
Capital contributions..................................... 7,000 --
Payments for debt issuance costs.......................... (3,487) (12)
--------- --------
Net cash provided by (used in) financing
activities...................................... 160,813 (8,287)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 43 (11)
CASH AND CASH EQUIVALENTS, beginning of period.............. 626 637
--------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 669 $ 626
========= ========
CASH PAID FOR INTEREST...................................... $ 7,679 $ 3,303
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-36
<PAGE> 248
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited
liability company, was formed in February 1999 as a wholly owned subsidiary of
Charter Investment, Inc. (Charter Investment). Charter Investment, through its
wholly owned cable television operating subsidiary, Charter Communications
Properties Holdings, LLC (CCPH), commenced operations with the acquisition of a
cable television system on September 30, 1995.
Effective December 23, 1998, as a part of a series of transactions, through
which Paul G. Allen acquired Charter Investment, Mr. Allen acquired CCPH for an
aggregate purchase price of $211 million, excluding $214 million in debt assumed
(the "Paul Allen Transaction"). In conjunction with the Paul Allen Transaction,
CCPH was converted from a corporation to a limited liability company. Also, in
conjunction with the Paul Allen Transaction, Charter Investment for fair value
acquired from unrelated third parties all of the interest it did not already own
in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of
CCA Holdings, Corp., CCT Holdings Corp. and Charter Communications Long Beach,
Inc.), all cable television operating companies, for $2.0 billion, excluding
$1.8 billion in debt assumed. Charter Investment previously managed and owned
minority interests in these companies. These acquisitions were accounted for
using the purchase method of accounting, and accordingly results of operations
of CharterComm Holdings and CCA Group are included in the financial statements
of Charter Holdings from the date of acquisition. In February 1999, Charter
Investment transferred all of its cable television operating subsidiaries to a
wholly owned subsidiary of Charter Holdings, Charter Communications Operating,
LLC (Charter Operating). Charter Holdings is a wholly owned subsidiary of
Charter Communications Holding Company, LLC (Charter Holdco). The transfer was
accounted for as a reorganization of entities under common control similar to a
pooling of interests.
The accompanying consolidated financial statements include the accounts of
CCPH and CCP, its wholly owned cable operating subsidiary, representing the
consolidated financial statements of Charter Holdings and subsidiaries
(collectively, the "Company") for all periods presented. The accounts of
CharterComm Holdings and CCA Group are not included since these companies were
not owned and controlled by Charter Investment prior to December 23, 1998.
As a result of the change in ownership of CCPH, CharterComm Holdings and
CCA Group, Charter Holdings has applied push-down accounting in the preparation
of the consolidated financial statements effective December 23, 1998.
Accordingly, the consolidated financial statements of Charter Holdings for
periods ended on or before December 23, 1998, are presented on a different cost
basis than the consolidated financial statements for the periods after December
23, 1998 (not presented herein), and are not comparable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. These investments are
carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the
F-37
<PAGE> 249
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
cost of new customer installations. The costs of disconnecting a customer are
charged to expense in the period incurred. Expenditures for repairs and
maintenance are charged to expense as incurred, while equipment replacement and
betterments are capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems.................................. 3-15 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3-5 years
</TABLE>
For the period from January 1, 1998, through December 23, 1998, and for the
year ended December 31, 1997, depreciation expense was $6.2 million and $3.9
million, respectively.
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable systems represent management's estimate
of fair value and are generally amortized using the straight-line method over a
period of 15 years. The period of 15 years is management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Company.
OTHER ASSETS
Debt issuance costs are being amortized to interest expense using the
effective interest method over the term of the related debt. The interest rate
cap costs are being amortized over the terms of the agreement, which
approximates three years.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted net cash flows
related to the asset over its remaining life, the carrying value of such asset
is reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable system. As of December 23, 1998, and December 31, 1997, no installation
revenue has been deferred, as direct selling costs have exceeded installation
revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Company ranging up to a federally
mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly
basis from the Company's customers and are periodically remitted to local
franchise authorities. Franchise fees collected and paid are reported as
revenues and expenses.
F-38
<PAGE> 250
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
INCOME TAXES
The Company filed a consolidated income tax return with Charter Investment.
Income taxes are allocated to the Company in accordance with the tax-sharing
agreement between the Company and Charter Investment.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. ACQUISITION:
In 1998, the Company acquired a cable system for an aggregate purchase
price, net of cash acquired, of $228.4 million, comprised of $167.5 million in
cash and $60.9 million in a note payable to the seller. The excess of the cost
of properties acquired over the amounts assigned to net tangible assets at the
date of acquisition was $207.6 million and is included in franchises.
The above 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 dates of acquisition. The
purchase price was allocated to tangible and intangible assets based on
estimated fair values at the acquisition date.
F-39
<PAGE> 251
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Unaudited pro forma operating results as though the acquisition discussed
above, excluding the Paul Allen Transaction, had occurred on January 1, 1997,
with adjustments to give effect to amortization of franchises, interest expense
and certain other adjustments are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998, THROUGH
DECEMBER YEAR ENDED
23, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 67,007 $ 63,909
Loss from operations........................................ (7,097) (7,382)
Net loss.................................................... $(24,058) $(26,099)
</TABLE>
The unaudited pro forma information has been presented for comparative
purposes and does not purport to be indicative of the results of operations had
the transaction been completed as of the assumed date or which may be obtained
in the future.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts is summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998, THROUGH FOR THE
DECEMBER YEAR ENDED
23, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Balance, beginning of period................................ $ 52 $ 87
Acquisition of system....................................... 96 --
Charged to expense.......................................... 1,122 325
Uncollected balances written off, net of recoveries......... (778) (360)
-- --
------ -----
Balance, end of period...................................... $ 492 $ 52
====== =====
</TABLE>
5. SALE OF FT. HOOD SYSTEM:
In February 1997, the Company sold the net assets of the Ft. Hood system,
which served customers in Texas, for an aggregate sales price of approximately
$12.5 million. The sale of the Ft. Hood system resulted in a loss of
approximately $1.4 million, which is included in operating, general and
administrative costs in the accompanying consolidated statement of operations
for the year ended December 31, 1997.
6. INCOME TAXES:
Deferred tax assets and liabilities are recognized for the estimated future
tax consequence attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred income tax assets and liabilities are measured using the enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Deferred income tax expense or benefit is
the result of changes in the liability or asset recorded for deferred taxes. A
valuation allowance must be established for any portion of a deferred tax asset
for which it is more likely than not that a tax benefit will not be realized.
F-40
<PAGE> 252
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
No current provision (benefit) for income taxes was recorded. The effective
income tax rate is less than the federal rate of 35% primarily due to providing
a valuation allowance on deferred income tax assets.
7. RELATED-PARTY TRANSACTIONS:
Charter Investment provides management services to the Company including
centralized customer billing services, data processing and related support,
benefits administration and coordination of insurance coverage and
self-insurance programs for medical, dental and workers' compensation claims.
Certain costs for services are billed and charged directly to the Company's
operating subsidiaries and are included in operating costs. These billings are
determined based on the number of basic customers. Such costs totaled $437 and
$220, respectively, for the period from January 1, 1998, through December 23,
1998, and the year ended December 31, 1997. All other costs incurred by Charter
Investment on behalf of the Company are expensed in the accompanying
consolidated financial statements and are included in corporate expense
allocations -- related party. The cost of these services is allocated based on
the number of basic customers. Management considers these allocations to be
reasonable for the operations of the Company.
Charter Investment utilizes a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to the Company as determined by independent actuaries,
at the present value of the actuarially computed present and future liabilities
for such benefits. Medical coverage provides for $2.4 million aggregate stop
loss protection and a loss limitation of $100 per person per year. Workers'
compensation coverage provides for $800 aggregate stop loss protection and a
loss limitation of $150 per person per year.
The Company is charged a management fee based on percentages of revenues as
stipulated in the management agreement between Charter Investment and the
Company. For the period from January 1, 1998, through December 23, 1998, and the
year ended December 31, 1997, the management fee charged to the Company
approximated the corporate expenses incurred by Charter Investment on behalf of
the Company.
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense for the period from
January 1, 1998, through December 23, 1998, and for the year ended December 31,
1997, were $278 and $130, respectively.
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
period from January 1, 1998, through December 23, 1998, and for the year ended
December 31, 1997, was $421 and $271, respectively.
LITIGATION
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
F-41
<PAGE> 253
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable systems. The Federal Communications Commission (FCC) has
principal responsibility for implementing the policies of the Cable Acts. Many
aspects of such regulation are currently the subject to judicial proceedings and
administrative or legislative proposals. Legislation and regulations continue to
change, and the Company cannot predict the impact of future developments on the
cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable systems and have
resulted in additional regulatory oversight by the FCC and local or state
franchise authorities. The Cable Acts and the corresponding FCC regulations have
established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulated rates on the cable
programming service tier (CPST). The FCC has taken the position that it will
still adjudicate pending CPST complaints but will strictly limit its review, and
possible refund orders, to the time period predating the sunset date, March 31,
1999. The Company does not believe any adjudications regarding their pre-sunset
complaints will have a material adverse effect on the Company's consolidated
financial position or results of operations.
A number of states subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. State governmental agencies are required to
follow FCC rules when prescribing rate regulation, and thus, state regulation of
cable television rates is not allowed to be more restrictive than the federal or
local regulation. The Company is subject to state regulation in Connecticut.
9. EMPLOYEE BENEFIT PLAN:
401(K) PLAN
The Company's employees may participate in the Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 15% of their salary, on or before tax basis, subject to a
maximum contribution limit as determined by the
F-42
<PAGE> 254
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Internal Revenue Service. The Company contributes an amount equal to 50% of the
first 5% of contributions by each employee. The Company contributed $74 and $29
for the period from January 1, 1998, through December 23, 1998, and for the year
ended December 31, 1997, respectively.
APPRECIATION RIGHTS PLAN
Certain employees of Charter participated in the 1995 Charter
Communications, Inc. Appreciation Rights Plan (the "Plan"). The Plan permitted
Charter Investment to grant 1,500,000 units to certain key employees, of which
1,251,500 were outstanding at December 31, 1997. Units received by an employee
vest at a rate of 20% per year, unless otherwise provided in the participant's
Appreciation Rights Unit Agreement. The appreciation rights entitled the
participants to receive payment, upon termination or change in control of
Charter Investment, of the excess of the unit value over the base value (defined
as the appreciation value) for each vested unit. The unit value was based on
adjusted equity, as defined in the Plan. Deferred compensation expense was based
on the appreciation value since the grant date and was being amortized over the
vesting period.
As a result of the acquisition of Charter Investment by Mr. Allen, the Plan
was terminated, all outstanding units became 100% vested and all amounts were
paid by Charter Investment in 1999. The cost of this plan was allocated to the
Company based on the number of basic customers. The company considers this
allocation to be reasonable for the operations of the Company. For the period
January 1, 1998, through December 23, 1998, the Company expensed $3,800,
included in corporate expense allocation-related parties, and increased
shareholder's investment for the cost of this plan.
10. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, Accounting for Derivatives Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged items in the income statement,
and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133 -- An Amendment of FASB Statement No.
133, has delayed the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company has not yet quantified the impact of adopting
SFAS No. 133 on the consolidated financial statements nor has determined the
timing of the adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in earnings (losses).
F-43
<PAGE> 255
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCA Group:
We have audited the accompanying combined balance sheet of CCA Holdings
Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc.
(collectively CCA Group) and subsidiaries as of December 31, 1997, and the
related combined statements of operations, shareholders' deficit and cash flows
for the period from January 1, 1998, through December 23, 1998, and for the
years ended December 31, 1997 and 1996. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of CCA Group and
subsidiaries as of December 31, 1997, and the combined results of their
operations and their cash flows for the period from January 1, 1998, through
December 23, 1998, and for the years ended December 31, 1997 and 1996, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
F-44
<PAGE> 256
CCA GROUP
COMBINED BALANCE SHEET -- DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,501
Accounts receivable, net of allowance for doubtful
accounts of $926....................................... 9,407
Prepaid expenses and other................................ 1,988
Deferred income tax asset................................. 5,915
----------
Total current assets.............................. 21,811
----------
RECEIVABLE FROM RELATED PARTY, including accrued interest... 13,090
----------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 352,860
Franchises, net of accumulated amortization of $132,871... 806,451
----------
1,159,311
----------
OTHER ASSETS................................................ 13,731
----------
$1,207,943
==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 25,625
Accounts payable and accrued expenses..................... 48,554
Payables to manager of cable television systems -- related
party.................................................. 1,975
----------
Total current liabilities......................... 76,154
----------
DEFERRED REVENUE............................................ 1,882
----------
DEFERRED INCOME TAXES....................................... 117,278
----------
LONG-TERM DEBT, less current maturities..................... 758,795
----------
DEFERRED MANAGEMENT FEES.................................... 4,291
----------
NOTES PAYABLE, including accrued interest................... 348,202
----------
SHAREHOLDERS' DEFICIT:
Common stock.............................................. 1
Additional paid-in capital................................ 128,499
Accumulated deficit....................................... (227,159)
----------
Total shareholders' deficit....................... (98,659)
----------
$1,207,943
==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-45
<PAGE> 257
CCA GROUP
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, YEAR ENDED
1998, THROUGH DECEMBER 31
DECEMBER 23, ---------------------
1998 1997 1996
------------- ---- ----
<S> <C> <C> <C>
REVENUES............................................. $ 324,432 $ 289,697 $233,392
--------- --------- --------
EXPENSES:
Operating costs.................................... 135,705 122,917 102,977
General and administrative......................... 28,440 26,400 18,687
Depreciation and amortization...................... 136,689 116,080 96,547
Management fees -- related parties................. 17,392 11,414 8,634
--------- --------- --------
318,226 276,811 226,845
--------- --------- --------
Income from operations.......................... 6,206 12,886 6,547
--------- --------- --------
OTHER INCOME (EXPENSE):
Interest income.................................... 4,962 2,043 1,883
Interest expense................................... (113,824) (108,122) (88,999)
Other, net......................................... (294) 171 (2,504)
--------- --------- --------
(109,156) (105,908) (89,620)
--------- --------- --------
Net loss........................................ $(102,950) $ (93,022) $(83,073)
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-46
<PAGE> 258
CCA GROUP
COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- -----
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995................. $ 1 $ 99,999 $ (51,064) $ 48,936
Net loss................................. -- -- (83,073) (83,073)
--- -------- --------- ---------
BALANCE, December 31, 1996................. 1 99,999 (134,137) (34,137)
Capital contributions.................... -- 28,500 -- 28,500
Net loss................................. -- -- (93,022) (93,022)
--- -------- --------- ---------
BALANCE, December 31, 1997................. 1 128,499 (227,159) (98,659)
Capital contributions.................... -- 5,684 -- 5,684
Net loss................................. -- -- (102,950) (102,950)
--- -------- --------- ---------
BALANCE, December 23, 1998................. $ 1 $134,183 $(330,109) $(195,925)
=== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-47
<PAGE> 259
CCA GROUP
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, YEAR ENDED
1998, THROUGH DECEMBER 31
DECEMBER 23, ---------------------
1998 1997 1996
------------- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(102,950) $(93,022) $ (83,073)
Adjustments to reconcile net loss to net cash
provided by operating activities --
Depreciation and amortization................... 136,689 116,080 96,547
Amortization of debt issuance costs and non cash
interest cost................................. 44,701 49,107 39,927
(Gain) loss on sale of property, plant and
equipment..................................... 511 (156) 1,257
Changes in assets and liabilities, net of
effects from acquisitions --
Accounts receivable, net...................... 4,779 222 (1,393)
Prepaid expenses and other.................... 243 (175) 216
Accounts payable and accrued expenses......... 3,849 8,797 3,855
Payables to manager of cable television
systems, including deferred management
fees....................................... 3,485 784 448
Deferred revenue.............................. 1,336 559 (236)
Other operating activities.................... 5,583 (3,207) 1,372
--------- -------- ---------
Net cash provided by operating activities..... 98,226 78,989 58,920
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment......... (95,060) (82,551) (56,073)
Payments for acquisitions, net of cash acquired.... -- (147,187) (122,017)
Other investing activities......................... (2,898) (1,296) 54
--------- -------- ---------
Net cash used in investing activities........... (97,958) (231,034) (178,036)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....................... 300,400 162,000 127,000
Repayments of long-term debt....................... (64,120) (39,580) (13,100)
Payments of debt issuance costs.................... (8,442) (3,360) (3,126)
Repayments under notes payable..................... (230,994) -- --
Capital contributions.............................. -- 28,500 --
--------- -------- ---------
Net cash provided by (used in) financing
activities.................................... (3,156) 147,560 110,774
--------- -------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS............ (2,888) (4,485) (8,342)
CASH AND CASH EQUIVALENTS, beginning of period....... 4,501 8,986 17,328
--------- -------- ---------
CASH AND CASH EQUIVALENTS, end of period............. $ 1,613 $ 4,501 $ 8,986
========= ======== =========
CASH PAID FOR INTEREST............................... $ 179,781 $ 49,687 $ 51,434
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-48
<PAGE> 260
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
CCA Group consists of CCA Holdings Corp. (CCA Holdings), CCT Holdings Corp.
(CCT Holdings) and Charter Communications Long Beach, Inc. (CC-LB), all Delaware
corporations (collectively referred to as "CCA Group" or the "Company") and
their subsidiaries. The combined financial statements of each of these companies
have been combined by virtue of their common ownership and management. All
material intercompany transactions and balances have been eliminated.
CCA Holdings commenced operations in January 1995 in connection with
consummation of the Crown Transaction (as defined below). The accompanying
financial statements include the accounts of CCA Holdings; its wholly-owned
subsidiary, CCA Acquisition Corp. (CAC); CAC's wholly-owned subsidiary, Cencom
Cable Entertainment, Inc. (CCE); and Charter Communications Entertainment I,
L.P. (CCE-I), which is controlled by CAC through its general partnership
interest. Through December 23, 1998, CCA Holdings was approximately 85% owned by
Kelso Investment Associates V, L.P., an investment fund, together with an
affiliate (collectively referred to as "Kelso" herein) and certain other
individuals and approximately 15% by Charter Communications, Inc. (Charter),
manager of CCE-I's cable television systems.
CCT Holdings was formed on January 6, 1995. CCT Holdings commenced
operations in September 1995 in connection with consummation of the Gaylord
Transaction (as defined below). The accompanying financial statements include
the accounts of CCT Holdings and Charter Communications Entertainment II, L.P.
(CCE-II), which is controlled by CCT Holdings through its general partnership
interest. Through December 23, 1998, CCT Holdings was owned approximately 85% by
Kelso and certain other individuals and approximately 15% by Charter, manager of
CCE-II's cable television systems.
In January 1995, CAC completed the acquisition of certain cable television
systems from Crown Media, Inc. (Crown), a subsidiary of Hallmark Cards,
Incorporated (Hallmark) (the "Crown Transaction"). On September 29, 1995, CAC
and CCT Holdings entered into an Asset Exchange Agreement whereby CAC exchanged
a 1% undivided interest in all of its assets for a 1.22% undivided interest in
certain assets to be acquired by CCT Holdings from an affiliate of Gaylord
Entertainment Company, Inc. (Gaylord). Effective September 30, 1995, CCT
Holdings acquired certain cable television systems from Gaylord (the "Gaylord
Transaction"). Upon execution of the Asset Purchase Agreement, CAC and CCT
Holdings entered into a series of agreements to contribute the assets acquired
under the Crown Transaction to CCE-I and certain assets acquired in the Gaylord
acquisition to CCE-II. Collectively, CCA Holdings and CCT Holdings own 100% of
CCE-I and CCE-II.
CC-LB was acquired by Kelso and Charter in May 1997. The accompanying
financial statements include the accounts of CC-LB and its wholly owned
subsidiary, Long Beach Acquisition Corp. (LBAC) from the date of acquisition.
Through December 23, 1998, CC-LB was owned approximately 85% by Kelso and
certain other individuals and approximately 15% by Charter, manager of LBAC's
cable television systems.
Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through
a series of transactions. In conjunction with Mr. Allen's acquisition, Charter
acquired 100% of the outstanding stock of CCA Holdings, CCT Holdings and CC-LB
on December 23, 1998.
F-49
<PAGE> 261
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In 1998, CCE-I provided cable television service to customers in
Connecticut, Illinois, Massachusetts, Missouri and New Hampshire, CCE-II
provided cable television service to customers in California and LBAC provided
cable television service to customers in Long Beach, California, and certain
surrounding areas.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997,
cash equivalents consist primarily of repurchase agreements. These investments
are carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installation. The costs of disconnecting a residence are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, and equipment replacement costs and betterments are
capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems.................................. 3-15 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3-5 years
</TABLE>
In 1997, the Company shortened the estimated useful lives of certain property,
plant and equipment for depreciation purposes. As a result, additional
depreciation of $8,123 was recorded during 1997.
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable television systems represent management's
estimate of fair value and are amortized using the straight-line method over 15
years.
OTHER ASSETS
Debt issuance costs are amortized to interest expense over the term of the
related debt. The interest rate cap costs are being amortized over the terms of
the agreement, which approximates three years.
INCOME TAXES
Income taxes are recorded in accordance with SFAS No. 109, "Accounting for
Income Taxes."
F-50
<PAGE> 262
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS:
In 1997, CC-LB acquired the stock of LBAC for an aggregate purchase price,
net of cash acquired, of $147,200. In connection with the completion of this
acquisition, LBAC recorded $55,900 of deferred income tax liabilities resulting
from differences between the financial reporting and tax basis of certain assets
acquired. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the date of acquisition was $190,200 and is
included in franchises.
In 1996, the Company acquired cable television systems in three separate
transactions for an aggregate purchase price, net of cash acquired, of $122,000.
The excess of the cost of properties acquired over the amounts assigned to net
tangible assets at the dates of acquisition was $100,200 and is included in
franchises.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of the acquisitions.
Unaudited pro forma operating results for the 1997 acquisitions as though
the acquisitions had been made on January 1, 1997, with pro forma adjustments to
give effect to amortization of franchises, interest expense and certain other
adjustments as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
(UNAUDITED)
-------------
<S> <C>
Revenues.................................................... $303,797
Income from operations...................................... 14,108
Net loss.................................................... (94,853)
</TABLE>
The unaudited pro forma information has been presented for comparative
purposes and does not purport to be indicative of the results of operations had
these transactions been completed as of the assumed date or which may be
obtained in the future.
3. RECEIVABLE FROM RELATED PARTY:
In connection with the transfer of certain assets acquired in the Gaylord
Transaction to Charter Communications Properties, Inc. (CCP), Charter
Communications Properties Holding Corp. (CCP Holdings), the parent of CCP and a
wholly owned subsidiary of Charter, entered into a $9,447 promissory note with
CCT Holdings. The promissory note bears interest at the rates paid by CCT
Holdings on the Gaylord Seller Note. Principal and interest are due on September
29, 2005. Interest income has been accrued based on an average rate of interest
over the life of the Gaylord Seller Note, which approximates 15.4% and totaled
$1,899 for the period from January 1, 1998, through December 23, 1998, and
$1,806 and $1,547 for the years ended December 31, 1997 and 1996, respectively.
As of December 31, 1997, interest receivable totaled $3,643.
F-51
<PAGE> 263
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1997:
<TABLE>
<S> <C>
Cable distribution systems.................................. $ 426,241
Land, buildings and leasehold improvements.................. 15,443
Vehicles and equipment...................................... 24,375
---------
466,059
Less -- Accumulated depreciation............................ (113,199)
---------
$ 352,860
=========
</TABLE>
Depreciation expense for the period from January 1, 1998, through December
23, 1998, and for the years ended December 31, 1997 and 1996, was $72,914,
$59,599 and $39,575, respectively.
5. OTHER ASSETS:
Other assets consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Debt issuance costs......................................... $13,416
Note receivable............................................. 2,100
Other....................................................... 1,342
-------
16,858
Less -- Accumulated amortization............................ (3,127)
-------
$13,731
=======
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1997:
<TABLE>
<S> <C>
Accrued interest............................................ $ 8,389
Franchise fees.............................................. 6,434
Programming expenses........................................ 5,855
Accounts payable............................................ 4,734
Public education and governmental costs..................... 4,059
Salaries and related benefits............................... 3,977
Capital expenditures........................................ 3,629
Other....................................................... 11,477
-------
$48,554
=======
</TABLE>
F-52
<PAGE> 264
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
CCE-I:
Term loans................................................ $274,120
Fund loans................................................ 85,000
Revolving credit facility................................. 103,800
--------
462,920
--------
CCE-II:
Term loans................................................ 105,000
Revolving credit facility................................. 123,500
--------
228,500
--------
LBAC:
Term loans................................................ 85,000
Revolving credit facility................................. 8,000
--------
93,000
--------
Total debt........................................ 784,420
Less -- Current maturities.................................. (25,625)
--------
Total long-term debt.............................. $758,795
========
</TABLE>
CCE-I CREDIT AGREEMENT
CCE-I maintains a credit agreement (the "CCE-I Credit Agreement"), which
provides for a $280,000 term loan that matures on September 30, 2006, an $85,000
fund loan that matures on March 31, 2007, and a $175,000 revolving credit
facility with a maturity date of September 30, 2006. Amounts under the CCE-I
Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as
defined, plus a margin of up to 2.75%. The variable interest rate ranged from
6.88% to 8.06% at December 23, 1998, and from 7.63% to 8.50% and 7.63% to 8.38%
at December 31, 1997 and 1996, respectively.
Commencing June 30, 2002, and at the end of each calendar quarter
thereafter, available borrowings under the revolving credit facility and the
term loan shall be reduced on an annual basis by 12.0% in 2002 and 15.0% in
2003. Commencing June 30, 2002, and at the end of each calendar quarter
thereafter, the available borrowings for the fund loan shall be reduced on an
annual basis by 0.75% in 2002 and 1.0% in 2003. A quarterly commitment fee of
between 0.375% and 0.5% per annum is payable on the unborrowed balance of the
revolving credit facility.
COMBINED CREDIT AGREEMENT
CCE-II and LBAC maintain a credit agreement (the "Combined Credit
Agreement") which provides for two term loan facilities, one with the principal
amount of $100,000 that matures on March 31, 2005, and the other with the
principal amount of $90,000 that matures on March 31, 2006. The Combined Credit
Agreement also provides for a $185,000 revolving credit facility, with a
maturity date of March 31, 2005. Amounts under the Combined Credit Agreement
bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin
of up to 2.5%. The variable interest rate ranged from 6.56% to 7.59% at December
23, 1998, and from 7.50% to 8.38% at December 31, 1997, respectively.
F-53
<PAGE> 265
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Commencing March 31, 2001, and at the end of each quarter thereafter,
available borrowings under the revolving credit facility and one term loan shall
be reduced on an annual basis by 5.0% in 2001, 15.0% in 2002 and 18.0% in 2003.
Commencing in December 31, 1999, and at the end of each quarter thereafter,
available borrowings under the other term loan shall be reduced on annual basis
by 0.5% in 1999, 0.8% in 2000, 1.0% in 2001, 1.0% in 2002 and 1.0% in 2003. A
quarterly commitment fee of between 0.25% and 0.375% per annum, based upon the
intercompany indebtedness of the Company, is payable on the unborrowed balance
of the revolving credit facility.
CCE CREDIT AGREEMENT
In October 1998, Charter Communications Entertainment, L.P. (CCE L.P.), a
98% direct and indirect owner of CCE-I and CCE-II and indirectly owned
subsidiary of the Company, entered into a credit agreement (the "CCE L.P. Credit
Agreement") which provides for a term loan facility with the principal amount of
$130,000 that matures on September 30, 2007. Amounts under the CCE L.P. Credit
Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a
margin of up to 3.25%. The variable interest rate at December 23, 1998, was
8.62%.
Commencing June 30, 2002, and the end of each calendar quarter thereafter,
the available borrowings for the term loan shall be reduced on an annual basis
by 0.75% in 2002 and 1.0% in 2003.
CCE-II HOLDINGS CREDIT AGREEMENT
CCE-II Holdings, LLC (CCE-II Holdings), a wholly owned subsidiary of CCE
L.P. and the parent of CCE-II, entered into a credit agreement (the "CCE-II
Holdings Credit Agreement") in November 1998, which provides for a term loan
facility with the principal amount of $95,000 that matures on September 30,
2006. Amounts under the CCE-II Holdings Credit Agreement bear interest at either
the LIBOR Rate or Base Rate, as defined, plus a margin of up to 3.25%. The
variable rate at December 23, 1998, was 8.56%.
Commencing June 30, 2002, and at the end of each quarter thereafter,
available borrowings under the revolving credit facility and one term loan shall
be reduced on an annual basis by 0.5% in 2002 and 1.0% in 2003.
The credit agreements require the Company to comply with various financial
and nonfinancial covenants, including the maintenance of annualized operating
cash flow to fixed charge ratio, as defined, not to exceed 1.0 to 1.0. These
debt instruments also contain substantial limitations on, or prohibitions of,
distributions, additional indebtedness, liens asset sales and certain other
items.
8. NOTES PAYABLE:
Notes payable consists of the following at December 31, 1997:
<TABLE>
<S> <C>
HC Crown Note............................................... $ 82,000
Accrued interest on HC Crown Note........................... 36,919
Gaylord Seller Note......................................... 165,688
Accrued interest on Gaylord Seller Note..................... 63,595
--------
Total............................................. $348,202
========
</TABLE>
In connection with the Crown Transaction, the Company entered into an
$82,000 senior subordinated loan agreement with a subsidiary of Hallmark, HC
Crown Corp., and pursuant to
F-54
<PAGE> 266
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
such loan agreement issued a senior subordinated note (the "HC Crown Note"). The
HC Crown Note was an unsecured obligation. The HC Crown Note was limited in
aggregate principal amount to $82,000 and has a stated maturity date of December
31, 1999 (the "Stated Maturity Date"). Interest has been accrued at 13% per
annum, compounded semiannually, payable upon maturity. In October 1998, the
Crown Note and accrued interest was paid in full.
In connection with the Gaylord Transaction, CCT Holdings entered into a
$165,700 subordinated loan agreement with Gaylord (the "Gaylord Seller Note").
Interest expense has been accrued based on an average rate of interest over the
life of the Gaylord Seller Note, which approximated 15.4%.
In connection with the Gaylord Transaction, CCT Holdings, CCE L.P. and
Gaylord entered into a contingent payment agreement (the "Contingent
Agreement"). The Contingent Agreement indicates CCE L.P. will pay Gaylord 15% of
any amount distributed to CCT Holdings in excess of the total of the Gaylord
Seller Note, Crown Seller Note and $450,000. In conjunction with the Paul G.
Allen acquisition of Charter and the Company, Gaylord was paid an additional
$132,000 pursuant to the Contingent Agreement and the Gaylord Seller Note was
paid in full.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1997, is as follows:
<TABLE>
<CAPTION>
1997
--------------------------------
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
-------- -------- -----
<S> <C> <C> <C>
DEBT
Debt under credit agreements............................ $784,420 $ -- $784,420
HC Crown Note (including accrued interest).............. 118,919 -- 118,587
Gaylord Seller Note (including accrued interest)........ 229,283 -- 214,074
INTEREST RATE HEDGE AGREEMENTS
Swaps................................................... -- 405,000 (1,214)
Caps.................................................... -- 120,000 --
Collars................................................. -- 190,000 (437)
</TABLE>
As the long-term debt under the credit agreements bear interest at current
market rates, their carrying amount approximates fair market value at December
31, 1997. Fair value of the HC Crown Note is based upon trading activity at
December 31, 1997. Fair value of the Gaylord Seller Note is based on current
redemption value.
The weighted average interest pay rate for the Company's interest rate swap
agreements was 7.82% at December 31, 1997. The weighted average interest rate
for the Company's interest rate cap agreements was 8.49% at December 31, 1997.
The weighted average interest rates for the Company's interest rate collar
agreements were 9.04% and 7.57% for the cap and floor components, respectively,
at December 31, 1997.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
F-55
<PAGE> 267
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would receive or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's Senior Credit Facility thereby reducing the exposure
to credit loss. The Company has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the results of
operations or the financial position of the Company.
10. COMMON STOCK:
The Company's common stock consist of the following at December 31, 1997:
<TABLE>
<S> <C>
CCA Holdings:
Common stock -- Class A, voting, $.01 par value, 100,000
shares authorized; 75,515 shares issued and
outstanding............................................ $ 1
Common stock -- Class B, voting, $.01 par value, 20,000
shares authorized; 4,300 shares issued and
outstanding............................................ --
Common stock -- Class C, nonvoting, $.01 par value, 5,000
shares authorized; 185 shares issued and outstanding... --
---
1
---
CCT Holdings:
Common stock -- Class A, voting, $.01 par value, 20,000
shares authorized; 16,726 shares issued and
outstanding............................................ --
Common stock -- Class B, voting, $.01 par value, 4,000
shares authorized; 3,000 shares issued and
outstanding............................................ --
Common stock -- Class C, nonvoting, $.01 par value, 1,000
shares authorized; 275 shares issued and outstanding... --
---
CC-LB:
Common stock -- Class A, voting, $.01 par value, 31,000
shares authorized, 27,850 shares issued and
outstanding............................................ --
Common stock -- Class B, voting, $.01 par value, 2,000
shares authorized, 1,500 shares issued and
outstanding............................................ --
Common stock -- Class C, nonvoting, $.01 par value, 2,000
shares authorized, 650 shares issued and outstanding... --
---
Total common stock................................ $ 1
===
</TABLE>
CCA HOLDINGS
The Class A Voting Common Stock (CCA Class A Common Stock) and Class C
Nonvoting Common Stock (CCA Class C Common Stock) have certain preferential
rights upon liquidation of CCA Holdings. In the event of liquidation,
dissolution or "winding up" of CCA Holdings, holders of CCA Class A and Class C
Common Stock are entitled to a preference of $1,000 per share. After such amount
is paid, holders of Class B Voting Common Stock (CCA Class B Common Stock) are
entitled to receive $1,000 per share. Thereafter, Class A and Class C
shareholders shall ratably receive the remaining proceeds.
F-56
<PAGE> 268
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
If upon liquidation, dissolution or "winding up" the assets of CCA Holdings
are insufficient to permit payment to Class A and Class C shareholders for their
full preferential amounts, all assets of CCA Holdings shall then be distributed
ratably to Class A and Class C shareholders. Furthermore, if the proceeds from
liquidation are inadequate to pay Class B shareholders their full preferential
amounts, the proceeds are to be distributed on a pro rata basis to Class B
shareholders.
Upon the occurrence of any Conversion Event (as defined within the Amended
and Restated Certificate of Incorporation) Class C shareholders may convert any
or all of their outstanding shares into the same number of Class A shares.
Furthermore, CCA Holdings may automatically convert outstanding Class C shares
into the same number of Class A shares.
CCA Holdings is restricted from making cash dividends on its common stock
until the balance outstanding under the HC Crown Note is repaid.
Charter and Kelso entered into a Stockholders' Agreement providing for
certain restrictions on the transfer, sale or purchase of CCA Holdings' common
stock.
CCT HOLDINGS
The Class A Voting Common Stock (CCT Class A Common Stock) and Class C
Nonvoting Common Stock (CCT Class C Common Stock) have certain preferential
rights upon liquidation of CCT Holdings. In the event of liquidation,
dissolution or "winding up" of CCT Holdings, holders of CCT Class A Common Stock
and Class C Common Stock are entitled to a preference of $1,000 per share. After
such amount is paid, holders of Class B Voting Common Stock (CCT Class B Common
Stock) are entitled to receive $1,000 per share. Thereafter, Class A and Class C
shareholders shall ratably receive the remaining proceeds.
If upon liquidation, dissolution or "winding up" the assets of CCT Holdings
are insufficient to permit payment to Class A Common Stock and Class C
shareholders for their full preferential amount, all assets of the Company shall
then be distributed ratably to Class A and Class C shareholders. Furthermore, if
the proceeds from liquidation are inadequate to pay Class B shareholders their
full preferential amount, the proceeds are to be distributed on a pro rata basis
to Class B shareholders.
Upon the occurrence of any Conversion Event (as defined within the Amended
and Restated Certificate of Incorporation), Class C shareholders may convert any
or all of their outstanding shares into the same number of Class A shares.
Furthermore, CCT Holdings may automatically convert outstanding Class C shares
into the same number of Class A shares.
CCT Holdings is restricted from making cash dividends on its common stock
until the balance outstanding under the note payable to seller is repaid.
Charter and Kelso entered into a Stockholders' Agreement providing for
certain restrictions on the transfer, sale or purchase of CCT Holdings' common
stock.
CC-LB
The Class A Voting Common Stock (CC-LB Class A Common Stock) and Class C
Nonvoting Common Stock (CC-LB Class C Common Stock) have certain preferential
rights upon liquidation of CC-LB. In the event of liquidation, dissolution or
"winding up" of CC-LB, holders of CC-LB Class A Common Stock and Class C Common
Stock are entitled to a preference of $1,000 per share. After such amount is
paid, holders of Class B Voting Common Stock (CC-LB Class B Common Stock) are
entitled to receive $1,000 per share. Thereafter, Class A, Class B and Class C
shareholders shall ratably receive the remaining proceeds.
F-57
<PAGE> 269
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
If upon liquidation, dissolution or "winding up" the assets of CC-LB are
insufficient to permit payment to Class A and Class C shareholders for their
full preferential amount, all assets of the Company shall then be distributed
ratably to Class A and Class C shareholders. Furthermore, if the proceeds from
liquidation are inadequate to pay Class B shareholders their full preferential
amount, the proceeds are to be distributed on a pro rata basis to Class B
shareholders.
CC-LB Class C Common Stock may be converted into CC-LB Class A Common Stock
upon the transfer of CC-LB Class C Common Stock to a person not affiliated with
the seller. Furthermore, CC-LB may automatically convert outstanding Class C
shares into the same number of Class A shares.
11. RELATED PARTY TRANSACTIONS:
Charter provides management services to the Company under the terms of a
contract which provides for annual base fees equal to $9,277 and $9,485 for the
period from January 1, 1998, through December 23, 1998, and for the year ended
December 31, 1997, respectively, plus an additional fee equal to 30% of the
excess, if any, of operating cash flow (as defined in the management agreement)
over the projected operating cash flow. Payment of the additional fee is
deferred due to restrictions provided within the Company's credit agreements.
Deferred management fees bear interest at 8.0% per annum. The additional fees
for the periods from January 1, 1998, through December 23, 1998, and the years
ended December 31, 1997 and 1996, totaled $2,160, $1,990 and $1,255,
respectively. In addition, the Company receives financial advisory services from
an affiliate of Kelso, under terms of a contract which provides for fees equal
to $1,064 and $1,113 per annum as of January 1, 1998, through December 23, 1998,
and December 31, 1997, respectively. Management and financial advisory service
fees currently payable of $2,281 are included in payables to manager of cable
television systems -- related party at December 31, 1997.
The Company pays certain acquisition advisory fees to an affiliate of Kelso
and Charter, which typically equal approximately 1% of the total purchase price
paid for cable television systems acquired. Total acquisition fees paid to the
affiliate of Kelso for the period from January 1, 1998, through December 23,
1998, were $-0-. Total acquisition fees paid to the affiliate of Kelso in 1997
and 1996 were $-0- and $1,400, respectively. Total acquisition fees paid to
Charter for the period from January 1, 1998, through December 23, 1998, were
$-0-. Total acquisition fees paid to Charter in 1997 and 1996 were $-0- and
$1,400, respectively.
The Company and all entities managed by Charter collectively utilize a
combination of insurance coverage and self-insurance programs for medical,
dental and workers' compensation claims. Medical coverage provides for $2,435
aggregate stop loss protection and a loss limitation of $100 per person per
year. Workers' compensation coverage provides for $800 aggregate stop loss
protection and a loss limitation of $150 per person per year. Charges are
determined by independent actuaries at the present value of the actuarially
computed present and future liabilities for such benefits. The Company is
allocated its share of the charges monthly based upon its total number of
employees, historical claims and medical cost trend rates. Management considers
this allocation to be reasonable for the operations of the Company. For the
period from January 1, 1998, through December 23, 1998, the Company expensed
$1,950 relating to insurance allocations. During 1997 and 1996, the Company
expensed $1,689 and $2,065, respectively, relating to insurance allocations.
Beginning in 1996, the Company and other entities managed by Charter
employed the services of Charter's National Data Center (the "National Data
Center"). The National Data Center performs certain customer billing services
and provides computer network, hardware and
F-58
<PAGE> 270
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
software support to the Company and other affiliated entities. The cost of these
services is allocated based on the number of customers. Management considers
this allocation to be reasonable for the operations of the Company. For the
period from January 1, 1998, through December 23, 1998, the Company expensed
$843 relating to these services. During 1997 and 1996, the Company expensed $723
and $466 relating to these services, respectively.
CCE-I maintains a regional office. The regional office performs certain
operational services on behalf of CCE-I and other affiliated entities. The cost
of these services is allocated to CCE-I and affiliated entities based on their
number of customers. Management considers this allocation to be reasonable for
the operations of CCE-I. From the period January 1, 1998, through December 23,
1998, the Company expensed $1,926 relating to these services. During 1997 and
1996, CCE-I expensed $861 and $799, respectively, relating to these services.
12. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Lease and rental costs charged to expense for the period from
January 1, 1998, through December 23, 1998, was $2,222. Rent expense incurred
under these leases during 1997 and 1996 was $1,956 and $1,704, respectively.
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expensed incurred for pole attachments for the period
from January 1, 1998, through December 23, 1998, was $2,430. Rent expense
incurred for pole attachments during 1997 and 1996 was $2,601 and $2,330,
respectively.
LITIGATION
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
13. REGULATION IN THE CABLE TELEVISION INDUSTRY:
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the
F-59
<PAGE> 271
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
maximum permitted rates. As of December 23, 1998, the amount refunded by the
Company has been insignificant. The Company may be required to refund additional
amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation. The Company is subject to state regulation in
Connecticut.
14. INCOME TAXES:
Deferred tax assets and liabilities are recognized for the estimated future
tax consequence attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using the enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Deferred income tax expense or benefit is
the result of changes in the liability or asset recorded for deferred taxes. A
valuation allowance must be established for any portion of a deferred tax asset
for which it is more likely than not that a tax benefit will not be realized.
For the period from January 1, 1998, through December 23, 1998, and the
years ended December 31, 1997 and 1996, no current provision (benefit) for
income taxes was recorded. The effective income tax rate is less than the
federal rate of 35% primarily due to providing a valuation allowance on deferred
income tax assets.
F-60
<PAGE> 272
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred taxes are comprised of the following at December 31, 1997:
<TABLE>
<S> <C>
Deferred income tax assets:
Accounts receivable....................................... $ 252
Other assets.............................................. 7,607
Accrued expenses.......................................... 4,740
Deferred revenue.......................................... 624
Deferred management fees.................................. 1,654
Tax loss carryforwards.................................... 80,681
Tax credit carryforward................................... 1,360
Valuation allowance....................................... (40,795)
---------
Total deferred income tax assets.................. 56,123
---------
Deferred income tax liabilities:
Property, plant and equipment............................. (38,555)
Franchise costs........................................... (117,524)
Other..................................................... (11,407)
---------
Total deferred income tax liabilities............. (167,486)
---------
Net deferred income tax liability................. $(111,363)
=========
</TABLE>
At December 31, 1997, the Company had net operating loss (NOL)
carryforwards for regular income tax purposes aggregating $204,400, which expire
in various years from 1999 through 2012. Utilization of the NOLs carryforwards
is subject to certain limitations.
15. EMPLOYEE BENEFIT PLANS:
The Company's employees may participate in the Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 15% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Company contributes an amount equal to 50% of the first 5% of contributions by
each employee. For the period from January 1, 1998, through December 23, 1998,
the Company contributed $585 to the 401(k) plan. During 1997 and 1996, the
Company contributed approximately $499 and $435 to the 401(k) Plan,
respectively.
Certain employees of the Company are participants in the 1996 Charter
Communications/ Kelso Group Appreciation Rights Plan (the "Plan"). The Plan
covers certain key employees and consultants within the group of companies and
partnerships controlled by affiliates of Kelso and managed by Charter. The Plan
permits the granting of up to 1,000,000 units, of which 705,000 were outstanding
at December 31, 1997. Unless otherwise provided in a particular instance, units
vest at a rate of 20% per annum. The Plan entitles participants to receive
payment of the appreciated unit value for vested units, upon the occurrence of
certain events specified in the Plan (i.e. change in control, employee
termination) The units do not represent a right to an equity interest to any
entities within the CCA Group. Compensation expense is based on the appreciated
unit value and is amortized over the vesting period.
As a result of the acquisition of Charter and the Company, the Plan was
terminated, all outstanding units became 100% vested and all amounts were paid
by Charter in 1999. For the period from January 1, 1998, through December 23,
1998, the Company recorded $5,684 of expense, included in management fees, and a
contribution from Charter related to the Appreciation Rights Plan.
F-61
<PAGE> 273
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
16. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings
(loss).
17. SUBSEQUENT EVENT:
Subsequent to December 23, 1998, CCA Holdings, CCT Holdings and CC-LB
converted to limited liability companies and are now known as CCA Holdings LLC,
CCT Holdings LLC and Charter Communications Long Beach, LLC, respectively.
F-62
<PAGE> 274
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CharterComm Holdings, L.P.:
We have audited the accompanying consolidated balance sheet of CharterComm
Holdings, L.P. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, partners' capital and cash flows for the
period from January 1, 1998, through December 23, 1998, and for the years ended
December 31, 1997 and 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CharterComm Holdings, L.P.
and subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for the period from January 1, 1998, through December 23,
1998, and for the years ended December 31, 1997 and 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
F-63
<PAGE> 275
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,742
Accounts receivable, net of allowance for doubtful
accounts of $330....................................... 3,158
Prepaid expenses and other................................ 342
--------
Total current assets.............................. 6,242
--------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 235,808
Franchises, net of accumulated amortization of $119,968... 480,201
--------
716,009
--------
OTHER ASSETS................................................ 16,176
--------
$738,427
========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 5,375
Accounts payable and accrued expenses..................... 30,507
Payables to manager of cable television systems -- related
party.................................................. 1,120
--------
Total current liabilities......................... 37,002
--------
DEFERRED REVENUE............................................ 1,719
--------
LONG-TERM DEBT, less current maturities..................... 666,662
--------
DEFERRED MANAGEMENT FEES.................................... 7,805
--------
DEFERRED INCOME TAXES....................................... 5,111
--------
REDEEMABLE PREFERRED LIMITED UNITS -- 577.81 units,
issued and outstanding.................................... 20,128
--------
PARTNERS' CAPITAL:
General Partner........................................... --
Common Limited Partners -- 220.24 units issued and
outstanding............................................ --
--------
Total partners' capital........................... --
--------
$738,427
========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-64
<PAGE> 276
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998, YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 23, --------------------
1998 1997 1996
------------ ---- ----
<S> <C> <C> <C>
REVENUES.............................................. $196,801 $175,591 $120,280
-------- -------- --------
OPERATING EXPENSES:
Operating costs..................................... 83,745 75,728 50,970
General and administrative.......................... 14,586 12,607 9,327
Depreciation and amortization....................... 86,741 76,535 53,133
Management fees -- related party.................... 14,780 8,779 6,014
-------- -------- --------
199,852 173,649 119,444
-------- -------- --------
Income (loss) from operations.................... (3,051) 1,942 836
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income..................................... 211 182 233
Interest expense.................................... (66,121) (61,498) (41,021)
Other, net.......................................... (1,895) 17 (468)
-------- -------- --------
(67,805) (61,299) (41,256)
-------- -------- --------
Loss before extraordinary item................... (70,856) (59,357) (40,420)
EXTRAORDINARY ITEM -- Loss on early retirement of
debt................................................ (6,264) -- --
-------- -------- --------
Net loss......................................... (77,120) (59,357) (40,420)
REDEMPTION PREFERENCE ALLOCATION:
Special Limited Partner units....................... -- -- (829)
Redeemable Preferred Limited units.................. -- -- (4,081)
NET LOSS ALLOCATED TO REDEEMABLE PREFERRED LIMITED
UNITS............................................... 20,128 2,553 4,063
-------- -------- --------
Net loss applicable to partners' capital
accounts....................................... $(56,992) $(56,804) $(41,267)
======== ======== ========
NET LOSS ALLOCATION TO PARTNERS' CAPITAL ACCOUNTS:
General Partner..................................... $(56,992) $(21,708) $(38,391)
Common Limited Partners............................. -- (35,096) (2,876)
-------- -------- --------
$(56,992) $(56,804) $(41,267)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-65
<PAGE> 277
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- -----
<S> <C> <C> <C>
BALANCE, December 31, 1995.............................. $ 29,396 $ 2,202 $ 31,598
Capital contributions................................. 30,703 2,300 33,003
Allocation of net loss................................ (38,391) (2,876) (41,267)
-------- -------- --------
BALANCE, December 31, 1996.............................. 21,708 1,626 23,334
Capital contributions................................. -- 33,470 33,470
Allocation of net loss................................ (21,708) (35,096) (56,804)
-------- -------- --------
BALANCE, December 31, 1997.............................. -- -- --
Capital contributions................................. 4,920 -- 4,920
Allocation of net loss................................ (56,992) -- (56,992)
-------- -------- --------
BALANCE, December 23, 1998.............................. $(52,072) $ -- $(52,072)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-66
<PAGE> 278
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998,
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 23, -----------------------
1998 1997 1996
------------ ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (77,120) $ (59,357) $ (40,420)
Adjustments to reconcile net loss to net cash provided
by operating activities --
Extraordinary item -- Loss on early retirement of
debt............................................. 6,264 -- --
Depreciation and amortization...................... 86,741 76,535 53,133
Amortization of debt issuance costs, debt discount
and interest rate cap agreements................. 14,563 14,212 9,564
Loss on disposal of property, plant and
equipment........................................ 1,714 203 367
Changes in assets and liabilities, net of effects
from acquisition --
Accounts receivable, net......................... 2,000 369 (303)
Prepaid expenses and other....................... (203) 943 245
Accounts payable and accrued expenses............ (1,970) 3,988 9,911
Payables to manager of cable television systems,
including deferred management fees............ 9,456 3,207 3,479
Deferred revenue................................. 770 (82) 452
Other operating activities....................... 5,378 -- --
--------- --------- ---------
Net cash provided by operating activities........ 47,593 40,018 36,428
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............ (85,044) (72,178) (48,324)
Payments for acquisitions, net of cash acquired....... (5,900) (159,563) (145,366)
Other investing activities............................ 5,280 1,577 (2,089)
--------- --------- ---------
Net cash used in investing activities.............. (85,664) (230,164) (195,779)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.......................... 547,400 231,250 260,576
Repayments of long-term debt.......................... (505,300) (67,930) (34,401)
Partners' capital contributions....................... -- 29,800 --
Payment of debt issuance costs........................ (3,651) (3,593) (11,732)
Payment of Special Limited Partnership units.......... -- -- (43,243)
Repayments of note payable -- related party........... -- -- (15,000)
Payments for interest rate cap agreements............. -- -- (35)
--------- --------- ---------
Net cash provided by financing activities.......... 38,449 189,527 156,165
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 378 (619) (3,186)
CASH AND CASH EQUIVALENTS, beginning of period.......... 2,742 3,361 6,547
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period................ $ 3,120 $ 2,742 $ 3,361
========= ========= =========
CASH PAID FOR INTEREST.................................. $ 61,559 $ 42,538 $ 28,860
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-67
<PAGE> 279
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
CharterComm Holdings, L.P. (CharterComm Holdings) was formed in March 1996
with the contributions of Charter Communications Southeast Holdings, L.P.
(Southeast Holdings), Charter Communications, L.P. (CC-I) and Charter
Communications II, L.P. (CC-II). This contribution was accounted for as a
reorganization under common control and, accordingly, the consolidated financial
statements and notes have been restated to include the results and financial
position of Southeast Holdings, CC-I and CC-II.
Through December 23, 1998, CharterComm Holdings was owned 75.3% by
affiliates of Charterhouse Group International, Inc., a privately owned
investment firm (collectively referred to herein as "Charterhouse"), indirectly
owned 5.7% by Charter Communications, Inc. (Charter), manager of the
Partnership's (as defined below) cable television systems, and owned 19.0%
primarily by other institutional investors.
Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through
a series of transactions. In conjunction with Mr. Allen's acquisition, Charter
acquired 100% of the outstanding partnership interests in CharterComm Holdings
on December 23, 1998.
The accompanying consolidated financial statements include the accounts of
CharterComm Holdings and its subsidiaries collectively referred to as the
"Partnership" herein. All significant intercompany balances and transactions
have been eliminated in consolidation.
In 1998, the Partnership through its subsidiaries provided cable television
service to customers in Alabama, Georgia, Kentucky, Louisiana, North Carolina,
South Carolina and Tennessee.
CASH EQUIVALENTS
The Partnership considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997,
cash equivalents consist primarily of repurchase agreements. These investments
are carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installation. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, and equipment replacement and betterments are capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems.................................. 3-15 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3-5 years
</TABLE>
F-68
<PAGE> 280
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1997, the Partnership shortened the estimated useful lives of certain
property, plant and equipment for depreciation purposes. As a result, an
additional $4,775 of depreciation was recorded during 1997.
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable television systems represent management's
estimate of fair value and are generally amortized using the straight-line
method over a period of 15 years. In addition, approximately $100,000 of
franchise rights are being amortized over a period of 3 to 11 years.
OTHER ASSETS
Debt issuance costs are being amortized to interest expense over the term
of the related debt. The interest rate cap costs are being amortized over the
terms of the agreement, which approximates three years.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of December 31, 1997, no installation revenue has
been deferred, as direct selling costs exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Partnership ranging up to a federally
mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are
collected from the Partnership's customers and are periodically remitted to
local franchises. Franchise fees collected and paid are reported as revenue.
INTEREST RATE HEDGE AGREEMENTS
The Partnership manages fluctuations in interest rates by using interest
rate hedge agreements, as required by certain debt agreements. Interest rate
swaps, caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
F-69
<PAGE> 281
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Partnership's interest rate swap agreements require the Partnership to
pay a fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Partnership to reduce the
impact of rising interest rates on floating rate debt.
The Partnership's participation in interest rate hedging transactions
involves instruments that have a close correlation with its debt, thereby
managing its risk. Interest rate hedge agreements have been designed for hedging
purposes and are not held or issued for speculative purposes.
OTHER INCOME (EXPENSE)
Other, net includes gain and loss on disposition of property, plant and
equipment, and other miscellaneous items, all of which are not directly related
to the Partnership's primary line of business. In 1996, the Partnership recorded
$367 of nonoperating losses for its portion of insurance deductibles pertaining
to damage caused by hurricanes to certain cable television systems.
INCOME TAXES
Income taxes are the responsibility of the partners and are not provided
for in the accompanying financial statements except for Peachtree Cable TV, Inc.
(Peachtree), an indirect wholly owned subsidiary, which is a C corporation and
for which taxes are presented in accordance with SFAS No. 109.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS:
In 1998, the Partnership acquired cable television systems in one
transaction for a purchase price net of cash acquired, of $5,900. The excess
cost of properties acquired over the amounts assigned to net tangible assets at
the date of acquisition was $5,000 and is included in franchises.
In 1997, the Partnership acquired cable television systems in three
separate transactions for an aggregate purchase price, net of cash acquired, of
$159,600. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the date of acquisition was $126,400 and is
included in franchises.
In 1996, the Partnership acquired cable television systems in three
separate transactions for an aggregate purchase price, net of cash acquired, of
$145,400. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the date of acquisition was $118,200 and is
included in franchises.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of acquisition.
F-70
<PAGE> 282
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma operating results for the 1997 acquisitions as though
the acquisitions had been made on January 1, 1997, with pro forma adjustments to
give effect to amortization of franchises, interest expense and certain other
adjustments are as follows.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C>
Revenues.................................................... $182,770
Income from operations...................................... 2,608
Net loss.................................................... (61,389)
</TABLE>
The unaudited pro forma information does not purport to be indicative of
the results of operations had these transactions been completed as of the
assumed date or which may be obtained in the future.
3. DISTRIBUTIONS AND ALLOCATIONS:
For financial reporting purposes, redemption preference allocations,
profits and losses are allocated to partners in accordance with the liquidation
provision of the applicable partnership agreement.
As stated in the Partnership Agreement, the Partnership may make
distributions to the partners out of all available funds at such times and in
such amounts as the General Partner may determine in its sole discretion.
4. REDEEMABLE PREFERRED LIMITED UNITS:
As of December 31, 1995, certain Redeemable Preferred Limited Partner units
of CC-I and CC-II were outstanding. During 1996, the Partnership issued certain
Redeemable Preferred Limited Partner units of CharterComm Holdings.
The Preferred Limited Partners' preference return has been reflected as an
addition to the Redeemable Preferred Limited Partner units, and the decrease has
been allocated to the General Partner and Common Limited Partner consistent with
the liquidation and distribution provisions in the partnership agreements.
At December 23, 1998, the balance related to the CharterComm Holdings
Preferred Limited Partner units was as follows:
<TABLE>
<S> <C>
Contribution, March 1996.................................... $ 20,052
1996 redemption preference allocation..................... 2,629
Allocation of net loss.................................... --
--------
Balance, December 31, 1996.................................. 22,681
1997 redemption preference allocation..................... --
Allocation of net loss.................................... (2,553)
--------
Balance, December 31, 1997.................................. 20,128
1998 redemption preference allocation..................... --
Allocation of net loss.................................... (20,128)
--------
Balance, December 23, 1998.................................. $ --
========
</TABLE>
F-71
<PAGE> 283
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1998 and 1997 redemption preference allocations of $4,617 and $4,020,
respectively, have not been reflected in the Preferred Limited Partners' capital
accounts since the General Partner and Common Limited Partners' capital accounts
have been reduced to $-0-.
5. SPECIAL LIMITED PARTNER UNITS (CC-I):
Prior to March 28, 1996, certain Special Limited Partner units of CC-I were
outstanding. CC-I's profits were allocated to the Special Limited Partners until
allocated profits equaled the unrecovered preference amount (preference amounts
range from 6% to 17.5% of the unrecovered initial cost of the partnership units
and unrecovered preference amounts per annum). When there was no profit to
allocate, the preference return was reflected as a decrease in Partners'
Capital.
In accordance with a purchase agreement and through the use of a capital
contribution from Charter Communications Southeast, L.P. (Southeast), a wholly
owned subsidiary of Southeast Holdings, resulting from the proceeds of the Notes
(see Note 9), CC-I paid the Special Limited Partners $43,243 as full
consideration for their partnership interests on March 28, 1996.
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1997:
<TABLE>
<S> <C>
Cable distribution systems.................................. $274,837
Land, buildings and leasehold improvements.................. 5,439
Vehicles and equipment...................................... 14,669
--------
294,945
Less -- Accumulated depreciation............................ (59,137)
--------
$235,808
========
</TABLE>
Depreciation expense for the period from January 1, 1998, through December
23, 1998, and for the years ended December 31, 1997 and 1996, was $44,307,
$33,634 and $16,997, respectively.
7. OTHER ASSETS:
Other assets consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Debt issuance costs......................................... $18,385
Other assets................................................ 3,549
-------
21,934
Less -- Accumulated amortization............................ (5,758)
-------
$16,176
=======
</TABLE>
As a result of the payment and termination of the CC-I Credit Agreement and
CC-II Credit Agreement (see Note 9), debt issuance costs of $6,264 were written
off as an extraordinary loss on early retirement of debt for the period from
January 1, 1998, through December 23, 1998.
F-72
<PAGE> 284
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1997:
<TABLE>
<S> <C>
Accrued interest............................................ $ 9,804
Franchise fees.............................................. 3,524
Programming costs........................................... 3,391
Accounts payable............................................ 2,479
Capital expenditures........................................ 2,099
Salaries and related benefits............................... 2,079
Other....................................................... 7,131
-------
$30,507
=======
</TABLE>
9. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Senior Secured Discount Debentures.......................... $146,820
11 1/4% Senior Notes........................................ 125,000
Credit Agreements:
CC-I...................................................... 112,200
CC-II..................................................... 339,500
--------
723,520
Less:
Current maturities........................................ (5,375)
Unamortized discount...................................... (51,483)
--------
$666,662
========
</TABLE>
SENIOR SECURED DISCOUNT DEBENTURES
On March 28, 1996, Southeast Holdings and CharterComm Holdings Capital
Corporation (Holdings Capital), a wholly owned subsidiary of Southeast Holdings
(collectively the "Debentures Issuers"), issued $146,820 of Senior Secured
Discount Debentures (the "Debentures") for proceeds of $75,000. Proceeds from
the Debentures were used to pay fees and expenses related to the issuance of the
Debentures and the balance of $72,400 was a capital contribution to Southeast.
The Debentures are secured by all of Southeast Holdings' ownership interest in
Southeast and rank pari passu in right and priority of payment to all other
existing and future indebtedness of the Debentures Issuers. The Debentures are
effectively subordinated to the claims of creditors of Southeast Holdings'
subsidiaries, including the Combined Credit Agreement (as defined herein). The
Debentures are redeemable at the Debentures Issuers' option at amounts
decreasing from 107% to 100% of principal, plus accrued and unpaid interest to
the redemption date, beginning on March 15, 2001. The Debentures Issuers are
required to make an offer to purchase all of the Debentures, at a purchase price
equal to 101% of the principal amount, together with accrued and unpaid
interest, upon a Change in Control, as defined in the Debentures Indenture. No
interest is payable on the Debentures prior to March 15, 2001. Thereafter,
interest on the Debentures is payable semiannually in arrears beginning
September 15, 2001, until maturity on March 15, 2007. The discount on the
Debentures is being accreted using the effective interest method at an interest
rate of 14% from the date of issuance to March 15, 2001.
F-73
<PAGE> 285
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11 1/4% SENIOR NOTES
Southeast and CharterComm Capital Corporation (Southeast Capital), a wholly
owned subsidiary of Southeast (collectively the "Notes Issuers"), issued
$125,000 aggregate principal amount of 11 1/4% Senior Notes (the "Notes"). The
Notes are senior unsecured obligations of the Notes Issuers and rank pari passu
in right and priority of payment to all other existing and future indebtedness
of the Notes Issuers. The Notes are effectively subordinated to the claims of
creditors of Southeast's subsidiaries, including the lenders under the Combined
Credit Agreement. The Notes are redeemable at the Notes Issuers' option at
amounts decreasing from 105.625% to 100% of principal, plus accrued and unpaid
interest to the date of redemption, beginning on March 15, 2001. The Notes
Issuers are required to make an offer to purchase all of the Notes, at a
purchase price equal to 101% of the principal amount, together with accrued and
unpaid interest, upon a Change in Control, as defined in the Notes Indenture.
Interest is payable semiannually on March 15 and September 15 until maturity on
March 15, 2006.
Southeast and Southeast Holdings are holding companies with no significant
assets other than their direct and indirect investments in CC-I and CC-II.
Southeast Capital and Holdings Capital were formed solely for the purpose of
serving as co-issuers and have no operations. Accordingly, the Notes Issuers and
Debentures Issuers must rely upon distributions from CC-I and CC-II to generate
funds necessary to meet their obligations, including the payment of principal
and interest on the Notes and Debentures.
COMBINED CREDIT AGREEMENT
In June 1998, CC-I and CC-II (the "Borrowers") replaced their existing
credit agreements and entered into a combined credit agreement (the "Combined
Credit Agreement"), which provides for two term loan facilities, one with the
principal amount of $200,000 that matures on June 30, 2007, and the other with
the principal amount of $150,000 that matures on December 31, 2007. The Combined
Credit Agreement also provides for a $290,000 revolving credit facility, with a
maturity date of June 30, 2007. Amounts under the Combined Credit Agreement bear
interest at the LIBOR Rate or Base Rate, as defined, plus a margin of up to
2.0%. The variable interest rates ranged from 6.69% to 7.31% at December 23,
1998.
Commencing March 31, 2002, and at the end of each calendar quarter
thereafter, the available borrowings for the revolving credit facility and the
$200,000 term loan shall be reduced on an annual basis by 11.0% in 2002 and
14.6% in 2003. Commencing March 31, 2002, and at the end of each calendar
quarter thereafter, the available borrowings for the $150,000 term loan shall be
reduced on an annual basis by 1.0% in 2002 and 1.0% in 2003. A quarterly
commitment fee of between 0.25% and 0.375% per annum is payable on the
unborrowed balance of the revolving credit facility.
The Debentures, Notes and Combined Credit Agreement require the Partnership
to comply with various financial and nonfinancial covenants including the
maintenance of a ratio of debt to annualized operating cash flow, as defined,
not to exceed 5.25 to 1 at December 23, 1998. These debt instruments also
contain substantial limitations on, or prohibitions of, distributions,
additional indebtedness, liens, asset sales and certain other items.
CC-I CREDIT AGREEMENT
CC-I maintained a credit agreement (the "CC-I Credit Agreement") with a
consortium of banks for borrowings up to $127,200, consisting of a revolving
line of credit of $63,600 and a
F-74
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CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
term loan of $63,600. Interest accrued, at CC-I's option, at rates based upon
the Base Rate, as defined in the CC-I Credit Agreement, LIBOR, or prevailing bid
rates of certificates of deposit plus the applicable margin based upon CC-I's
leverage ratio at the time of the borrowings. The variable interest rates ranged
from 7.75% to 8.00% and 7.44% to 7.50% at December 31, 1997 and 1996,
respectively.
In June 1998, the CC-I Credit Agreement was repaid and terminated in
conjunction with the establishment of the Combined Credit Agreement.
CC-II CREDIT AGREEMENT
CC-II maintained a credit agreement (the "CC-II Credit Agreement") with a
consortium of banks for borrowings up to $390,000, consisting of a revolving
credit facility of $215,000, and two term loans totaling $175,000. Interest
accrued, at CC-II's option, at rates based upon the Base Rate, as defined in the
CC-II Credit Agreement, LIBOR, or prevailing bid rates of certificates of
deposit plus the applicable margin based upon CC-II's leverage ratio at the time
of the borrowings. The variable interest rates ranged from 7.63% to 8.25% and
7.25% to 8.125% at December 31, 1997 and 1996, respectively.
In June 1998, the CC-II Credit Agreement was repaid and terminated in
conjunction with the establishment of the Combined Credit Agreement.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1997, is as follows:
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
-------- -------- -----
<S> <C> <C> <C>
DEBT
Senior Secured Discount Debentures.............. $ 95,337 $ -- $115,254
11 1/4% Senior Notes............................ 125,000 -- 136,875
CC-I Credit Agreement........................... 112,200 -- 112,200
CC-II Credit Agreement.......................... 339,500 -- 339,500
INTEREST RATE HEDGE AGREEMENTS
CC-I:
Swaps......................................... -- 100,000 (797)
CC-II:
Swaps......................................... -- 170,000 (1,030)
Caps.......................................... -- 70,000 --
Collars....................................... -- 55,000 (166)
</TABLE>
As the CC-I and CC-II Credit Agreements bear interest at current market
rates, their carrying amounts approximate fair market values at December 31,
1997. The fair value of the Notes and the Debentures is based on current
redemption value.
The weighted average interest pay rate for CC-I interest rate swap
agreements was 8.07% at December 31, 1997.
The weighted average interest pay rate for CC-II interest rate swap
agreements was 8.03% at December 31, 1997. The weighted average interest rate
for CC-II interest cap agreements was
F-75
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CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8.48% at December 31, 1997. The weighted average interest rates for CC-II
interest rate collar agreements were 9.01% and 7.61% for the cap and floor
components, respectively, at December 31, 1997.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the
Partnership's exposure through its use of interest rate hedge agreements. The
amounts exchanged are determined by reference to the notional amount and the
other terms of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Partnership would receive or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Partnership's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Partnership's credit facilities thereby reducing the exposure to
credit loss. The Partnership has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the results of
operations or the financial position of the Partnership.
11. INCOME TAXES:
The book value of the Partnership's net assets (excluding Peachtree)
exceeds its tax reporting basis by $2,919 as of December 31, 1997.
As of December 31, 1997, temporary differences and carryforwards that gave
rise to deferred income tax assets and liabilities for Peachtree are as follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Accounts receivable....................................... $ 4
Accrued expenses.......................................... 29
Deferred management fees.................................. 111
Deferred revenue.......................................... 24
Tax loss carryforwards.................................... 294
Tax credit carryforwards.................................. 361
-------
Total deferred income tax assets.................. 823
-------
Deferred income tax liabilities:
Property, plant and equipment............................. (1,372)
Franchises and other assets............................... (4,562)
-------
Total deferred income tax liabilities............. (5,934)
-------
Net deferred income tax liability................. $(5,111)
=======
</TABLE>
12. RELATED PARTY TRANSACTIONS:
Charter provides management services to the Partnership under the terms of
contracts which provide for fees equal to 5% of the Partnership's gross service
revenues. The debt agreements prohibit payment of a portion of such management
fees (40% for both CC-I and
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CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CC-II) until repayment in full of the outstanding indebtedness. The remaining
60% of management fees, are paid quarterly through December 31, 1998.
Thereafter, the entire fee may be deferred if a multiple of EBITDA, as defined,
does not exceed outstanding indebtedness of CC-I and CC-II. In addition,
payments due on the Notes and Debentures shall be paid before any deferred
management fees are paid. Expenses recognized under the contracts for the period
from January 1, 1998, through December 23, 1998, were $9,860. Expenses
recognized under the contracts during 1997 and 1996 were $8,779 and $6,014,
respectively. Management fees currently payable of $1,432 are included in
payables to manager of cable television systems -- related party at December 31,
1997.
The Partnership and all entities managed by Charter collectively utilize a
combination of insurance coverage and self-insurance programs for medical,
dental and workers' compensation claims. Medical coverage provides for $2,435
aggregate stop loss protection and a loss limitation of $100 per person per
year. Workers' compensation coverage provides for $800 aggregate stop loss
protection and a loss limitation of $150 per person per year. Charges are
determined by independent actuaries at the present value of the actuarially
computed present and future liabilities for such benefits. The Partnership is
allocated its share of the charges monthly based upon its total number of
employees, historical claims and medical cost trend rates. Management considers
this allocation to be reasonable for the operations of the Partnership. For the
period from January 1, 1998, through December 23, 1998, the Partnership expensed
$1,831 relating to insurance allocations. During 1997 and 1996, the Partnership
expensed $1,524 and $1,136, respectively, relating to insurance allocations.
The Partnership employs the services of Charter's National Data Center (the
"National Data Center"). The National Data Center performs certain customer
billing services and provides computer network, hardware and software support
for the Partnership and other entities managed by Charter. The cost of these
services is allocated based on the number of basic customers. Management
considers this allocation to be reasonable for the operations of the
Partnership. For the period from January 1, 1998, through December 23, 1998, the
Partnership expensed $685 relating to these services. During 1997 and 1996, the
Partnership expensed $606 and $345, respectively, relating to these services.
CC-I, CC-II and other entities managed by Charter maintain regional
offices. The regional offices perform certain operational services. The cost of
these services is allocated based on number of basic customers. Management
considers this allocation to be reasonable for the operations of the
Partnership. For the period from January 1, 1998, through December 23, 1998, the
Partnership expensed $3,009 relating to these services. During 1997 and 1996,
the Partnership expensed $1,992 and $1,294, respectively, relating to these
services.
The Partnership pays certain acquisition advisory fees to Charter and
Charterhouse for cable television systems acquired. Total acquisition fees paid
to Charter for the period from January 1, 1998, through December 23, 1998, were
$-0-. Total acquisition fees paid to Charter in 1997 and 1996 were $982 and
$1,738, respectively. Total acquisition fees paid to Charterhouse for the period
from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition
fees paid to Charterhouse in 1997 and 1996 were $982 and $1,738, respectively.
During 1997, the ownership of CharterComm Holdings changed as a result of
CharterComm Holdings receiving a $25,000 cash contribution from an institutional
investor, a $3,000 cash contribution from Charterhouse and a $2,000 cash
contribution from Charter, as well as the transfer of assets and liabilities of
a cable television system through a series of transactions initiated by Charter
and Charterhouse. Costs of $200 were incurred in connection with the cash
F-77
<PAGE> 289
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contributions. These contributions were contributed to Southeast Holdings which,
in turn, contributed them to Southeast.
13. COMMITMENTS AND CONTINGENCIES:
LEASES
The Partnership leases certain facilities and equipment under noncancelable
operating leases. Lease and rental costs charged to expense for the period from
January 1, 1998, through December 23, 1998, was $642. Rent expense incurred
under leases during 1997 and 1996 was $615 and $522, respectively.
The Partnership also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Partnership anticipates that
such rentals will recur. Rent expense incurred for pole rental attachments for
the period from January 1, 1998, through December 23, 1998, was $3,261. Rent
expense incurred for pole attachments during 1997 and 1996 was $2,930 and
$2,092, respectively.
LITIGATION
The Partnership is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Partnership's consolidated financial position or results of
operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 23,
1998, the amount returned by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by
F-78
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CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company in the event certain of its rates are successfully challenged by
franchising authorities or found to be unreasonable by the FCC. The Company does
not believe that the amount of any such refunds would have a material adverse
effect on the financial position or results of operations of the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
14. EMPLOYEE BENEFIT PLANS:
The Partnership's employees may participate in Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 15% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Partnership contributes an amount equal to 50% of the first 5% of contributions
by each employee. For the period from January 1, 1998, through December 23,
1998, the Partnership contributed $305. During 1997 and 1996, the Partnership
contributed $262 and $149, respectively.
Certain Partnership employees participate in the 1996 Charter
Communications/ Charterhouse Group Appreciation Rights Plan (the "Appreciation
Rights Plan"). The Appreciation Rights Plan covers certain key employees and
consultants within the group of companies and partnerships controlled by
Charterhouse and managed by Charter. The Plan permits the granting of up to
1,000,000 units, of which 925,000 were outstanding at December 31, 1997. Unless
otherwise provided in a particular instance, units vest at a rate of 20% per
annum. The Plan entitles participants to receive payment of the appreciated unit
value for vested units, upon the occurrence of certain events specified in the
Plan (i.e. change in control, employee termination). The units do not represent
a right to an equity interest in CharterComm Holdings. Compensation expense is
based on the appreciated unit value and is amortized over the vesting period.
As a result of the acquisition of Charter and the Partnership, the Plan was
terminated, all outstanding units became 100% vested and all amounts were paid
by Charter in 1999. For the period from January 1, 1998, through December 23,
1998, the Partnership recorded $4,920 of expense, included in management fees,
and a contribution from Charter related to the Appreciation Rights Plan.
F-79
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CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Partnership
has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings
(loss).
16. SUBSEQUENT EVENT:
Subsequent to December 31, 1998, CharterComm Holdings, L.P. and all of its
subsidiaries converted to limited liability companies and are now known as
CharterComm Holdings LLC and subsidiaries.
F-80
<PAGE> 292
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Marcus Cable Holdings, LLC:
We have audited the accompanying consolidated statements of operations,
members' deficit and cash flows of Marcus Cable Holdings, LLC and subsidiaries
for the three months ended March 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations of Marcus
Cable Holdings, LLC and subsidiaries and their cash flows for the three months
ended March 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 6, 2000
F-81
<PAGE> 293
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
MARCH 31,
1999
------------
<S> <C>
REVENUES.................................................... $ 125,180
---------
OPERATING EXPENSES:
Operating costs........................................... 45,309
General and administrative................................ 23,675
Depreciation and amortization............................. 51,688
Management fees -- related party.......................... 4,381
---------
125,053
---------
Income from operations................................. 127
---------
OTHER INCOME (EXPENSE):
Interest Income........................................... 104
Interest expense.......................................... (27,067)
Other, net................................................ (158)
---------
(27,121)
---------
Loss before extraordinary item.............................. (26,994)
EXTRAORDINARY ITEM -- Loss from early extinguishment of
debt........................................................ (107,978)
---------
Net loss.................................................... $(134,972)
=========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-82
<PAGE> 294
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCUS CABLE
PROPERTIES, VULCAN MEMBERS'
L.L.C CABLE, INC DEFICIT
------------ ---------- ---------
<S> <C> <C> <C>
BALANCE, December 31, 1998........................... $(21,355) $ 125,639 $ 104,284
Net loss -- January 1, 1999 to March 31, 1999........ (5,129) (129,843) (134,972)
-------- --------- ---------
BALANCE, March 31, 1999.............................. $(26,484) $ (4,204) $ (30,688)
======== ========= =========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-83
<PAGE> 295
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1999
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (134,972)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 51,688
Amortization of non-cash interest expense.............. 868
Accretion of notes payable............................. 14,522
Extraordinary item -- loss from early extinguishment of
long-term debt........................................ 107,978
Changes in assets and liabilities, net of effects from
dispositions of cable television systems-
Accounts receivable.................................. 2,650
Prepaid expenses and other........................... 2,882
Accounts payable and accrued expenses................ (13,170)
Other operating activities........................... 9,022
-----------
Net cash provided by operating activities......... 41,468
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (57,057)
-----------
Net cash used in investing activities............. (57,057)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 24,246
Repayments of long-term debt.............................. (1,680,142)
Loan from Charter Holdings................................ 1,680,142
-----------
Net cash provided by financing activities......... 24,246
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 8,657
CASH AND CASH EQUIVALENTS, beginning of period.............. 813
-----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 9,470
===========
CASH PAID FOR INTEREST...................................... $ 12,807
===========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-84
<PAGE> 296
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Marcus Cable Holdings, LLC (Marcus Holdings), a Delaware limited liability
company, was formed in February 1999 as parent of Marcus Cable Company, L.L.C.
(MCCLLC), formerly Marcus Cable Company, L.P. (MCCLP). MCCLP was formed as a
Delaware limited partnership and was converted to a Delaware limited liability
company on June 9, 1998. Marcus Holdings and its subsidiaries (collectively, the
"Company") derive their primary source of revenues by providing various levels
of cable television programming and services to residential and business
customers. The Company's operations are conducted through Charter Cable
Operating Company, LLC, formerly Marcus Cable Operating Company, L.L.C., a
wholly owned subsidiary of the Company. The Company operates cable television
systems primarily in Texas, Wisconsin, Indiana, California and Alabama.
The accompanying consolidated financial statements include the accounts of
MCCLLC and its subsidiary limited liability companies and corporations,
representing the financial statements of the Company for the period presented.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
On April 23, 1998, Vulcan Cable, Inc. and Paul G. Allen (collectively
referred to as "Vulcan") acquired all of the outstanding limited partnership
interest and substantially all of the general partner interest in MCCLP for cash
payments of $1,392,000 (the "Vulcan Acquisition"). Under the terms of the
purchase agreement, the owner of the remaining 0.6% general partner interest in
the Company (the "Minority Interest"), which represents 100% of the voting
control of the Company, could cause Vulcan to purchase the 0.6% general partner
interest under certain conditions, or Vulcan could cause the Minority Interest
to sell its interest to Vulcan under certain conditions at a fair value of not
less than $8,000. On March 31, 1999, Vulcan acquired voting control of the
Company by its acquisition of the Minority Interest for cash consideration.
Effective December 23, 1998, through a series of transactions, Mr. Allen
acquired approximately 94% of Charter Communications, Inc. (Charter) (renamed
Charter Investment, Inc.). Beginning in October 1998, Charter began to manage
the operations of the Company.
In March 1999, Charter transferred all of its cable television operating
subsidiaries to a subsidiary, Charter Communications Holdings, LLC (Charter
Holdings) in connection with the issuance of Senior Notes and Senior Discount
Notes totaling $3.6 billion. These operating subsidiaries were then transferred
to Charter Communications Operating, LLC (Charter Operating). On April 7, 1999,
the cable television operating subsidiaries of the Company were transferred to
Charter Operating subsequent to the purchase by Mr. Allen of the Minority
Interest.
As a result of the Vulcan Acquisition, the Company recognized severance and
stay-on bonus compensation of $16,034 for the year ended December 31, 1998. As
of December 31, 1998, 35 employees and officers of the Company had been
terminated and $13,634 had been paid under severance and bonus arrangements. By
March 31, 1999, 50 additional employees were terminated and the remaining
balance of $2,400 was paid in April 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
F-85
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MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installation. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for maintenance and repairs are charged to
expense as incurred and equipment replacements and betterments are capitalized.
Depreciation is provided by the straight-line method over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems.................................. 3-10 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3- 5 years
</TABLE>
Depreciation expense for the three months ended March 31, 1999 was $33,696.
FRANCHISES
Costs incurred in obtaining and renewing cable television franchises are
deferred and amortized over the estimated lives of the franchises. Costs
relating to unsuccessful franchise applications are charged to expense when it
is determined that the efforts to obtain the franchise will not be successful.
Franchise rights acquired through the purchase of cable television systems
represent management's estimate of fair value and are amortized using the
straight-line method over a period of 15 years. The period of 15 years is
management's best estimate of the useful lives of the franchises and assumes
substantially all of those franchises that expire during the period will be
renewed by the Company. Amortization expense for the three months ended March
31, 1999 was $17,992.
OTHER ASSETS
Debt issuance costs are amortized to interest expense over the term of the
related debt.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of March 31, 1999, no installation revenue has been
deferred as direct selling costs exceeded installation revenue.
F-86
<PAGE> 298
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
INCOME TAXES
Income taxes are the responsibility of the individual members and are not
provided for in the accompanying financial statements. The Company's subsidiary
corporations are subject to federal income tax but have had no operations since
inception and therefore, no taxable income.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. MEMBERS' EQUITY (DEFICIT)
Upon completion of the Vulcan Acquisition, Vulcan owned 99.4% of MCCLP
through direct ownership of all LP Units and through 80% ownership of Marcus
Cable Properties, Inc. ("MCPI"), the general partner of Marcus Cable Properties,
L.P. ("MCPLP"), the general partner of MCCLP. The Minority Interest owned the
voting common stock, or the remaining 20% of MCPI.
On June 9, 1998, MCCLP was converted into a Delaware limited liability
company with two members: Vulcan Cable, Inc., with 96.2% ownership, and Marcus
Cable Properties, L.L.C. ("MCPLLC") (formerly MCPLP), with 3.8% ownership.
Vulcan Cable, Inc. owns approximately 25.6% and MCPI owns approximately 74.4% of
MCPLLC, with Vulcan's interest in MCPI unchanged. As there was no change in
ownership interests, the historical partners' capital balances at June 9, 1998
were transferred to and became the initial equity of MCCLLC, and thus the
accompanying statement of members' equity has been presented as if the
conversion of MCCLP into MCCLLC occurred on April 23, 1998, the date of the
Vulcan Acquisition (see Note 1).
As of March 31, 1999, MCCLLC has 100 issued and outstanding membership
units. Income and losses of MCCLLC are allocated to the members in accordance
with their ownership interests. Members are not personally liable for
obligations of MCCLLC.
4. RELATED PARTY TRANSACTIONS
The Company and Charter entered into a management agreement on October 6,
1998 whereby Charter began to manage the day-to-day operations of the Company.
In consideration for the management consulting services provided by Charter,
Marcus paid Charter an annual fee equal to 3% of the gross revenues of the cable
system operations plus reimbursement for out of pocket costs and expenses
incurred by Charter in performing services under the management agreement. For
the three months ended March 31, 1999, management fees under this agreement were
$4,381. In connection with the transfer of the Company's operating subsidiaries
to Charter Operating, the annual fee paid by Marcus to Charter increased to
3.5%.
5. EMPLOYEE BENEFIT PLAN
The Company sponsored a 401(k) plan for its employees whereby employees
that qualified for participation under the plan could contribute up to 15% of
their salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matched participant
contributions up to a maximum of 2% of a participant's salary. As a result of
the Vulcan Acquisition, participants became fully vested in Company matching
contributions.
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MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In connection with Vulcan's acquisition of Charter, the Marcus Plan's
assets were frozen as of December 23, 1998 and employees became fully vested in
company matching contributions after the Vulcan Acquisition. Effective January
1, 1999, the Company's employees with two months of service are eligible to
participate in the Charter Communications, Inc. 401(k) Plan (the "Charter
Plan"). Employees that qualify for participation in the Charter Plan can
contribute up to 15% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Company contributes an amount equal to 50% of the first 5% of contributions by
each employee. For the three months ended March 31, 1999, the Company made
contributions to the Charter Plan of $237.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Lease and rental costs charged to expense for the three months
ended March 31, 1999 were $584. The Company also rents utility poles in its
operations. Generally, pole rentals are cancelable on short notice, but the
Company anticipates that such rentals will recur. Rent expense for pole
attachments for the three months ended March 31, 1999 was $955.
LITIGATION
In Alabama, Indiana, Maryland, Texas and Wisconsin, customers have filed
putative class action lawsuits on behalf of all of the Company's customers
residing in those states who are or were customers, and who have been charged a
processing fee for delinquent payment of their cable bill. The plaintiffs
challenge the legality of the processing fee and seek declaratory judgment,
injunctive relief and unspecified damages. The Company is in the process of
finalizing a global settlement of these cases, which settlement must be approved
by a court. Unless a global settlement is consummated and approved, the Company
intends to vigorously defend the actions. At this stage, the Company is not able
to project the final costs of settlement, the expenses of defending the actions
or the potential outcome of the actions, including the impact on the
consolidated financial position or results of operations.
The Company is also party to lawsuits, which are generally incidental to
its business. In the opinion of management, after consulting with legal counsel,
the outcome of these lawsuits will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in
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MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
additional regulatory oversight by the FCC and local or state franchise
authorities. The Cable Acts and the corresponding FCC regulations have
established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
7. LONG-TERM DEBT
In March 1999, concurrent with the issuance of Senior Notes and Senior
Discount Notes (see Note 1), Charter and the Company extinguished all long-term
debt, excluding borrowings of Charter and the Company under their respective
credit agreements, and refinanced all existing credit agreements at various
subsidiaries of Charter and the Company with a new credit agreement entered into
by Charter Operating. The excess of the amount paid over the carrying value of
the Company's long-term debt, net of unamortized debt issuance costs, was
recorded as Extraordinary item -- loss on early extinguishment of debt in the
accompanying consolidated statement of operations.
8. ACCOUNTING STANDARD NOT IMPLEMENTED
In June 1998, the Financial Accounting Standards Boards adopted Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Financial Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards requiring that
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MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133, as amended by SFAS No. 137, is effective for fiscal years beginning after
June 15, 2000. The Company has not yet quantified the impacts of adopting SFAS
No. 133 on its consolidated financial statements nor has it determined the
timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could
increase volatility of earnings (loss).
F-90
<PAGE> 302
INDEPENDENT AUDITORS' REPORT
The Members
Marcus Cable Holdings, LLC:
We have audited the accompanying consolidated balance sheets of Marcus
Cable Holdings, LLC and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, members' equity/partners' capital
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Marcus Cable
Holdings, LLC and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Dallas, Texas
February 19, 1999
(except for the fourth and seventh paragraphs of Note 1
which are as of August 25, 1999 and April 7, 1999, respectively)
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MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
- - - ------
Current assets:
Cash and cash equivalents................................. $ 813 $ 1,607
Accounts receivable, net of allowance of $1,800 in 1998
and $1,904 in 1997..................................... 16,055 23,935
Prepaid expenses and other................................ 6,094 2,105
---------- ----------
Total current assets.............................. 22,962 27,647
Investment in cable television systems:
Property, plant and equipment............................. 741,021 706,626
Franchises................................................ 783,742 945,125
Noncompetition agreements................................. 4,425 6,770
Other assets................................................ 52,928 64,300
---------- ----------
$1,605,078 $1,750,468
========== ==========
LIABILITIES AND MEMBERS' EQUITY/PARTNERS' CAPITAL
- - - -------------------------------------------------
Current liabilities:
Current maturities of long-term debt...................... $ 77,500 $ 67,499
Accrued liabilities....................................... 66,985 68,754
---------- ----------
Total current liabilities......................... 144,485 136,253
Long-term debt.............................................. 1,354,919 1,531,927
Other long-term liabilities................................. 1,390 2,261
Members' equity/partners' capital........................... 104,284 80,027
---------- ----------
$1,605,078 $1,750,468
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-92
<PAGE> 304
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Cable services................................... $ 499,265 $ 473,701 $ 432,172
Management fees -- related party................. 555 5,614 2,335
--------- --------- ---------
Total revenues........................... 499,820 479,315 434,507
--------- --------- ---------
Operating expenses:
Selling, service and system management........... 193,725 176,515 157,197
General and
administrative................................ 77,913 72,351 73,017
Transaction and severance costs.................. 135,379 -- --
Management fees -- related party................. 3,341 -- --
Depreciation and amortization.................... 215,789 188,471 166,429
--------- --------- ---------
Total operating expenses................. 626,147 437,337 396,643
--------- --------- ---------
Operating income (loss).................. (126,327) 41,978 37,864
--------- --------- ---------
Other (income) expense:
Interest expense................................. 159,985 151,207 144,376
Gain on sale of assets........................... (201,278) -- (6,442)
--------- --------- ---------
Total other (income) expense............. (41,293) 151,207 137,934
--------- --------- ---------
Loss before extraordinary
item................................... (85,034) (109,229) (100,070)
Extraordinary item -- loss on early retirement of
debt............................................. (9,059) -- --
--------- --------- ---------
Net loss................................. $ (94,093) $(109,229) $(100,070)
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-93
<PAGE> 305
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY/PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCUS
CLASS B CABLE
GENERAL LIMITED PROPERTIES, VULCAN
PARTNERS PARTNERS L.L.C. CABLE, INC. TOTAL
-------- -------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995..... $(21,396) $ 310,722 -- -- $ 289,326
Net loss....................... (200) (99,870) -- -- (100,070)
-------- --------- -------- -------- ---------
Balance at December 31, 1996..... (21,596) 210,852 -- -- 189,256
Net loss....................... (218) (109,011) -- -- (109,229)
-------- --------- -------- -------- ---------
Balance at December 31, 1997..... (21,814) 101,841 -- -- 80,027
Net loss -- January 1, 1998 to
April 22, 1998.............. (224) (111,838) -- -- (112,062)
Capital contributions.......... -- -- -- 118,350 118,350
Reorganization of limited
partnership to limited
liability company........... 22,038 9,997 (22,038) (9,997) --
Net income -- April 23, 1998 to
December 31, 1998........... -- -- 683 17,286 17,969
-------- --------- -------- -------- ---------
Balance at December 31, 1998..... $ -- $ -- $(21,355) $125,639 $ 104,284
======== ========= ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-94
<PAGE> 306
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (94,093) $(109,229) $(100,070)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Extraordinary item -- loss on early retirement of
debt................................................... 9,059 -- --
Gain on sale of assets.................................. (201,278) -- (6,442)
Depreciation and amortization........................... 215,789 188,471 166,429
Non cash interest expense............................... 82,416 72,657 63,278
Changes in assets and liabilities, net of working
capital adjustments for acquisitions:
Accounts receivable, net.............................. 7,880 (6,439) (70)
Prepaid expenses and other............................ (4,017) 95 (574)
Other assets.......................................... 413 (385) (502)
Accrued liabilities................................... (1,769) 9,132 (3,063)
--------- --------- ---------
Net cash provided by operating activities:......... 14,400 154,302 118,986
--------- --------- ---------
Cash flows from investing activities:
Acquisition of cable systems.............................. (57,500) (53,812) (10,272)
Proceeds from sale of assets, net of cash acquired and
selling costs........................................... 401,432 -- 20,638
Additions to property, plant and equipment................ (224,723) (197,275) (110,639)
Other..................................................... (689) -- --
--------- --------- ---------
Net cash provided by (used in) investing
activities:...................................... 118,520 (251,087) (100,273)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under Senior Credit Facility................... 217,750 226,000 65,000
Repayments under Senior Credit Facility................... (359,500) (131,250) (95,000)
Repayments of notes and debentures........................ (109,344) -- --
Payment of debt issuance costs............................ (99) (1,725) --
Cash contributed by member................................ 118,350 -- --
Payments on other long-term liabilities................... (871) (667) (88)
--------- --------- ---------
Net cash provided by (used in) financing
activities....................................... (133,714) 92,358 (30,088)
--------- --------- ---------
Net decrease in cash and cash equivalents................... (794) (4,427) (11,375)
Cash and cash equivalents at the beginning of the period.... 1,607 6,034 17,409
--------- --------- ---------
Cash and cash equivalents at the end of the period.......... $ 813 $ 1,607 $ 6,034
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 81,765 $ 81,155 $ 83,473
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-95
<PAGE> 307
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Marcus Cable Holdings, LLC ("MCHLLC"), a Delaware limited liability
company, was formed in February 1999 as parent of Marcus Cable Company, L.L.C.
("MCCLLC"), formerly Marcus Cable Company, L.P. ("MCCLP"). MCCLP was formed as a
Delaware limited partnership and was converted to a Delaware limited liability
company on June 9, 1998 (See Note 3). MCHLLC and its subsidiaries (collectively,
the "Company") derive their primary source of revenues by providing various
levels of cable television programming and services to residential and business
customers. The Company's operations are conducted through Marcus Cable Operating
Company, L.L.C. ("MCOC"), a wholly-owned subsidiary of the Company. The Company
operates its cable television systems primarily in Texas, Wisconsin, Indiana,
California and Alabama.
The accompanying consolidated financial statements include the accounts of
MCHLLC, which is the predecessor of MCCLLC, and its subsidiary limited liability
companies and corporations. All significant intercompany accounts and
transactions have been eliminated in consolidation.
On April 23, 1998, Vulcan Cable, Inc. and Paul G. Allen (collectively
referred to as "Vulcan") acquired all of the outstanding limited partnership
interests and substantially all of the general partner interest in MCCLP for
cash payments of $1,392,000 ("the Vulcan Acquisition"). Under the terms of the
purchase agreement, the owner of the remaining 0.6% general partner interest in
the Company (the "Minority Interest"), which represents 100% of the voting
control of the Company, could cause Vulcan to purchase the 0.6% general partner
interest under certain conditions, or Vulcan could cause the Minority Interest
to sell its interest to Vulcan under certain conditions, at a fair value of not
less than $8,000.
The accompanying consolidated financial statements do not reflect the
application of purchase accounting for the Vulcan Acquisition because the
Securities and Exchange Commission staff challenged such accounting treatment
since, as of December 31, 1998, Vulcan had not acquired voting control of the
Company. On March 31, 1999, Vulcan acquired voting control of the Company by its
acquisition of the Minority Interest for cash consideration.
In connection with the Vulcan Acquisition, the Company incurred transaction
costs of approximately $119,345, comprised primarily of $90,200 of compensation
paid to employees of the Company by Vulcan in settlement of specially designated
Class B units in MCCLP ("EUnit") granted in past periods by the general partner
of MCCLP, $24,000 of transaction fees paid to certain equity partners for
investment banking services and $5,200 of expenses for professional fees. These
transaction costs have been included in the accompanying consolidated statement
of operations for the year ended December 31, 1998.
Effective December 23, 1998, through a series of transactions, Paul G.
Allen acquired approximately 94% of Charter Communications, Inc. ("Charter").
Beginning in October 1998, Charter managed the operations of the Company.
In March 1999, Charter transferred all of its cable television operating
subsidiaries to a subsidiary, Charter Communications Holdings, LLC (Charter
Holdings) in connection with the issuance of Senior Notes and Senior Discount
Notes totaling $3.6 billion. These operating subsidiaries were then transferred
to Charter Communications Operating, LLC ("Charter Operating"). On April 7,
1999, the cable operations of the Company were transferred to Charter Operating
subsequent to the purchase by Paul G. Allen of the Minority Interest.
F-96
<PAGE> 308
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the Vulcan Acquisition, the Company recognized severance and
stay-on bonus compensation of $16,034, which is included in Transaction and
Severance Costs in the accompanying statement of operations for the year ended
December 31, 1998. As of December 31, 1998, 35 employees and officers of the
Company had been terminated and $13,634 had been paid under severance and bonus
arrangements. By March 31, 1999, an additional 50 employees will be terminated.
The remaining balance of $2,400 is to be paid by April 30, 1999 and an
additional $400 in stay-on bonuses will be recorded as compensation in 1999 as
the related services are provided.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1998
and 1997, cash equivalents consist of certificates of deposit and money market
funds. These investments are carried at cost which approximates market value.
(b) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installation. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for maintenance and repairs are charged to
expense as incurred and equipment replacements and betterments are capitalized.
Depreciation is provided by the straight-line method over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems...................... 3-10 years
Buildings and leasehold improvements............ 5-15 years
Vehicles and equipment.......................... 3-5 years
</TABLE>
(c) FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the estimated lives of the franchises. Costs relating to
unsuccessful franchise applications are charged to expense when it is determined
that the efforts to obtain the franchise will not be successful. Franchise
rights acquired through the purchase of cable television systems represent
management's estimate of fair value and are amortized using the straight-line
method over a period of 15 years. The period of 15 years is management's best
estimate of the useful lives of the franchises and assumes substantially all of
those franchises that expire during the period will be renewed by the Company.
Accumulated amortization was $317,335 and $264,600 at December 31, 1998 and
1997, respectively.
(d) NONCOMPETITION AGREEMENTS
Noncompetition agreements are amortized using the straight-line method over
the term of the respective agreements. Accumulated amortization was $20,267 and
$19,144 at December 31, 1998 and 1997, respectively.
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<PAGE> 309
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) OTHER ASSETS
Debt issuance costs are amortized to interest expense over the term of the
related debt. Going concern value of acquired cable systems is amortized using
the straight-line method over a period up to 10 years.
(f) IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
(g) REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of December 31, 1998 and 1997, no installation
revenue has been deferred, as direct selling costs exceeded installation
revenue.
Management fee revenues are recognized concurrently with the recognition of
revenues by the managed cable television system, or as a specified monthly
amount as stipulated in the management agreement. Incentive management fee
revenue is recognized upon performance of specified actions as stipulated in the
management agreement.
(h) INCOME TAXES
Income taxes are the responsibility of the individual members and are not
provided for in the accompanying financial statements. The Company's subsidiary
corporations are subject to federal income tax but have had no operations and
therefore, no taxable income since inception.
(i) INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain of its debt agreements. Interest rate
swaps and caps are accounted for as hedges of debt obligations, and accordingly,
the net settlement amounts are recorded as adjustments to interest expense in
the period incurred.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating thereby creating fixed
rate debt. Interest rate caps are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported
F-98
<PAGE> 310
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(k) ACCOUNTING STANDARD NOT IMPLEMENTED
In June 1998, the Financial Accounting Standards Boards adopted Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Financial Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No.
137, is effective for fiscal years beginning after June 15, 2000. The Company
has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility of earnings
(loss).
(3) CAPITAL STRUCTURE
PARTNERS' CAPITAL
(a) CLASSES OF PARTNERSHIP INTERESTS
The MCCLP partnership agreement (the "Partnership Agreement") provided for
Class B Units and Convertible Preference Units. Class B Units consisted of
General Partner Units ("GP Units") and Limited Partner Units ("LP Units"). To
the extent that GP Units had the right to vote, GP Units voted as Class B Units
together with Class B LP Units. Voting rights of Class B LP Units were limited
to items specified under the Partnership Agreement. Prior to the dissolution of
the Partnership on June 9, 1998, there were 18,848.19 GP Units and 294,937.67
Class B LP Units outstanding.
The Partnership Agreement also provided for the issuance of a class of
Convertible Preference Units. These units were entitled to a general
distribution preference over the Class B LP Units and were convertible into
Class B LP Units. The Convertible Preference Units could vote together with
Class B Units as a single class, and the voting percentage of each Convertible
Preference Unit, at a given time, was based on the number of Class B LP Units
into which such Convertible Preference Unit is then convertible. MCCLP had
issued 7,500 Convertible Preference Units with a distribution preference and
conversion price of two thousand dollars per unit.
The Partnership Agreement permitted the General Partner, at its sole
discretion, to issue up to 31,517 Employee Units (classified as Class B Units)
to key individuals providing services to the Company. Employee Units were not
entitled to distributions until such time as all units have received certain
distributions as calculated under provisions of the Partnership Agreement
("subordinated thresholds"). At December 31, 1997 28,033.20 Employee Units were
outstanding with a subordinated threshold ranging from $1,600 to $1,750 per unit
(per unit amounts in whole numbers). In connection with the Vulcan Acquisition,
the amount paid to EUnit holders of $90,200 was recognized as Transaction and
Severance Costs in the year ended December 31, 1998.
F-99
<PAGE> 311
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) ALLOCATION OF INCOME AND LOSS TO PARTNERS
MCCLP incurred losses from inception. Losses were allocated as follows:
(1) First, among the partners whose capital accounts exceed their
unreturned capital contributions in proportion to such excesses until each such
partner's capital account equals its unreturned capital contribution; and
(2) Next, to the holders of Class B Units in accordance with their
unreturned capital contribution percentages.
The General Partner was allocated a minimum of 0.2% to 1% of income or loss
at all times, depending on the level of capital contributions made by the
partners.
MEMBERS' EQUITY
Upon completion of the Vulcan Acquisition, Vulcan collectively owned 99.4%
of MCCLP through direct ownership of all LP Units and through 80% ownership of
Marcus Cable Properties, Inc. ("MCPI"), the general partner of Marcus Cable
Properties, L.P. ("MCPLP"), the general partner of MCCLP. The Minority Interest
owned the voting common stock, or the remaining 20% of MCPI. In July 1998,
Vulcan contributed $20,000 in cash to the Company relating to certain employee
severance arrangements.
On June 9, 1998, MCCLP was converted into a Delaware limited liability
company with two members: Vulcan Cable, Inc., with 96.2% ownership, and Marcus
Cable Properties, L.L.C. ("MCPLLC") (formerly MCPLP), with 3.8% ownership.
Vulcan Cable, Inc. owns approximately 25.6% and MCPI owns approximately 74.4% of
MCPLLC, with Vulcan's interest in MCPI unchanged. As there was no change in
ownership interests, the historical partners' capital balances at June 9, 1998
were transferred to and became the initial equity of MCCLLC, and thus the
accompanying statement of members' equity has been presented as if the
conversion of MCCLP into MCCLLC occurred on April 23, 1998, the date of the
Vulcan Acquisition (see Note 1).
As of December 31, 1998, MCCLLC has 100 issued and outstanding membership
units. Income and losses of MCCLLC are allocated to the members in accordance
with their ownership interests. Members are not personally liable for
obligations of MCCLLC.
(4) ACQUISITIONS AND DISPOSITIONS
In 1998, the Company acquired cable television systems in the Birmingham,
Alabama area for a purchase price of $57,500. The excess of the cost of
properties acquired over the amounts assigned to net tangible assets and
noncompetition agreements as of the date of acquisition was approximately
$44,603 and is included in franchises.
Additionally, in 1998, the Company completed the sale of certain cable
television systems for an aggregate net sales price of $401,432, resulting in a
total gain of $201,278.
In 1997, the Company acquired cable television systems in the Dallas-Ft.
Worth, Texas area for a purchase price of $35,263. The excess of the cost of
properties acquired over the amounts assigned to net tangible assets as of the
date of acquisition was $15,098 and is included in franchises.
Additionally, in July 1997, the Company completed an exchange of cable
television systems in Indiana and Wisconsin. According to the terms of the trade
agreement, in addition to the contribution of its systems, the Company paid
$18,549.
F-100
<PAGE> 312
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1996, the Company acquired cable television systems in three separate
transactions for an aggregate purchase price of $10,272. The excess of the cost
of properties acquired over the amounts assigned to net tangible assets as of
the date of acquisition was $4,861 and is included in franchises.
Additionally, in 1996, the Company completed the sale of cable television
systems in Washington, D.C. for a sale price of $20,638. The sale resulted in a
gain of $6,442.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, results of operations of the acquired assets have
been included in the accompanying consolidated financial statements from the
dates of acquisition. The purchase prices were allocated to tangible and
intangible assets based on estimated fair market values at the dates of
acquisition. The cable system trade discussed above was accounted for as a
nonmonetary exchange and, accordingly, the additional cash contribution was
allocated to tangible and intangible assets based on recorded amounts of the
nonmonetary assets relinquished.
Unaudited pro forma operating results as though 1998 and 1997 acquisitions
and divestitures discussed above had occurred on January 1, 1997, with
adjustments to give effect to amortization of franchises, interest expense and
certain other adjustments are as follows for the years ended December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
(UNAUDITED)
<S> <C> <C>
Revenues........................................... $ 457,929 $ 421,665
Operating income (loss)............................ (148,472) 9,064
Net loss........................................... (150,841) (142,143)
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cable distribution systems........................ $ 996,804 $ 878,721
Vehicles and other................................ 40,243 37,943
Land and buildings................................ 18,861 17,271
---------- ---------
1,055,908 933,935
Accumulated depreciation.......................... (314,887) (227,309)
---------- ---------
$ 741,021 $ 706,626
========== =========
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
was $129,663, $96,220, and $72,281, respectively.
(6) OTHER ASSETS
Other assets consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Debt issuance costs.................................. $ 41,079 $ 45,225
Going concern value.................................. 37,274 37,274
Other................................................ 677 1,090
-------- --------
79,030 83,589
Accumulated amortization............................. (26,102) (19,289)
-------- --------
$ 52,928 $ 64,300
======== ========
</TABLE>
F-101
<PAGE> 313
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Accrued operating liabilities.......................... $26,334 $27,923
Accrued programming costs.............................. 9,539 9,704
Accrued franchise fees................................. 8,907 10,131
Accrued property taxes................................. 4,586 5,125
Accrued interest....................................... 3,752 7,949
Other accrued liabilities.............................. 13,867 7,922
------- -------
$66,985 $68,754
======= =======
</TABLE>
(8) LONG-TERM DEBT
The Company has outstanding the following borrowings on long-term debt
arrangements at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Senior Credit Facility............................ $ 808,000 $ 949,750
13 1/2% Senior Subordinated Discount Notes........ 383,236 336,304
14 1/4% Senior Discount Notes..................... 241,183 213,372
11 7/8% Senior Debentures......................... -- 100,000
---------- ----------
1,432,419 1,599,426
Less current maturities........................... 77,500 67,499
---------- ----------
$1,354,919 $1,531,927
========== ==========
</TABLE>
The Company, through MCOC, maintains a senior credit facility ("Senior
Credit Facility"), which provides for two term loan facilities, one with a
principal amount of $490,000 that matures on December 31, 2002 ("Tranche A") and
the other with a principal amount of $300,000 million that matures on April 30,
2004 ("Tranche B"). The Senior Credit Facility provides for scheduled
amortization of the two term loan facilities which began in September 1997. The
Senior Credit Facility also provides for a $360,000 revolving credit facility
("Revolving Credit Facility"), with a maturity date of December 31, 2002.
Amounts outstanding under the Senior Credit Facility bear interest at either
the: i) Eurodollar rate, ii) prime rate, or iii) CD base rate or Federal Funds
rate, plus a margin of up to 2.25%, which is subject to certain quarterly
adjustments based on the ratio of MCOC's total debt to annualized operating cash
flow, as defined. The variable interest rates ranged from 6.23% to 7.75% and
5.97% to 8.00% at December 23, 1998, and December 31, 1997, respectively. A
quarterly commitment fee ranging from 0.250% to 0.375% per annum is payable on
the unused commitment under the Senior Credit Facility.
On October 16, 1998, the Company entered into an agreement to amend its
Senior Credit Facility. The amendment provides for, among other items, a
reduction in the permitted leverage and cash flow ratios, a reduction in the
interest rate charge under the Senior Credit Facility and a change in the
restriction related to the use of cash proceeds from asset sales to allow such
proceeds to be used to redeem the 11 7/8% Senior Debentures.
In 1995, the Company issued $299,228 of 14 1/4% Senior Discount Notes due
December 15, 2005 (the "14 1/4% Notes") for net proceeds of $150,003. The
14 1/4% Notes are unsecured and rank pari passu to the 11 7/8% Debentures
(defined below). The 14 1/4% Notes are redeemable at the option of MCHLLC at
amounts decreasing from 107% to 100% of par beginning on June 15, 2000. No
interest is payable until December 15, 2000. Thereafter interest is payable
semi-
F-102
<PAGE> 314
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
annually until maturity. The discount on the 14 1/4% Notes is being accreted
using the effective interest method. The unamortized discount was $85,856 at
December 31, 1997.
In 1994, the Company, through MCOC, issued $413,461 face amount of 13 1/2%
Senior Subordinated Discount Notes due August 1, 2004 (the "13 1/2% Notes") for
net proceeds of $215,000. The 13 1/2% Notes are unsecured, are guaranteed by
MCHLLC and are redeemable, at the option of MCOC, at amounts decreasing from
105% to 100% of par beginning on August 1, 1999. No interest is payable on the
13 1/2% Notes until February 1, 2000. Thereafter, interest is payable
semi-annually until maturity. The discount on the 13 1/2% Notes is being
accreted using the effective interest method. The unamortized discount was
$77,157 at December 31, 1997.
In 1993, the Company issued $100,000 principal amount of 11 7/8% Senior
Debentures due October 1, 2005 (the "11 7/8% Debentures"). The 11 7/8%
Debentures were unsecured and were redeemable at the option of the Company on or
after October 1, 1998 at amounts decreasing from 105.9% to 100% of par at
October 1, 2002, plus accrued interest, to the date of redemption. Interest on
the 11 7/8% Debentures was payable semi-annually each April 1 and October 1
until maturity.
On July 1, 1998, $4,500 face amount of the 14 1/4% Notes and $500 face
amount of the 11 7/8% Notes were tendered for gross tender payments of $3,472
and $520 respectively. The payments resulted in a gain on the retirement of the
debt of $753. On December 11, 1998, the 11 7/8% Notes were redeemed for a gross
payment of $107,668, including accrued interest. The redemption resulted in a
loss on the retirement of the debt of $9,059.
The 14 1/4% Notes, 13 1/2% Notes, 11 7/8% Debentures and Senior Credit
Facility are all unsecured and require the Company and/or its subsidiaries to
comply with various financial and other covenants, including the maintenance of
certain operating and financial ratios. These debt instruments also contain
substantial limitations on, or prohibitions of, distributions, additional
indebtedness, liens, asset sales and certain other items.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying and fair values of the Company's significant financial
instruments as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Senior Credit Facility......................... $808,000 $808,000 $949,750 $949,750
13 1/2% Notes.................................. 383,236 418,629 336,304 381,418
14 1/4% Notes.................................. 241,183 279,992 213,372 258,084
11 7/8% Debentures............................. -- -- 100,000 108,500
</TABLE>
The carrying amount of the Senior Credit Facility approximates fair value
as the outstanding borrowings bear interest at market rates. The fair values of
the 14 1/4% Notes, 13 1/2% Notes, and 11 7/8% Debentures, are based on quoted
market prices. The Company had interest rate swap agreements covering a notional
amount of $500,000 at December 31, 1998 and 1997. The fair value of such swap
agreements was ($5,761) at December 31, 1998.
The weighted average interest pay rate for the interest rate swap
agreements was 5.7% at December 31, 1998, and 1997. Certain of these agreements
allow for optional extension by the counterparty or for automatic extension in
the event that one month LIBOR exceeds a stipulated rate on any monthly reset
date. Approximately $100,000 notional amount included in the $500,000 notional
amount described above is also modified by an interest rate cap agreement which
resets monthly.
F-103
<PAGE> 315
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The notional amounts of the interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair values of the interest rate hedge agreements generally reflect the
estimated amounts that the Company would receive or (pay) (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's Senior Credit Facility thereby reducing the exposure
to credit loss. The Company has policies regarding the financial stability and
credit standing of the major counterparties. Nonperformance by the
counterparties is not anticipated nor would it have a material adverse effect on
the Company's consolidated financial position or results of operations.
(10) RELATED PARTY TRANSACTIONS
The Company and Charter entered into a management agreement on October 6,
1998 whereby Charter began to manage the day-to-day operations of the Company.
In consideration for the management consulting services provided by Charter,
Marcus pays Charter an annual fee equal to 3% of the gross revenues of the cable
system operations, plus expenses. From October 6, 1998 to December 31, 1998,
management fees under this agreement were $3,341.
Prior to the consummation of the Vulcan Acquisition, affiliates of Goldman
Sachs owned limited partnership interests in MCCLP. Maryland Cable Partners,
L.P. ("Maryland Cable"), which was controlled by an affiliate of Goldman Sachs,
owned the Maryland Cable systems. MCOC managed the Maryland Cable systems under
the Maryland Cable Agreement. Pursuant to such agreement, MCOC earned a
management fee equal to 4.7% of the revenues of Maryland Cable.
Effective January 31, 1997, Maryland Cable was sold to a third party.
Pursuant to the Maryland Cable Agreement, MCOC recognized incentive management
fees of $5,069 during the twelve months ended December 31, 1997 in conjunction
with the sale. Although MCOC is no longer involved in the active management of
the Maryland Cable systems, MCOC has entered into an agreement with Maryland
Cable to oversee the activities, if any, of Maryland Cable through the
liquidation of the partnership. Pursuant to such agreement, MCOC earns a nominal
monthly fee. During the year ended December 31, 1998, MCOC earned total
management fees of $555. Including the incentive management fees noted above,
during the years ended December 31, 1997 and 1996, MCOC earned total management
fees of $5,614 and $2,335, respectively.
(11) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) plan for its employees whereby employees that
qualify for participation under the plan can contribute up to 15% of their
salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matches participant
contributions up to a maximum of 2% of a participant's salary. For the years
ended December 31, 1998, 1997 and 1996, the Company made contributions to the
plan of $765, $761 and $480, respectively.
F-104
<PAGE> 316
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Lease and rental costs charged to expense for the years ended
December 31, 1998, 1997 and 1996 were $3,394, $3,230, and $2,767, respectively.
The Company also rents utility poles in its operations. Generally, pole rentals
are cancelable on short notice, but the Company anticipates that such rentals
will recur. Rent expense for pole attachments for the years ended December 31,
1998, 1997 and 1996 were $4,081, $4,314, and $4,008, respectively.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 23,
1998, the amount returned by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
F-105
<PAGE> 317
MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
LITIGATION
In Alabama, Indiana, Texas and Wisconsin, customers have filed punitive
class action lawsuits on behalf of all person residing in those respective
states who are or were potential customers of the Company's cable television
service, and who have been charged a processing fee for delinquent payment of
their cable bill. The actions challenge the legality of the processing fee and
seek declaratory judgment, injunctive relief and unspecified damages. In Alabama
and Wisconsin, the Company has entered into joint speculation and case
management orders with attorneys for plaintiffs. A Motion to Dismiss is pending
in Indiana. The Company intends to vigorously defend the actions. At this stage
of the actions, the Company is not able to project the expenses of defending the
actions or the potential outcome of the actions, including the impact on the
consolidated financial position or results of operations.
The Company is also party to lawsuits which are generally incidental to its
business. In the opinion of management, after consulting with legal counsel, the
outcome of these lawsuits will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
(13) SUBSEQUENT EVENT (UNAUDITED)
In March 1999, concurrent with the issuance of Senior Notes and Senior
Discount Notes, the combined company (Charter and the Company, see note 1)
extinguished all long-term debt, excluding borrowings of Charter and the Company
under their respective credit agreements, and refinanced all existing credit
agreements at various subsidiaries of the Company and Charter with a new credit
agreement entered into by a wholly owned subsidiary of the combined company.
F-106
<PAGE> 318
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Renaissance Media Group LLC
We have audited the accompanying consolidated balance sheet of Renaissance
Media Group LLC (the "Company") as of April 30, 1999 and the related
consolidated statements of operations, changes in members' equity, and cash
flows for the four months ended April 30, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company at April 30, 1999, and the consolidated results of its operations
and its cash flows for the four months then ended in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
June 4, 1999
except for Note 11, as to which the date is
June 29, 1999
F-107
<PAGE> 319
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, 1999
--------------
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 5,400
Accounts receivable -- trade (less allowance for doubtful
accounts of $86).......................................... 520
Accounts receivable -- other................................ 492
Prepaid expenses and other assets........................... 416
Investment in cable television systems:
Property, plant and equipment............................. 76,250
Less: accumulated depreciation............................ (10,706)
--------
65,544
--------
Cable television franchises............................... 238,429
Less: accumulated amortization............................ (16,754)
--------
221,675
--------
Intangible assets......................................... 17,544
Less: accumulated amortization............................ (1,525)
--------
16,019
--------
Net investment in cable television systems................ 303,238
--------
Total assets................................................ $310,066
========
LIABILITIES AND MEMBERS' EQUITY
Accounts payable............................................ $ 546
Accrued expenses............................................ 3,222
Subscriber advance payments and deposits.................... 657
Deferred marketing credits.................................. 650
Debt........................................................ 213,402
--------
Total liabilities........................................... 218,477
--------
Members' equity:
Paid-in capital........................................... 108,600
Accumulated deficit....................................... (17,011)
--------
Total members' equity....................................... 91,589
--------
Total liabilities and members' equity....................... $310,066
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-108
<PAGE> 320
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
APRIL 30, 1999
--------------
<S> <C>
Revenues.................................................... $20,396
Costs and expenses:
Service costs............................................. 6,325
Selling, general and administrative....................... 3,057
Depreciation and amortization............................. 8,912
-------
Operating income............................................ 2,102
Interest income............................................. 122
Interest (expense).......................................... (6,321)
-------
(Loss) before credit for taxes.............................. (4,097)
Credit for taxes............................................ 65
-------
Net (loss).................................................. $(4,032)
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-109
<PAGE> 321
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
PAID-IN ACCUMULATED MEMBERS'
CAPITAL DEFICIT EQUITY
-------- ----------- --------
<S> <C> <C> <C>
Balance December 31, 1998............................... $108,600 $(12,979) $95,621
Net (loss).............................................. -- (4,032) (4,032)
-------- -------- -------
Balance April 30, 1999.................................. $108,600 $(17,011) $91,589
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-110
<PAGE> 322
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
APRIL 30, 1999
--------------
<S> <C>
OPERATING ACTIVITIES
Net (loss).................................................. $(4,032)
Adjustments to non-cash and non-operating items:
Depreciation and amortization............................. 8,912
Accretion on Senior Discount Notes........................ 3,528
Other non-cash charges.................................... 322
Changes in operating assets and liabilities:
Accounts receivable -- trade, net...................... 206
Accounts receivable -- other........................... 92
Prepaid expenses and other assets...................... (75)
Accounts payable....................................... (1,496)
Accrued expenses....................................... (3,449)
Subscriber advance payments and deposits............... 49
Deferred marketing support............................. (150)
-------
Net cash provided by operating activities................... 3,907
-------
INVESTING ACTIVITIES
Purchased cable television systems:
Property, plant and equipment............................. (830)
Cable television franchises............................... (1,940)
Escrow deposit.............................................. 150
Capital expenditures........................................ (4,250)
Other intangible assets..................................... 16
-------
Net cash used in investing activities....................... (6,854)
-------
FINANCING ACTIVITIES
Repayment of advances from Holdings......................... (135)
-------
Net cash used in financing activities....................... (135)
-------
Net decrease in cash and cash equivalents................... (3,082)
Cash and cash equivalents at December 31, 1998.............. 8,482
=======
Cash and cash equivalents at April 30, 1999................. $ 5,400
=======
SUPPLEMENTAL DISCLOSURES
Interest paid............................................... $ 4,210
=======
</TABLE>
See accompanying notes to consolidated financial statements
F-111
<PAGE> 323
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Renaissance Media Group LLC ("Group") a wholly owned subsidiary of
Renaissance Media Holdings LLC ("Holdings"), was formed in March 1998 to own and
operate cable television systems in small and medium sized markets, which
provide programming, and other related services, to subscribers through its
hybrid coaxial and fiber optic distribution plant for a monthly fee. Group and
its wholly owned subsidiaries, Renaissance Media (Louisiana) LLC ("Louisiana"),
Renaissance Media (Tennessee) LLC ("Tennessee"), and Renaissance Media LLC
("Media") are collectively referred to as the "Company". On April 9, 1998, the
Company acquired six cable television systems (the "Acquisition") from TWI
Cable, Inc., a subsidiary of Time Warner Inc. ("Time Warner"). Prior to the
Acquisition, the Company had no operations other than start-up related
activities.
On February 23, 1999, Holdings, Charter Communications, Inc. ("Charter"),
now known as Charter Investment, Inc. and Charter Communications, LLC ("Buyer"
or "CC LLC") executed a purchase agreement (the "Charter Purchase Agreement"),
providing for Holdings to sell and Buyer to purchase, all of the outstanding
limited liability company membership interests in Group held by Holdings (the
"Charter Transaction") subject to certain covenants and restrictions pending
satisfaction of certain conditions prior to closing. The purchase price was
$459,000, consisting of $348,000 in cash and $111,000 in assumed debt. On April
30, 1999, the Charter Transaction was consummated.
These financial statements have been prepared as of and for the four months
ended April 30, 1999 immediately prior to the consummation of the Charter
Transaction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING STANDARDS
During 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value and that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB Statement No. 133 -- An Amendment of FASB
Statement No. 133" has delayed the effective date of SFAS No. 133 to fiscal
years beginning after June 15, 2000. The adoption of SFAS No. 133 is not
expected to have a material impact on the consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of the Company and its wholly owned subsidiaries. Significant inter-company
accounts and transactions have been eliminated.
F-112
<PAGE> 324
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
CONCENTRATION OF CREDIT RISK
A significant portion of the customer base is concentrated within the local
geographical area of each of the individual cable television systems. The
Company generally extends credit to customers and the ultimate collection of
accounts receivable could be affected by the local economy. Management performs
continuous credit evaluations of its customers and may require cash in advance
or other special arrangements from certain customers. Management does not
believe that there is any significant credit risk which could have a material
effect on the Company's financial condition.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and investments in short-term,
highly liquid securities, which have maturities when purchased of three months
or less.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at purchased and capitalized
cost. Capitalized internal costs principally consist of employee costs and
interest on funds borrowed during construction. Capitalized labor, materials and
associated overhead amounted to approximately $721 for the four months ended
April 30, 1999. Replacements, renewals and improvements to installed cable plant
are capitalized. Maintenance and repairs are charged to expense as incurred.
Depreciation expense for the four months ended April 30, 1999 amounted to
$3,434.
Property, plant and equipment is depreciated using the straight-line method
over the following estimated service lives:
<TABLE>
<S> <C>
Buildings and leasehold improvements........................ 5-30 years
Cable systems, equipment and subscriber devices............. 5-30 years
Transportation equipment.................................... 3-5 years
Furniture, fixtures and office equipment.................... 5-10 years
</TABLE>
Property, plant and equipment at April 30, 1999 consisted of:
<TABLE>
<S> <C>
Land........................................................ $ 436
Buildings and leasehold improvements........................ 1,445
Cable systems, equipment and subscriber devices............. 64,658
Transportation equipment.................................... 2,301
Furniture, fixtures and office equipment.................... 923
Construction in progress.................................... 6,487
-------
76,250
Less: accumulated depreciation.............................. (10,706)
-------
Total....................................................... $65,544
=======
</TABLE>
F-113
<PAGE> 325
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
CABLE TELEVISION FRANCHISES AND INTANGIBLE ASSETS
Cable television franchise costs include the assigned fair value, at the
date of acquisition, of the franchises from purchased cable television systems.
Intangible assets include goodwill, deferred financing and other intangible
assets. Cable television franchises and intangible assets are amortized using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Cable television franchises................................. 15 years
Goodwill.................................................... 25 years
Deferred financing and other intangible assets.............. 2-10 years
</TABLE>
Intangible assets at April 30, 1999 consisted of:
<TABLE>
<S> <C>
Goodwill.................................................... $ 8,608
Deferred financing costs.................................... 8,307
Other intangible assets..................................... 629
-------
17,544
Less: accumulated amortization.............................. (1,525)
-------
Total....................................................... $16,019
=======
</TABLE>
The Company reviews the carrying value of its long-lived assets, including
property, plant and equipment, cable television franchises and intangible
assets, whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. To the extent the estimated future cash inflows
attributable to the asset, less estimated future cash outflows, is less than the
carrying amount, an impairment loss is recognized to the extent that the
carrying value of such asset is greater than its fair value.
REVENUES AND COSTS
Subscriber fees are recorded as revenue in the period the related services
are provided and advertising revenues are recognized in the period the related
advertisements are exhibited. Rights to exhibit programming are purchased from
various cable networks. The costs of such rights are generally expensed as the
related services are made available to subscribers.
ADVERTISING COSTS
Advertising costs are expensed upon the first exhibition of the related
advertisements and are recorded net of marketing credits earned from launch
incentive and cooperative advertising programs.
During the four months ended April 30, 1999 the company earned marketing
credits in excess of advertising expense incurred. Advertising expense and
marketing credits amounted to $263 and $306, respectively, for the four months
ended April 30, 1999.
ESTIMATES USED IN FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-114
<PAGE> 326
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
3. ACQUISITIONS
BAYOU VISION, INC.
On February 3, 1999, Media acquired the cable television assets of Bayou
Vision, Inc. and Gulf South Cable, Inc. serving approximately 1,950 subscribers
in the Villages of Estherwood, Morse and Mermentau and Acadia and Livingston
Parish, Louisiana. The cash purchase price was approximately $2,700 and was paid
out of available Company funds.
4. DEBT
As of April 30, 1999, debt consisted of:
<TABLE>
<S> <C>
10% Senior Discount Notes at accreted value (a)............. $110,902
Credit Agreement (b)........................................ 102,500
--------
$213,402
========
</TABLE>
- - - ---------------
(a) On April 9, 1998, the Company issued $163,175 principal amount at maturity,
$100,012 initial accreted value, of 10% senior discount notes due 2008 (the
"Notes"). The Notes pay no cash interest until April 15, 2003. From and
after April 15, 2003 the Notes will bear interest, payable semi-annually in
cash, at a rate of 10% per annum on April 15 and October 15 of each year,
commencing October 15, 2003. The Notes are due on April 15, 2008. The fair
market value of the Notes at April 30, 1999 was $116,262. See Note 11
regarding the offer to repurchase the Notes.
(b) On April 9, 1998, Media entered into a credit agreement among Morgan Stanley
& Co. Incorporated as Placement Agent, Morgan Stanley Senior Funding Inc.,
as Syndication Agent, the Lenders, CIBC Inc., as Documentation Agent and
Bankers Trust Company as Administrative Agent (the "Credit Agreement"). The
aggregate commitments under the Credit Agreement total $150,000, consisting
of a $40,000 revolver (the "Revolver"), $60,000 Tranche A Term Loans and
$50,000 Tranche B Term Loans (collectively the "Term Loans"). The Revolver
and Term Loans are collateralized by a first lien position on all present
and future assets and the member's interest of Media, Louisiana and
Tennessee. The Credit Agreement provides for interest at varying rates based
upon various borrowing options and the attainment of certain financial
ratios and for commitment fees of 1/2% on the unused portion of the
revolver. Management believes the terms are comparable to those that could
be obtained from third parties. The effective interest rate, including
commitment fees and amortization of related deferred financing costs and the
interest-rate cap, for the four months ended April 30, 1999 was 7.58%. See
Note 11 regarding the repayment of amounts outstanding under the Credit
Agreement upon consummation of the Charter Transaction. The Credit Agreement
and the indenture pursuant to which the Notes were issued contain
restrictive covenants on the Company regarding additional indebtedness,
investment guarantees, loans, acquisitions, dividends and merger or sale of
the subsidiaries and require the maintenance of certain financial ratios.
5. INTEREST RATE CAP AGREEMENT
The Company purchases interest rate cap agreements that are designed to
limit its exposure to increasing interest rates and are designated to its
floating rate debt. The strike price of these agreements exceeds the current
market levels at the time they are entered into. The interest rate
F-115
<PAGE> 327
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
indices specified by the agreements have been and are expected to be highly
correlated with the interest rates the Company incurs on its floating rate debt.
Payments to be received as a result of the specified interest rate index
exceeding the strike price are accrued in other assets and are recognized as a
reduction of interest expense (the accrual accounting method). The cost of these
agreements is included in other assets and amortized to interest expense ratably
during the life of the agreement. Upon termination of interest rate cap
agreements, any gain is deferred in other liabilities and amortized over the
remaining term of the original contractual life of the agreement as a reduction
of interest expense.
The Company purchased an interest rate cap agreement from Morgan Stanley
Capital Services Inc. The carrying value as of April 30, 1999 was $34. The fair
value of the interest rate cap was $0 as of April 30, 1999.
The following table summarizes the interest rate cap agreement:
<TABLE>
<CAPTION>
NOTIONAL INITIAL FIXED RATE
PRINCIPAL EFFECTIVE TERMINATION CONTRACT (PAY
AMOUNT TERM DATE DATE COST RATE)
- - - --------- ------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
$100,000 2 Years 12/1/97 12/1/99 $100 7.25%
</TABLE>
6. TAXES
For the four months ended April 30, 1999, the credit for taxes has been
calculated on a separate company basis. The components of the credit for taxes
are as follows:
<TABLE>
<CAPTION>
FOUR MONTHS
ENDED
APRIL 30, 1999
--------------
<S> <C>
Federal:
Current................................................... $ --
Deferred.................................................. --
State:...................................................... --
Current................................................... (65)
Deferred.................................................. --
----
(Credit) for taxes.......................................... $(65)
====
</TABLE>
The Company's current state tax credit results from overpayment in 1998 of
franchise tax in Tennessee and Mississippi and tax on capital in New York.
The Company has a net operating loss ("NOL") carry-forward for income tax
purposes which is available to offset future taxable income. This NOL totals
approximately $22,324 and will expire in the year 2018 and 2019 at $14,900 and
$7,424 respectively. The Company has established a valuation allowance to offset
the entire potential future tax benefit of the NOL carry-forward and, therefore,
has recognized no deferred tax asset with respect to the NOL.
Louisiana and Tennessee have elected to be treated as corporations for
federal income tax purposes and have not recorded any tax benefit for their
losses as the realization of these losses by reducing future taxable income in
the carry forward period is uncertain at this time.
F-116
<PAGE> 328
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
7. RELATED PARTY TRANSACTIONS
(A) Transactions with Morgan Stanley entities
In connection with the Acquisition, Media entered into the Credit Agreement
with Morgan Stanley Senior Funding Inc. and Morgan Stanley & Co. Incorporated
(collectively the "Morgan Stanley Entities") acted as the Placement Agent for
the Notes. In connection with these services the Morgan Stanley Entities
received customary fees and expense reimbursement comparable to that of a third
party exchange.
(B) Transactions with Time Warner and related parties
In connection with the Acquisition, Media entered into an agreement with
Time Warner (the "Time Warner Agreement"), pursuant to which Time Warner managed
the Company's programming in exchange for providing the Company access to
certain Time Warner programming arrangements (the "Programming Arrangements").
Management believes that programming rates made available to the Company through
its relationship with Time Warner are lower than rates that the Company could
obtain separately. Such volume rates will not continue to be available after the
Charter Transaction.
For the four months ended April 30, 1999, the Company incurred
approximately $2,716 in costs under the Programming Arrangements. In addition,
the Company has incurred programming costs of approximately $958 for programming
services owned directly or indirectly by Time Warner entities for the four
months ended April 30, 1999.
(C) Transactions with board member
The Company has utilized the law firm of one of its board members for legal
services for the Acquisition, financing agreements and various ongoing legal
matters. These fees totaled approximately $154 for the four months ended April
30, 1999.
8. ACCRUED EXPENSES
Accrued expenses as of April 30, 1999 consist of the following:
<TABLE>
<S> <C>
Accrued franchise fees...................................... $ 830
Accrued programming costs................................... 644
Accrued salaries, wages and benefits........................ 516
Accrued interest............................................ 340
Accrued property and sales tax.............................. 231
Accrued legal and professional fees......................... 43
Other accrued expenses...................................... 618
------
$3,222
======
</TABLE>
9. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan which covers substantially
all employees (the "Plan"). The Plan provides for contributions from eligible
employees up to 15% of their compensation subject to Internal Revenue Code
limitations. The Company's contribution to the Plan is limited to 50% of each
eligible employee's contribution up to 10% of his or her
F-117
<PAGE> 329
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
compensation. The Company has the right in any year to set the amount of the
Company's contribution percentage. Company matching contributions to the Plan
for the four months ended April 30, 1999 were approximately $54. All participant
contributions and earnings are fully vested upon contribution and Company
contributions and earnings vest 20% per year of employment with the Company,
becoming fully vested after five years.
In connection with the Charter Transaction, the Plan's assets were frozen
as of April 30, 1999, and employees became fully vested. Effective July 1, 1999,
the Company's employees with two months of service are eligible to participate
in the Charter Communications, Inc. 401(k) Plan.
10. COMMITMENTS AND CONTINGENCIES
(A) Leases
The Company had rental expense under various lease and rental agreements
primarily for offices, tower sites and warehouses of approximately $59 for the
four months ended April 30, 1999. In addition, the Company rents utility poles
in its operations generally under short term arrangements, but the Company
expects these arrangements to recur. Total rent expense for utility poles was
approximately $272 for the four months ended April 30, 1999.
Future minimum annual rental payments under noncancellable leases are as
follows:
<TABLE>
<S> <C>
1999........................................................ $ 29
2000........................................................ 38
2001........................................................ 24
2002........................................................ 21
2003 and thereafter......................................... 70
----
Total....................................................... $182
====
</TABLE>
(B) Employment Agreements
Media entered into employment agreements with six senior executives, who
are also investors in Holdings, for the payment of salaries and bonuses. In
connection with the Charter Transaction, the employment agreements with the six
senior executives were terminated with no liability to the Company.
(C) Other Agreements
In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996, Time
Warner agreed with the Federal Communications Commission ("FCC") to invest in
certain upgrades to its cable infrastructure (consisting primarily of materials
and labor in connection with the plant upgrades up to 750 MHz) by November 30,
2000. This agreement with the FCC (the "FCC Agreement") has been assumed by the
Company as part of the Acquisition and did not terminate as a result of the
Charter Transaction. The Company has agreed to invest approximately $25,100 in
upgrades to its cable infrastructure in accordance with the FCC Agreement.
The Company has spent approximately $3,650 on such upgrades as of April 30,
1999.
11. SUBSEQUENT EVENTS
The Charter Transaction was consummated at the close of business on April
30, 1999. In connection with the closing of the Charter Transaction, all amounts
outstanding under the Credit
F-118
<PAGE> 330
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Agreement, including accrued interest and unpaid fees, were paid in full and the
Credit Agreement was terminated. The effects of the debt repayment and the CC
LLC capital contribution will be reflected in the consolidated financial
statements of the Company for periods subsequent to April 30, 1999.
In connection with the closing of the Charter Transaction, the Time Warner
Agreement was terminated on April 30, 1999 and Media paid Time Warner $650 for
deferred marketing credits owed to program providers under the Programming
Arrangements. See Note 7 (Transactions with Time Warner and related parties).
On May 28, 1999, as a result of the Charter Transaction (i.e., change of
control) and in accordance with the terms and conditions of the indenture
governing the Notes, the Company made an offer (the "Tender Offer") to purchase
any and all of the Notes at 101% of their accreted value, plus accrued and
unpaid interest, if any, through June 28, 1999. The Tender Offer expired on June
23, 1999, whereby 48,762 notes ($1,000 face amount at maturity) were validly
tendered and accepted for purchase. On June 28, 1999, Charter Communications
Operating, LLC, the indirect parent of Group, paid a sum of $34,223 for all of
the Notes validly tendered. Accordingly, the Company recorded this payment for
the extinguishment of debt as a capital contribution.
12. MANAGEMENT AGREEMENT (UNAUDITED)
Effective May 1, 1999, the Company is charged a management fee equal to
3.5% of revenues, as stipulated in the previous management agreement between
Charter and Charter Communications Operating, LLC ("CCO"), the indirect parent
of Group. To the extent that management fees charged to the Company are
greater/(less) than the proportionate share (based on basic subscribers) of
corporate expenses incurred by Charter on behalf of the Company, Group will
record distributions to/(capital contributions from) Charter. On November 12,
1999, Charter and CCO entered into a revised management agreement eliminating
the 3.5% management fee and entitling Charter to reimbursement from CCO of all
of its costs incurred in connection with the performance of its services under
the revised management agreement.
F-119
<PAGE> 331
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Renaissance Media Group LLC
We have audited the accompanying consolidated balance sheet of Renaissance
Media Group LLC as of December 31, 1998 and the related consolidated statements
of operations, changes in members' equity, and cash flows for the year ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Renaissance
Media Group LLC at December 31, 1998, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
February 22, 1999
except for Note 11, as to which
the date is February 24, 1999
F-120
<PAGE> 332
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 8,482
Accounts receivable -- trade (less allowance for doubtful
accounts of $92).......................................... 726
Accounts receivable -- other................................ 584
Prepaid expenses and other assets........................... 340
Escrow deposit.............................................. 150
Investment in cable television systems:
Property, plant and equipment............................. 71,246
Less: Accumulated depreciation............................ (7,294)
--------
63,952
--------
Cable television franchises............................... 236,489
Less: Accumulated amortization............................ (11,473)
--------
225,016
--------
Intangible assets......................................... 17,559
Less: Accumulated amortization............................ (1,059)
--------
16,500
--------
Total investment in cable television systems......... 305,468
--------
Total assets...................................... $315,750
========
LIABILITIES AND MEMBERS' EQUITY
Accounts payable............................................ $ 2,042
Accrued expenses(a)......................................... 6,670
Subscriber advance payments and deposits.................... 608
Deferred marketing support.................................. 800
Advances from Holdings...................................... 135
Debt........................................................ 209,874
--------
Total Liabilities................................. 220,129
--------
Members' Equity:
Paid in capital............................................. 108,600
Accumulated deficit......................................... (12,979)
--------
Total members' equity................................ 95,621
--------
Total liabilities and members' equity............. $315,750
========
</TABLE>
- - - ---------------
(a) includes accrued costs from transactions with affiliated companies of $921.
See accompanying notes to financial statements.
F-121
<PAGE> 333
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES.................................................... $ 41,524
--------
COSTS & EXPENSES
Service Costs(a).......................................... 13,326
Selling, General & Administrative......................... 7,711
Depreciation & Amortization............................... 19,107
--------
Operating Income....................................... 1,380
Interest Income........................................ 158
Interest (Expense) (b)................................. (14,358)
--------
(Loss) Before Provision for Taxes...................... (12,820)
Provision for Taxes.................................... 135
--------
Net (Loss)............................................. $(12,955)
========
</TABLE>
- - - ---------------
(a) includes costs from transactions with affiliated companies of $7,523.
(b) includes $676 of amortization of deferred financing costs.
See accompanying notes to financial statements.
F-122
<PAGE> 334
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PAID TOTAL
IN ACCUMULATED MEMBER'S
CAPITAL (DEFICIT) EQUITY
------- ----------- --------
<S> <C> <C> <C>
Contributed Members' Equity -- Renaissance Media
Holdings LLC and Renaissance Media LLC................ $ 15,000 $ (24) $14,976
Additional capital contributions........................ 93,600 -- 93,600
Net (Loss).............................................. -- (12,955) (12,955)
-------- -------- -------
Balance December 31, 1998............................... $108,600 $(12,979) $95,621
======== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-123
<PAGE> 335
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net (loss).................................................. $(12,955)
Adjustments to non-cash and non-operating items:
Depreciation and amortization............................. 19,107
Accretion on Senior Discount Notes........................ 7,363
Other non-cash charges.................................... 730
Changes in operating assets and liabilities:
Accounts receivable -- trade, net...................... (726)
Accounts receivable -- other........................... (584)
Prepaid expenses and other assets...................... (338)
Accounts payable....................................... 2,031
Accrued expenses....................................... 6,660
Subscriber advance payments and deposits............... 608
Deferred marketing support............................. 800
--------
Net cash provided by operating activities................... 22,696
--------
INVESTING ACTIVITIES:
Purchased cable television systems:
Property, plant and equipment.......................... (65,580)
Cable television franchises............................ (235,412)
Cash paid in excess of identifiable assets............. (8,608)
Escrow deposit............................................ (150)
Capital expenditures...................................... (5,683)
Cable television franchises............................... (1,077)
Other intangible assets................................... (526)
--------
Net cash (used in) investing activities..................... (317,036)
--------
FINANCING ACTIVITIES:
Debt acquisition costs.................................... (8,323)
Principal repayments on bank debt......................... (7,500)
Advances from Holdings.................................... 33
Proceeds from bank debt................................... 110,000
Proceeds from 10% Senior Discount Notes................... 100,012
Capital contributions..................................... 108,600
--------
Net cash provided by financing activities................... 302,822
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 8,482
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1997.............. --
--------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1998.............. $ 8,482
========
SUPPLEMENTAL DISCLOSURES:
INTEREST PAID............................................. $ 4,639
========
</TABLE>
See accompanying notes to financial statements.
F-124
<PAGE> 336
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Renaissance Media Group LLC ("Group") was formed on March 13, 1998 by
Renaissance Media Holdings LLC ("Holdings"). Holdings is owned by Morgan Stanley
Capital Partners III, L.P. ("MSCP III"), Morgan Stanley Capital Investors, L.P.
("MSCI"), MSCP III 892 Investors, L.P. ("MSCP Investors" and, collectively, with
its affiliates, MSCP III and MSCI and their respective affiliates, the "Morgan
Stanley Entities"), Time Warner and the Management Investors. On March 20, 1998,
Holdings contributed to Group its membership interests in two wholly-owned
subsidiaries; Renaissance Media (Louisiana) LLC ("Louisiana") and Renaissance
Media (Tennessee) LLC ("Tennessee"), which were formed on January 7, 1998.
Louisiana and Tennessee acquired a 76% interest and 24% interest, respectively,
in Renaissance Media LLC ("Media") from Morgan Stanley Capital Partners III,
Inc. ("MSCP"), on February 13, 1998 through an acquisition of entities under
common control accounted for as if it were a pooling of interests. As a result,
Media became a subsidiary of Group and Holdings. Group and its aforementioned
subsidiaries are collectively referred to as the "Company". On April 9, 1998,
the Company acquired (the "Acquisition") six cable television systems (the
"Systems") from TWI Cable, Inc. ("TWI Cable"), a subsidiary of Time Warner Inc.
("Time Warner"). See Note 3. Prior to this Acquisition, the Company had no
operations other than start-up related activities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NEW ACCOUNTING STANDARDS
During fiscal 1998, the Financial Accounting Standards Board ("FASB")
issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133").
FAS 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The Company
will adopt FAS 133 as of January 1, 2000. The impact of the adoption on the
Company's consolidated financial statements is not expected to be material.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of the Company and its wholly owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated.
CONCENTRATION OF CREDIT RISK
A significant portion of the customer base is concentrated within the local
geographical area of each of the individual cable television systems. The
Company generally extends credit to customers and the ultimate collection of
accounts receivable could be affected by the local economy. Management performs
continuous credit evaluations of its customers and may require cash in advance
or other special arrangements from certain customers. Management does not
believe that there is any significant credit risk which could have a material
effect on the Company's financial condition.
REVENUE AND COSTS
Subscriber fees are recorded as revenue in the period the related services
are provided and advertising revenues are recognized in the period the related
advertisements are exhibited.
F-125
<PAGE> 337
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Rights to exhibit programming are purchased from various cable networks. The
costs of such rights are generally expensed as the related services are made
available to subscribers.
ADVERTISING COSTS
Advertising costs are expensed upon the first exhibition of the related
advertisements. Advertising expense amounted to $491 in 1998.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and investments in short-term,
highly liquid securities, which have maturities when purchased of three months
or less.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at purchased and capitalized
cost. Capitalized internal costs principally, consist of employee costs and
interest on funds borrowed during construction. Capitalized labor, materials and
associated overhead amounted to approximately $1,429 in 1998. Replacements,
renewals and improvements to installed cable plant are capitalized. Maintenance
and repairs are charged to expense as incurred. Depreciation expense for the
year ended December 31, 1998 amounted to $7,314. Property, plant and equipment
is depreciated using the straight-line method over the following estimated
service lives:
<TABLE>
<S> <C>
Buildings and leasehold improvements........................ 5 - 30 years
Cable systems, equipment and subscriber devices............. 5 - 30 years
Transportation equipment.................................... 3 - 5 years
Furniture, fixtures and office equipment.................... 5 - 10 years
</TABLE>
Property, plant and equipment at December 31, 1998 consisted of:
<TABLE>
<S> <C>
Land...................................................... $ 432
Buildings and leasehold improvements...................... 1,347
Cable systems, equipment and subscriber devices........... 62,740
Transportation equipment.................................. 2,181
Furniture, Fixtures and office equipment.................. 904
Construction in progress.................................. 3,642
-------
71,246
Less: accumulated depreciation.............................. (7,294)
-------
Total............................................. $63,952
=======
</TABLE>
F-126
<PAGE> 338
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
CABLE TELEVISION FRANCHISES AND INTANGIBLE ASSETS
Cable television franchise costs include the assigned fair value, at the
date of acquisition, of the franchises from purchased cable television systems.
Intangible assets include goodwill, deferred financing and other intangible
assets. Cable television franchises and intangible assets are amortized using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Cable television franchises................................. 15 years
Goodwill.................................................... 25 years
Deferred financing and other intangible assets.............. 2 - 10 years
</TABLE>
Intangible assets at December 31, 1998 consisted of:
<TABLE>
<S> <C>
Goodwill.................................................... $ 8,608
Deferred Financing Costs.................................... 8,323
Other intangible assets..................................... 628
-------
17,559
Less: accumulated amortization.............................. (1,059)
-------
Total............................................. $16,500
=======
</TABLE>
The Company periodically reviews the carrying value of its long-lived
assets, including property, plant and equipment, cable television franchises and
intangible assets, whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. To the extent the estimated future cash
inflows attributable to the asset, less estimated future cash outflows, is less
than the carrying amount, an impairment loss is recognized to the extent that
the carrying value of such asset is greater than its fair value.
ESTIMATES USED IN FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
3. ACQUISITIONS
TWI CABLE
On April 9, 1998, the Company acquired six cable television systems from
TWI Cable. The systems are clustered in southern Louisiana, western Mississippi
and western Tennessee. This Acquisition represented the first acquisition by the
Company. The purchase price for the systems was $309,500 which was paid as
follows: TWI Cable received $300,000 in cash, inclusive of an escrow deposit of
$15,000, and a $9,500 (9,500 units) equity interest in Renaissance Media
Holdings LLC, the parent company of Group. In addition to the purchase price,
the Company incurred approximately $1,385 in transaction costs, exclusive of
financing costs.
The Acquisition was accounted for using the purchase method and,
accordingly, results of operations are reported from the date of the Acquisition
(April 9, 1998). The excess of the purchase price over the estimated fair value
of the tangible assets acquired has been allocated to cable television
franchises and goodwill in the amount of $235,387 and $8,608, respectively.
F-127
<PAGE> 339
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
DEFFNER CABLE
On August 31, 1998, the Company acquired the assets of Deffner Cable, a
cable television company located in Gadsden, Tennessee. The purchase price was
$100 and was accounted for using the purchase method. The allocation of the
purchase price is subject to change, although management does not believe that
any material adjustment to such allocation is expected.
BAYOU VISION, INC.
On February 3, 1999, Media acquired the cable television assets of Bayou
Vision, Inc. and Gulf South Cable, Inc. serving approximately 1,950 subscribers
in the Villages of Estherwood, Morse and Mermentau and Acadia and Livingston
Parish, Louisiana. The cash purchase price was approximately $2,700 and was paid
out of available Company funds.
Unaudited Pro Forma summarized results of operations for the Company for
the year ended December 31, 1998 and 1997, assuming the Acquisition, Notes (as
hereinafter defined) offering and Credit Agreement (as hereinafter defined) had
been consummated on January 1, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1998
---- ----
<S> <C> <C>
Revenues.................................................... $ 50,987 $ 56,745
Expenses.................................................... 53,022 55,210
-------- --------
Operating (loss) income..................................... (2,035) 1,535
Interest expense and other expenses......................... (19,740) (19,699)
-------- --------
Net (Loss).................................................. $(21,775) $(18,164)
======== ========
</TABLE>
4. DEBT
As of December 31, 1998, debt consisted of:
<TABLE>
<S> <C>
10.00% Senior Discount Notes at Accreted Value(a)........... $107,374
Credit Agreement(b)......................................... 102,500
--------
$209,874
========
</TABLE>
(a) On April 9, 1998, in connection with the Acquisition described in Note
3, the Company issued $163,175 principal amount at maturity, $100,012 initial
accreted value, of 10.00% senior discount notes due 2008 ("Notes"). The Notes
pay no interest until April 15, 2003. From and after April 15, 2003 the Notes
will bear interest, payable semi-annually in cash, at a rate of 10% per annum on
April 15 and October 15 of each year, commencing October 15, 2003. The Notes are
due on April 15, 2008.
(b) On April 9, 1998, Renaissance Media entered into a credit agreement
among Morgan Stanley & Co. Incorporated as Placement Agent, Morgan Stanley
Senior Funding Inc., as Syndication Agent, the Lenders, CIBC Inc., as
Documentation Agent and Bankers Trust Company as Administrative Agent (the
"Credit Agreement"). The aggregate commitments under the Credit Agreement total
$150,000, consisting of a $40,000 revolver, $60,000 Tranche A Term Loans and
$50,000 Tranche B Term Loans (collectively the "Term Loans"). The revolving
credit and term loans are collateralized by a first lien position on all present
and future assets and the member's
F-128
<PAGE> 340
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
interest of Media, Louisiana and Tennessee. The Credit Agreement provides for
interest at varying rates based upon various borrowing options and the
attainment of certain financial ratios and for commitment fees of 1/2% on the
unused portion of the revolver. The effective interest rate, including
commitment fees and amortization of related deferred financing costs and the
interest-rate cap, for the year ended December 31, 1998 was 8.82%.
On April 9, 1998, $110,000 was borrowed under the Credit Agreement's
Tranche A and B Term Loans. On June 23, 1998, $7,500 was repaid resulting in
$102,500 of outstanding Tranche A and B Term Loans as of December 31, 1998.
As of December 31, 1998, the Company had unrestricted use of the $40,000
revolver. No borrowings had been made by the Company under the revolver through
that date.
Annual maturities of borrowings under the Credit Agreement for the years
ending December 31 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 776
2000........................................................ 1,035
2001........................................................ 2,701
2002........................................................ 9,506
2003........................................................ 11,590
2004........................................................ 11,590
Thereafter.................................................. 65,302
--------
102,500
Less: Current portion....................................... (776)
--------
$101,724
========
</TABLE>
The Credit Agreement and the Indenture pursuant to which the Notes were
issued contain restrictive covenants on the Company and subsidiaries regarding
additional indebtedness, investment guarantees, loans, acquisitions, dividends
and merger or sale of the subsidiaries and require the maintenance of certain
financial ratios.
Total interest cost incurred for the year ended December 31, 1998,
including commitment fees and amortization of deferred financing and
interest-rate cap costs was $14,358, net of capitalized interest of $42.
5. INTEREST RATE-CAP AGREEMENT
The Company purchases interest-rate cap agreements that are designed to
limit its exposure to increasing interest rates and are designated to its
floating rate debt. The strike price of these agreements exceeds the current
market levels at the time they are entered into. The interest rate indices
specified by the agreements have been and are expected to be highly correlated
with the interest rates the Company incurs on its floating rate debt. Payments
to be received as a result of the specified interest rate index exceeding the
strike price are accrued in other assets and are recognized as a reduction of
interest expense (the accrual accounting method). The cost of these agreements
is included in other assets and amortized to interest expense ratably during the
life of the agreement. Upon termination of an interest-rate cap agreement, any
gain is deferred in other liabilities and amortized over the remaining term of
the original contractual life of the agreement as a reduction of interest
expense.
F-129
<PAGE> 341
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
On December 1, 1997, the Company purchased an interest-rate cap agreement
from Morgan Stanley Capital Services Inc. The carrying value as of December 31,
1998 was $47. The fair value of the interest-rate cap, which is based upon the
estimated amount that the Company would receive or pay to terminate the cap
agreement as of December 31, 1998, taking into consideration current interest
rates and the credit worthiness of the counterparties, approximates its carrying
value.
The following table summarizes the interest-rate cap agreement:
<TABLE>
<CAPTION>
NOTIONAL INITIAL
PRINCIPAL EFFECTIVE TERMINATION CONTRACT FIXED RATE
AMOUNT TERM DATE DATE COST (PAY RATE)
- - - --------- ---- --------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C>
$100,000 2 years 12/1/97 12/1/99 $100 7.25%
</TABLE>
6. TAXES
For the year ended December 31, 1998, the provision for income taxes has
been calculated on a separate company basis. The components of the provision for
income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Federal:
Current................................................... $ --
Deferred.................................................. --
State:
Current................................................... 135
Deferred.................................................. --
----
Provision for income taxes............................. $135
====
</TABLE>
The Company's current state tax liability results from its obligation to
pay franchise tax in Tennessee and Mississippi and tax on capital in New York.
The Company has a net operating loss ("NOL") carryforward for income tax
purposes which is available to offset future taxable income. This NOL totals
approximately $14,900 and expires in the year 2018. The Company has established
a valuation allowance to offset the entire potential future tax benefit of the
NOL carryforward and, therefore, has recognized no deferred tax asset with
respect to the NOL.
Louisiana and Tennessee have elected to be treated as corporations for
federal income tax purposes and have not recorded any tax benefit for their
losses as the realization of theses losses by reducing future taxable income in
the carry forward period is uncertain at this time.
7. RELATED PARTY TRANSACTIONS
(a) TRANSACTIONS WITH MORGAN STANLEY ENTITIES
In connection with the Acquisition, Media entered into the Credit Agreement
with Morgan Stanley Senior Funding Inc. and Morgan Stanley & Co. Incorporated
acted as the Placement Agent for the Notes. In connection with these services
the Morgan Stanley Entities received customary fees and expense reimbursement.
F-130
<PAGE> 342
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
(b) TRANSACTIONS WITH TIME WARNER AND RELATED PARTIES
In connection with the Acquisition, Media entered into an agreement with
Time Warner, pursuant to which Time Warner manages the Company's programming in
exchange for providing the Company access to certain Time Warner programming
arrangements.
(c) Transactions with Management
Prior to the consummation of the Acquisition described in Note 3, Media
paid fees in 1998 to six senior executives of the Company who are investors in
the Company (the "Management Investors") for services rendered prior to their
employment by Media relating to the Acquisition and the Credit Agreement. These
fees totaled $287 and were recorded as transaction and financing costs.
(d) DUE TO MANAGEMENT INVESTORS
Prior to the formation of the Company, the Management Investors advanced
$1,000 to Holdings, which was used primarily for working capital purposes. Upon
formation of the Company, Holdings contributed certain assets and liabilities to
Group and the $1,000 advance from the Management Investors was recorded as paid
in capital.
(e) TRANSACTIONS WITH BOARD MEMBER
The Company has utilized the law firm of one of its board members for legal
services for the Acquisition, financing agreements and various ongoing legal
matters. These fees totaled approximately $1,348 for the year ended December 31,
1998.
8. ACCRUED EXPENSES
Accrued expenses as of December 31, 1998 consist of the following:
<TABLE>
<S> <C>
Accrued programming costs................................... $1,986
Accrued interest............................................ 1,671
Accrued franchise fees...................................... 1,022
Accrued legal and professional fees,........................ 254
Accrued salaries, wages and benefits........................ 570
Accrued property and sales tax.............................. 637
Other accrued expenses...................................... 530
------
$6,670
======
</TABLE>
9. EMPLOYEE BENEFIT PLAN
Effective April 9, 1998, the Company began sponsoring a defined
contribution plan which covers substantially all employees (the "Plan"). The
Plan provides for contributions from eligible employees up to 15% of their
compensation. The Company's contribution to the Plan is limited to 50% of each
eligible employee's contribution up to 10% of his or her compensation. The
Company has the right in any year to set the amount of the Company's
contribution percentage. Company matching contributions to the Plan for the year
ended December 31, 1998 were approximately $97. All participant contributions
and earnings are fully vested upon contribution
F-131
<PAGE> 343
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
and company contributions and earnings vest 20% per year of employment with the
Company, becoming fully vested after five years.
10. COMMITMENTS AND CONTINGENCIES
(a) LEASES
The Company had rental expense under various lease and rental agreements
primarily for offices, tower sites and warehouses of approximately $125 in 1998.
In addition, the Company rents utility poles in its operations generally under
short term arrangements, but the Company expects these arrangements to recur.
Total rent expense for utility poles was approximately $620 in 1998. Future
minimum annual rental payments under noncancellable leases are as follows:
<TABLE>
<S> <C>
1999............................................... $162
2000............................................... 38
2001............................................... 24
2002............................................... 20
2003 and thereafter................................ 66
----
Total......................................... $310
====
</TABLE>
(b) EMPLOYMENT AGREEMENTS
Media has entered into employment agreements with six senior executives who
are also investors in Holdings. Under the conditions of five of the agreements
the employment term is five years, expiring in April 2003 and requires Media to
continue salary payments (including any bonus) through the term if the
executive's employment is terminated by Media without cause, as defined in the
employment agreement. Media's obligations under the employment agreements may be
reduced in certain situations based on actual operating performance relative to
the business plan, death or disability or by actions of the other senior
executives.
The employment agreement for one senior executive has a term of one year
and may be renewed annually. This agreement has been renewed through April 8,
2000.
(c) OTHER AGREEMENTS
In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996, Time
Warner agreed with the Federal Communications Commission ("FCC") to invest in
certain upgrades to its cable infrastructure (consisting primarily of materials
and labor in connection with the plant upgrades up to 750 megahertz) by 1999
(approximately $23 million). This agreement with the FCC has been assumed by the
Company as part of the Acquisition.
11. SUBSEQUENT EVENT
On February 23, 1999, Holdings entered into an agreement with Charter
Communications, LLC and Charter Communications, Inc., to sell 100% of its
members' equity in the Company for approximately $459,000, subject to certain
closing conditions. This transaction is expected to close during the third
quarter of 1999.
F-132
<PAGE> 344
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
12. YEAR 2000 ISSUES (UNAUDITED)
The Company relies on computer systems, related software applications and
other control devices in operating and monitoring all major aspects of its
business, including, but not limited to, its financial systems (such as general
ledger, accounts payable, payroll and fixed asset modules), subscriber billing
systems, internal networks and telecommunications equipment. The Company also
relies, directly and indirectly, on the external systems of various independent
business enterprises, such as its suppliers and financial organizations, for the
accurate exchange of data.
The Company continues to assess the likely impact of Year 2000 issues on
its business operations, including its material information technology ("IT")
and non-IT applications. These material applications include all billing and
subscriber information systems, general ledger software, payroll systems,
accounting software, phone switches and certain headend applications, all of
which are third party supported.
The Company believes it has identified all systems that may be affected by
Year 2000 Issues. Concurrent with the identification phase, the Company is
securing compliance determinations relative to all identified systems. For those
systems that the Company believes are material, compliance programs have been
received or such systems have been certified by independent parities as Year
2000 compliant. For those material systems that are subject to compliance
programs, the Company expects to receive Year 2000 certifications from
independent parties by the second quarter 1999. Determinations of Year 2000
compliance requirements for less mission critical systems are in progress and
are expected to be completed in the second quarter of 1999.
With respect to third parties with which the Company has a material
relationship, the Company believes its most significant relationships are with
financial institutions, who receive subscriber monthly payments and maintain
Company bank accounts, and subscriber billing and management systems providers.
We have received compliance programs which if executed as planned should provide
a high degree of assurance that all Year 2000 issues will be addressed by mid
1999.
The Company has not incurred any material Year 2000 costs to date, and
excluding the need for contingency plans, does not expect to incur any material
Year 2000 costs in the future because most of its applications are maintained by
third parties who have borne Year 2000 compliance costs.
The Company cannot be certain that it or third parties supporting its
systems have resolved or will resolve all Year 2000 issues in a timely manner.
Failure by the Company or any such third party to successfully address the
relevant Year 2000 issues could result in disruptions of the Company's business
and the incurrence of significant expenses by the Company. Additionally, the
Company could be affected by any disruption to third parties with which the
Company does business if such third parties have not successfully addressed
their Year 2000 issues.
Failure to resolve Year 2000 issues could result in improper billing to the
Company's subscribers which could have a major impact on the recording of
revenue and the collection of cash as well as create significant customer
dissatisfaction. In addition, failure on the part of the financial institutions
with which the Company relies on for its cash collection and management services
could also have a significant impact on collections, results of operations and
the liquidity of the Company.
F-133
<PAGE> 345
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998
(ALL DOLLAR AMOUNTS IN THOUSANDS)
The Company has not yet finalized contingency plans necessary to handle the
most likely worst case scenarios. Before concluding as to possible contingency
plans, the Company must determine whether the material service providers
contemplate having such plans in place. In the event that contingency plans from
material service providers are not in place or are deemed inadequate, management
expects to have such plans in place by the third quarter of 1999.
F-134
<PAGE> 346
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
TWI Cable, Inc.
We have audited the accompanying combined balance sheet of the Picayune MS,
Lafourche LA, St. Tammany LA, St. Landry LA, Pointe Coupee LA, and Jackson TN
cable television systems, (collectively, the "Combined Systems") included in TWI
Cable, Inc. ("TWI Cable"), as of April 8, 1998, and the related combined
statements of operations, changes in net assets and cash flows for the period
from January 1, 1998 through April 8, 1998. These combined financial statements
are the responsibility of the Combined Systems' management. Our responsibility
is to express an opinion on these combined financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Combined Systems, included in TWI Cable, at April 8, 1998, and the combined
results of their operations and their cash flows for the period from January 1,
1998 through April 8, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
New York, New York
February 22, 1999
F-135
<PAGE> 347
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 8, 1998
-------------
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 7
Receivables, less allowance of $116......................... 576
Prepaid expenses and other assets........................... 438
Property, plant and equipment, net.......................... 35,992
Cable television franchises, net............................ 195,907
Goodwill and other intangibles, net......................... 50,023
--------
Total assets...................................... $282,943
========
LIABILITIES AND NET ASSETS
Accounts payable............................................ $ 63
Accrued programming expenses................................ 978
Accrued franchise fees...................................... 616
Subscriber advance payments and deposits.................... 593
Deferred income taxes....................................... 61,792
Other liabilities........................................... 747
--------
Total liabilities................................. 64,789
Total net assets.................................. 218,154
--------
Total liabilities and net assets.................. $282,943
========
</TABLE>
See accompanying notes to combined financial statements.
F-136
<PAGE> 348
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1, 1998
THROUGH
APRIL 8, 1998
---------------
<S> <C>
REVENUES.................................................... $15,221
COSTS AND EXPENSES:
Operating and programming................................... 3,603
Selling, general and administrative......................... 4,134
Depreciation and amortization............................... 5,031
(Gain) on disposal of fixed assets.......................... (96)
-------
Total costs and expenses.......................... 12,672
-------
Operating income............................................ 2,549
Provision for income taxes.................................. 1,191
-------
Net income.................................................. $ 1,358
=======
</TABLE>
See accompanying notes to combined financial statements.
F-137
<PAGE> 349
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1997................................ $224,546
Repayment of advances from Parent......................... (17,408)
Advances from Parent...................................... 9,658
Net income................................................ 1,358
--------
Balance at April 8, 1998.................................... $218,154
========
</TABLE>
See accompanying notes to combined financial statements.
F-138
<PAGE> 350
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 1, 1998
THROUGH
APRIL 8, 1998
---------------
<S> <C>
OPERATING ACTIVITIES:
Net income.................................................. $ 1,358
Adjustments for noncash and nonoperating items:
Income tax expense........................................ 1,191
Depreciation and amortization............................. 5,031
(Gain) on disposal of fixed assets........................ (96)
Changes in operating assets and liabilities:
Receivables, prepaids and other assets................. 289
Accounts payable, accrued expenses and other
liabilities........................................... (770)
Other balance sheet changes............................ (4)
-------
Net cash provided by operations............................. 6,999
-------
INVESTING ACTIVITIES:
Capital expenditures........................................ (613)
-------
Net cash used in investing activities....................... (613)
-------
FINANCING ACTIVITIES:
Net repayment of advances from Parent....................... (7,750)
-------
Net cash (used in) financing activities..................... (7,750)
INCREASE IN CASH AND CASH EQUIVALENTS....................... (1,364)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 1,371
-------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 7
=======
</TABLE>
See accompanying notes to combined financial statements.
F-139
<PAGE> 351
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The cable television systems operating in the metropolitan areas of
Picayune, Mississippi; Lafourche, Louisiana; St. Tammany, Louisiana; St. Landry,
Louisiana; Pointe Coupee, Louisiana; and Jackson, Tennessee (the "Combined
Systems") are principally engaged in the cable television business under
non-exclusive franchise agreements, which expire at various times beginning in
1999. The Combined Systems' operations consist primarily of selling video
programming which is distributed to subscribers for a monthly fee through a
network of coaxial and fiber-optic cables.
Prior to January 4, 1996, the Combined Systems were included in certain
subsidiaries of Cablevision Industries Corporation ("CVI"). On January 4, 1996,
CVI merged into a wholly owned subsidiary of Time Warner Inc. (the "CVI
Merger"). On October 1, 1996, Time Warner Inc. ("Time Warner") completed a
reorganization amongst certain of its wholly owned cable television subsidiaries
whereby CVI was renamed TWI Cable Inc. ("TWI Cable").
BASIS OF PRESENTATION
TWI Cable has sold the Combined Systems to Renaissance Media Holdings LLC
("Renaissance") pursuant to an Asset Purchase Agreement with Renaissance, dated
November 14, 1997 (see Note 8). Accordingly, the accompanying combined financial
statements of the Combined Systems reflect the "carved out" historical financial
position, results of operations, cash flows and changes in net assets of the
operations of the Combined Systems as if they had been operating as a separate
company. Effective as of January 1, 1996, the Combined Systems' financial
statements reflect the new basis of accounting arising from Time Warner's merger
with CVI. Based on Time Warner's allocation of the purchase price, the assets
and liabilities of the Combined Systems were revalued resulting in goodwill
allocated to the Combined Systems of approximately $52,971,000, which is being
amortized over its estimated life of 40 years. In addition, approximately
$220,981,000 was allocated to cable television franchises and other intangible
assets, which is being amortized over periods up to 20 years.
The combined statements have been adjusted to include the allocation of
certain corporate expenses incurred by Time Warner Cable and/or TWI Cable on the
Combined Systems' behalf, based upon the number of Combined System subscribers
managed by Time Warner Cable and the ratio of Combined System subscribers to
total TWI Cable subscribers, respectively. These allocations reflect all costs
of doing business that the Combined Systems would have incurred on a stand alone
basis as disclosed in Note 3. Management believes that these allocations are
reasonable.
BASIS OF COMBINATION
The combined financial statements include the assets, liabilities,
revenues, expenses, income, loss and cash flows of the Combined Systems, as if
the Combined Systems were a single company. Significant intercompany accounts
and transactions between the Combined Systems have been eliminated. Significant
accounts and transactions with Time Warner and its affiliates are disclosed as
related party transactions (see Note 3).
F-140
<PAGE> 352
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined financial
statements and footnotes thereto. Actual results could differ from those
estimates.
CONCENTRATION OF CREDIT RISK
A significant portion of the customer base is concentrated within the local
geographical area of each of the individual cable television systems. The
Combined Systems generally extend credit to customers and the ultimate
collection of accounts receivable could be affected by the local economy.
Management performs continuous credit evaluations of its customers and may
require cash in advance or other special arrangements from certain customers.
Management does not believe that there is any significant credit risk which
could have a material effect on the financial condition of the Combined Systems.
REVENUE AND COSTS
Subscriber fees are recorded as revenue in the period the related services
are provided and advertising revenues are recognized in the period the related
advertisements are exhibited. Rights to exhibit programming are purchased from
various cable networks. The costs of such rights are generally expensed as the
related services are made available to subscribers.
FRANCHISE FEES
Local governmental authorities impose franchise fees on the cable
television systems owned by the Combined Systems ranging up to a federally
mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are
collected from the Combined Systems' customers and such fees are not included as
revenue or as a franchise fee expense.
ADVERTISING COSTS
Advertising costs are expensed upon the first exhibition of the related
advertisements. Advertising expense amounted to $105,000 for the period from
January 1, 1998 through April 8, 1998.
STATEMENT OF CASH FLOWS
The Combined Systems participate in a cash management system with
affiliates whereby cash receipts are transferred to a centralized bank account
from which centralized payments to various suppliers and creditors are made on
behalf of the Combined Systems. The excess of such cash receipts over payments
is included in net assets. Amounts shown as cash represent the Combined Systems'
net cash receipts not transferred to the centralized account as of December 31,
1996 and 1997. The average net intercompany payable balances was $166,522,000
for the period from January 1, 1998 through April 8, 1998.
For purposes of this statement, cash and cash equivalents includes all
highly liquid investments purchased with original maturities of three months or
less.
F-141
<PAGE> 353
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to property,
plant and equipment generally include material, labor, overhead and interest.
Depreciation is provided on the straight-line method over estimated useful lives
as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5-20 years
Cable television equipment.................................. 5-15 years
Furniture, fixtures and other equipment..................... 3-10 years
</TABLE>
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
APRIL 8, 1998
-------------
(IN THOUSANDS)
<S> <C>
Land and buildings.......................................... $ 2,255
Cable television equipment.................................. 40,276
Furniture, fixtures and other equipment..................... 2,308
Construction in progress.................................... 1,183
--------
46,022
Less accumulated depreciation............................... (10,030)
--------
Total............................................. $ 35,992
========
</TABLE>
INTANGIBLE ASSETS
The Combined Systems amortized goodwill over periods up to 40 years and
cable television franchises over periods up to 20 years, both using the
straight-line method. For the period from January 1, 1998 through April 8, 1998
amortization of goodwill amounted to $360,000 and amortization of cable
television franchises amounted to $3,008,000. Accumulated amortization of
intangible assets amounted to $28,114,000 at April 8, 1998.
IMPAIRMENT
Management separately reviews the carrying value of acquired long-lived
assets for each acquired entity on a quarterly basis to determine whether an
impairment may exist. Management considers relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of long-lived
assets can be recovered. Upon a determination that the carrying value of
long-lived assets will not be recovered from the undiscounted future cash flows
of the acquired business, the carrying value of such long-lived assets would be
considered impaired and would be reduced by a charge to operations in the amount
of the impairment. An impairment charge is measured as a deficiency in estimated
discounted future cash flows of the acquired business to recover the carrying
value related to the long-lived assets.
INCOME TAXES
Income taxes have been provided using the liability method prescribed by
FASB Statement No. 109, "Accounting for Income Taxes." Under the liability
method, deferred income taxes reflect tax carryforwards and the net tax effects
of temporary differences between the carrying amount of assets and liabilities
for financial statements and income tax purposes, as determined under enacted
tax laws and rates.
F-142
<PAGE> 354
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. EMPLOYEE BENEFIT PLANS
Following the CVI Merger, the Combined Systems began participation in the
Time Warner Cable Pension Plan (the "Pension Plan"), a non-contributory defined
benefit pension plan, and the Time Warner Cable Employee Savings Plan (the
"Savings Plan") which are administered by a committee appointed by the Board of
Representatives of Time Warner Entertainment Company, L.P. ("TWE"), an affiliate
of Time Warner, and which cover substantially all employees.
Benefits under the Pension Plan are determined based on formulas which
reflect an employee's years of service and compensation levels during the
employment period. Pension expense for the period from January 1, 1998 through
April 8, 1998 totaled $61,000.
The Combined Systems' contributions to the Savings Plan are limited to
6.67% of an employee's eligible compensation during the plan year. The Board of
Representatives of TWE has the right in any year to set the maximum amount of
the Combined Systems' contribution. Defined contribution plan expense for the
period from January 1, 1998 through April 8, 1998 totaled $38,000.
The Combined Systems have no material obligations for other post retirement
benefits.
3. RELATED PARTIES
In the normal course of conducting business, the Combined Systems had
various transactions with Time Warner and its affiliates, generally on terms
resulting from a negotiation between the affected units that in management's
view resulted in reasonable allocations.
PROGRAMMING
Included in the Combined Systems' operating expenses are charges for
programming and promotional services provided by Home Box Office, Turner
Broadcasting System, Inc. and other affiliates of Time Warner. These charges are
based on customary rates and are in the ordinary course of business. These
charges totaled $1,164,000 for the period from January 1, 1998 through April 8,
1998. Accrued related party expenses for these programming and promotional
services included in accrued programming expenses approximated $409,000 for the
period from January 1, 1998 through April 8, 1998.
MANAGEMENT FEES
TWI Cable entered into a management service arrangement with Time Warner
Cable ("TWC"), pursuant to which TWC is responsible for the management and
operation of TWI Cable, which includes the Combined Systems. The management fees
paid to TWC by TWI Cable are based on an allocation of the corporate expenses of
TWC's cable division in proportion to the respective number of subscribers of
all cable systems managed by TWC's cable division. The allocation of the TWI
Cable management fee to the Combined Systems approximated $486,000 for the
period from January 1, 1998 through April 8, 1998.
Other divisional expenses allocated to the Combined Systems approximated
$299,000 for the period from January 1, 1998 through April 8, 1998.
F-143
<PAGE> 355
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. INTEREST EXPENSE
Prior to the CVI Merger, the Jackson, Tennessee system was included in
Cablevision Industries Limited Partnership and Combined Entities ("CILP"). The
Jackson system was charged interest expense in connection with CILP's (a) senior
and subordinated bank credit agreements; and (b) senior unsecured subordinated
Series A and Series B notes payable to CVI. The remaining five systems
comprising the Combined Systems were included in Cablevision Industries of the
Southeast, Inc. and Combined Entities ("CIOS"). These systems were charged
interest expense in connection with CIOS's (a) bank revolving credit agreement;
and (b) junior and senior subordinated debt to CVI.
5. INCOME TAXES
Effective January 4, 1996, the Combined Systems are included in the
consolidated federal income tax return of Time Warner. Prior to January 4, 1996,
the Combined Systems were included in the consolidated federal income tax return
of CVI. The provision for income taxes has been calculated on a separate company
basis. The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM JANUARY 1, 1998
THROUGH
APRIL 8, 1998
--------------------
(IN THOUSANDS)
<S> <C>
Federal:
Current................................................. $ --
Deferred................................................ 962
State:
Current................................................. --
Deferred................................................ 229
------
Net provision for income taxes....................... $1,191
======
</TABLE>
The Combined Systems did not, and will not, have a tax sharing agreement
with either Time Warner, TWI Cable or CVI. Therefore, the Combined Systems have
not and will not be compensated for the utilization of the Combined Systems' tax
losses, by Time Warner, TWI Cable or CVI. In addition, the Combined Systems have
not and will not be required to make payments to either Time Warner or TWI Cable
for the current tax provision of the Combined Systems.
The differences between the income tax provision expected at the U.S.
federal statutory income tax rate and the total income tax provision are due to
nondeductible goodwill amortization and state taxes.
F-144
<PAGE> 356
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Combined Systems' deferred tax assets and
liabilities, as calculated on a separate company basis, are as follows:
<TABLE>
<CAPTION>
APRIL 8, 1998
-------------
(IN THOUSANDS)
<S> <C>
Deferred tax liabilities:
Amortization.............................................. $57,817
Depreciation.............................................. 4,181
-------
Total gross deferred tax liabilities.............. 61,998
-------
Deferred tax assets:
Tax loss carryforwards.................................... 160
Allowance for doubtful accounts........................... 46
-------
Total deferred tax assets......................... 206
-------
Net deferred tax liability........................ $61,792
=======
</TABLE>
On a separate company basis, the Combined Systems have tax loss
carryforwards of approximately $400,000 at April 8, 1998. However, if the
Combined Systems are acquired in an asset purchase, the tax loss carryforwards,
and net deferred tax liabilities relating to temporary differences will not
carry over to Renaissance (see Note 8).
6. COMMITMENTS AND CONTINGENCIES
The Combined Systems had rental expense of approximately $244,000 for the
period from January 1, 1998 through April 8, 1998 under various lease and rental
agreements for offices, utility poles, warehouses and computer equipment. Future
minimum annual rental payments under noncancellable leases will approximate
$1,000,000 annually over the next five years.
In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996, TWC
has agreed with the Federal Communications Commission ("FCC") to invest in
certain upgrades to its cable infrastructure (consisting primarily of materials
and labor in connection with the plant upgrades up to 750 megahertz) over the
next three years (approximately $25 million at December 31, 1997). This
agreement with the FCC, which extends to the Combined Systems, will be assumed
by Renaissance as it relates to the Combined Systems in accordance with the
Asset Purchase Agreement.
F-145
<PAGE> 357
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. OTHER LIABILITIES
Other liabilities consist of:
<TABLE>
<CAPTION>
APRIL 8, 1998
-------------
(IN THOUSANDS)
<S> <C>
Compensation................................................ $279
Data Processing Costs....................................... 161
Sales and other taxes....................................... 146
Copyright Fees.............................................. 35
Pole Rent................................................... 93
Other....................................................... 33
----
Total............................................. $747
====
</TABLE>
8. SUBSEQUENT EVENT
The sale of the Combined Systems, in connection with the Asset Purchase
Agreement with Renaissance, closed on April 9, 1998 at the purchase price of
$309,500,000.
F-146
<PAGE> 358
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
TWI Cable Inc.
We have audited the accompanying combined balance sheets of the Picayune
MS, Lafourche LA, St. Tammany LA, St. Landry LA, Pointe Coupee LA, and Jackson
TN cable television systems, (collectively, the "Combined Systems") included in
TWI Cable, Inc. ("TWI Cable"), as of December 31, 1996 and 1997, the related
combined statements of operations, changes in net assets and cash flows for the
years then ended. In addition, we have audited the combined statement of
operations and cash flows for the year ended December 31, 1995 of the
Predecessor Combined Systems. These combined financial statements are the
responsibility of the Combined Systems' or the Predecessor's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Combined
Systems, included in TWI Cable or the Predecessor, at December 31, 1996 and
1997, and the combined results of their operations and their cash flows for the
years ended December 31, 1995, 1996 and 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
March 16, 1998
F-147
<PAGE> 359
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 570 $ 1,371
Receivables, less allowance of $71 and $116 for the years
ended December 31, 1996 and 1997, respectively............ 794 1,120
Prepaid expenses and other assets........................... 45 183
Property, plant and equipment, net.......................... 36,966 36,944
Cable television franchises, net............................ 209,952 198,913
Goodwill and other intangibles, net......................... 51,722 50,383
-------- --------
Total assets...................................... $300,049 $288,914
======== ========
LIABILITIES AND NET ASSETS
Accounts payable............................................ $ 1,640 $ 652
Accrued programming expenses................................ 847 904
Accrued franchise fees...................................... 736 835
Subscriber advance payments and deposits.................... 66 407
Deferred income taxes....................................... 58,340 60,601
Other liabilities........................................... 945 969
-------- --------
Total liabilities................................. 62,574 64,368
Total net assets.................................. 237,475 224,546
-------- --------
Total liabilities and net assets.................. $300,049 $288,914
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-148
<PAGE> 360
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997
---- ---- ----
(PREDECESSOR) (INCLUDED IN TWI CABLE INC.)
<S> <C> <C> <C>
REVENUES............................................ $43,549 $47,327 $50,987
COSTS AND EXPENSES:
Operating and programming........................... 13,010 12,413 12,101
Selling, general and administrative................. 9,977 12,946 13,823
Depreciation and amortization....................... 17,610 18,360 18,697
(Gain) loss on disposal of fixed assets............. -- (244) 620
------- ------- -------
Total costs and expenses.................. 40,597 43,475 45,241
------- ------- -------
Operating income.................................... 2,952 3,852 5,746
Interest expense.................................... 11,871 -- --
------- ------- -------
(Loss) income before income tax (benefit) expense... (8,919) 3,852 5,746
Income tax (benefit) expense........................ (3,567) 1,502 2,262
------- ------- -------
Net (loss) income................................... $(5,352) $ 2,350 $ 3,484
======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-149
<PAGE> 361
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<S> <C>
Contribution by Parent...................................... $250,039
Repayment of advances from Parent......................... (47,895)
Advances from Parent...................................... 32,981
Net income................................................ 2,350
--------
Balance at December 31, 1996................................ 237,475
Repayment of advances from Parent......................... (50,661)
Advances from Parent...................................... 34,248
Net income................................................ 3,484
--------
Balance at December 31, 1997................................ $224,546
========
</TABLE>
See accompanying notes to combined financial statements.
F-150
<PAGE> 362
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
---- ---- ----
(PREDECESSOR) (INCLUDED IN TWI CABLE INC.)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income................................... $(5,352) $ 2,350 $ 3,484
Adjustments for noncash and nonoperating items:
Income tax (benefit) expense................... (3,567) 1,502 2,262
Depreciation and amortization.................. 17,610 18,360 18,697
(Gain) loss on disposal of fixed assets........ -- (244) 620
Changes in operating assets and liabilities:
Receivables, prepaids and other assets....... (196) 944 (464)
Accounts payable, accrued expenses and other
liabilities............................... (972) 176 (466)
Other balance sheet changes.................. -- -- (529)
------- --------- --------
Net cash provided by operations..................... 7,523 23,088 23,604
INVESTING ACTIVITIES:
Purchase of Predecessor cable systems, net of cash
acquired.......................................... -- (249,473) --
Capital expenditures................................ (7,376) (8,170) (6,390)
------- --------- --------
Net cash used in investing activities............... (7,376) (257,643) (6,390)
FINANCING ACTIVITIES:
Advance from Parent for purchase of Predecessor..... -- 250,039 --
Net repayment of advances from Parent............... -- (14,914) (16,413)
------- --------- --------
Net cash provided by (used in) financing
activities........................................ -- 235,125 (16,413)
INCREASE IN CASH AND CASH EQUIVALENTS............... 147 570 801
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.... 419 0 570
------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......... $ 566 $ 570 $ 1,371
======= ========= ========
</TABLE>
See accompanying notes to combined financial statements.
F-151
<PAGE> 363
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The cable television systems operating in the metropolitan areas of
Picayune, Mississippi; Lafourche, Louisiana; St. Tammany, Louisiana; St. Landry,
Louisiana; Pointe Coupee, Louisiana; and Jackson, Tennessee (the "Combined
Systems") are principally engaged in the cable television business under
non-exclusive franchise agreements, which expire at various times beginning in
1999. The Combined Systems' operations consist primarily of selling video
programming which is distributed to subscribers for a monthly fee through a
network of coaxial and fiber-optic cables.
Prior to January 4, 1996, the Combined Systems were included in certain
subsidiaries of Cablevision Industries Corporation ("CVI"). On January 4, 1996,
CVI merged into a wholly owned subsidiary of Time Warner Inc. (the "CVI
Merger"). On October 1, 1996, Time Warner Inc. ("Time Warner") completed a
reorganization amongst certain of its wholly owned cable television subsidiaries
whereby CVI was renamed TWI Cable Inc. ("TWI Cable").
BASIS OF PRESENTATION
TWI Cable has committed to sell the Combined Systems to Renaissance Media
Holdings LLC ("Renaissance") pursuant to an Asset Purchase Agreement with
Renaissance, dated November 14, 1997. Accordingly, the accompanying combined
financial statements of the Combined Systems reflect the "carved out" historical
financial position, results of operations, cash flows and changes in net assets
of the operations of the Combined Systems as if they had been operating as a
separate company. Effective as of January 1, 1996, the Combined Systems'
financial statements reflect the new basis of accounting arising from Time
Warner's merger with CVI. Based on Time Warner's allocation of the purchase
price, the assets and liabilities of the Combined Systems were revalued
resulting in goodwill allocated to the Combined Systems of approximately
$52,971,000, which is being amortized over its estimated life of 40 years. In
addition, approximately $220,981,000 was allocated to cable television
franchises and other intangible assets, which is being amortized over periods up
to 20 years. The Combined Systems' financial statements through December 31,
1995 reflect the historical cost of their assets and liabilities and results of
their operations.
The combined statements have been adjusted to include the allocation of
certain corporate expenses incurred by Time Warner Cable and/or TWI Cable on the
Combined Systems' behalf, based upon the number of Combined System subscribers
managed by Time Warner Cable and the ratio of Combined System subscribers to
total TWI Cable subscribers, respectively. These allocations reflect all costs
of doing business that the Combined Systems would have incurred on a stand alone
basis as disclosed in Note 3. Management believes that these allocations are
reasonable.
BASIS OF COMBINATION
The combined financial statements include the assets, liabilities,
revenues, expenses, income, loss and cash flows of the Combined Systems, as if
the Combined Systems were a single company. Significant intercompany accounts
and transactions between the Combined Systems have been eliminated. Significant
accounts and transactions with Time Warner and its affiliates are disclosed as
related party transactions (see Note 3).
F-152
<PAGE> 364
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined financial
statements and footnotes thereto. Actual results could differ from those
estimates.
CONCENTRATION OF CREDIT RISK
A significant portion of the customer base is concentrated within the local
geographical area of each of the individual cable television systems. The
Combined Systems generally extend credit to customers and the ultimate
collection of accounts receivable could be affected by the local economy.
Management performs continuous credit evaluations of its customers and may
require cash in advance or other special arrangements from certain customers.
Management does not believe that there is any significant credit risk which
could have a material effect on the financial condition of the Combined Systems.
REVENUE AND COSTS
Subscriber fees are recorded as revenue in the period the related services
are provided and advertising revenues are recognized in the period the related
advertisements are exhibited. Rights to exhibit programming are purchased from
various cable networks. The costs of such rights are generally expensed as the
related services are made available to subscribers.
FRANCHISE FEES
Local governmental authorities impose franchise fees on the cable
television systems owned by the Combined Systems ranging up to a federally
mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are
collected from the Combined Systems' customers. Prior to January 1997, franchise
fees were not separately itemized on customers' bills. Such fees were considered
part of the monthly charge for basic services and equipment, and therefore were
reported as revenue and expense in the Combined Systems' financial results.
Management began the process of itemizing such fees on all customers' bills
beginning in January 1997. In conjunction with itemizing these charges, the
Combined Systems began separately collecting the franchise fee on all revenues
subject to franchise fees. As a result, such fees are no longer included as
revenue or as franchise fee expense. The net effect of this change is a
reduction in 1997 revenue and franchise fee expense of approximately $1,500,000
versus the comparable period in 1996.
ADVERTISING COSTS
Advertising costs are expensed upon the first exhibition of the related
advertisements. Advertising expense amounted to $308,000, $632,000 and $510,000
for the years ended 1995, 1996 and 1997, respectively.
STATEMENT OF CASH FLOWS
The Combined Systems participate in a cash management system with
affiliates whereby cash receipts are transferred to a centralized bank account
from which centralized payments to various suppliers and creditors are made on
behalf of the Combined Systems. The excess of
F-153
<PAGE> 365
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
such cash receipts over payments is included in net assets. Amounts shown as
cash represent the Combined Systems' net cash receipts not transferred to the
centralized account as of December 31, 1996 and 1997. The average net
intercompany payable balances were $173,348,000 and $170,438,000 for the years
ended December 31, 1996 and 1997, respectively.
For purposes of this statement, cash and cash equivalents includes all
highly liquid investments purchased with original maturities of three months or
less.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions to property,
plant and equipment generally include material, labor, overhead and interest.
Depreciation is provided on the straight-line method over estimated useful lives
as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5-20 years
Cable television equipment.................................. 5-15 years
Furniture, fixtures and other equipment..................... 3-10 years
</TABLE>
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
---- ----
<S> <C> <C>
Land and buildings.......................................... $ 2,003 $ 2,265
Cable television equipment.................................. 32,324 39,589
Furniture, fixtures and other equipment..................... 1,455 2,341
Construction in progress.................................... 5,657 1,028
------- -------
41,439 45,223
Less accumulated depreciation............................... (4,473) (8,279)
------- -------
Total............................................. $36,966 $36,944
======= =======
</TABLE>
INTANGIBLE ASSETS
During 1996 and 1997, the Combined Systems amortized goodwill over periods
up to 40 years and cable television franchises over periods up to 20 years, both
using the straight-line method. Prior to the CVI Merger, goodwill and cable
television franchises were amortized over 15 years using the straight-line
method. For the years ended 1995, 1996, and 1997, amortization of goodwill
amounted to $8,199,000, $1,325,000, and $1,325,000, respectively, and
amortization of cable television franchises amounted to $1,284,000, $11,048,000,
and $11,048,000, respectively. Accumulated amortization of intangible assets at
December 31, 1996 and 1997 amounted to $12,373,000 and $24,746,000,
respectively.
IMPAIRMENT
Management separately reviews the carrying value of acquired long-lived
assets for each acquired entity on a quarterly basis to determine whether an
impairment may exist. Management considers relevant cash flow and profitability
information, including estimated future operating results, trends and other
available information, in assessing whether the carrying value of long-lived
assets can be recovered. Upon a determination that the carrying value of
long-lived assets
F-154
<PAGE> 366
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
will not be recovered from the undiscounted future cash flows of the acquired
business, the carrying value of such long-lived assets would be considered
impaired and would be reduced by a charge to operations in the amount of the
impairment. An impairment charge is measured as a deficiency in estimated
discounted future cash flows of the acquired business to recover the carrying
value related to the long-lived assets.
INCOME TAXES
Income taxes have been provided using the liability method prescribed by
FASB Statement No. 109, "Accounting for Income Taxes." Under the liability
method, deferred income taxes reflect tax carryforwards and the net tax effects
of temporary differences between the carrying amount of assets and liabilities
for financial statements and income tax purposes, as determined under enacted
tax laws and rates.
2. EMPLOYEE BENEFIT PLANS
Following the CVI Merger, the Combined Systems began participation in the
Time Warner Cable Pension Plan (the "Pension Plan"), a non-contributory defined
benefit pension plan, and the Time Warner Cable Employee Savings Plan (the
"Savings Plan") which are administered by a committee appointed by the Board of
Representatives of Time Warner Entertainment Company, L.P. ("TWE"), an affiliate
of Time Warner, and which cover substantially all employees.
Benefits under the Pension Plan are determined based on formulas which
reflect an employee's years of service and compensation levels during the
employment period. Pension expense for the years ended December 31, 1996 and
1997 totaled $184,000 and $192,000, respectively.
The Combined Systems' contributions to the Savings Plan are limited to
6.67% of an employee's eligible compensation during the plan year. The Board of
Representatives of TWE has the right in any year to set the maximum amount of
the Combined Systems' contribution. Defined contribution plan expense for the
years ended December 31, 1996 and 1997 totaled $107,000 and $117,000,
respectively.
Prior to the CVI Merger, substantially all employees were eligible to
participate in a profit sharing plan or a defined contribution plan. The profit
sharing plan provided that the Combined Systems may contribute, at the
discretion of their board of directors, an amount up to 15% of compensation for
all eligible participants out of its accumulated earnings and profits, as
defined. Profit sharing expense amounted to approximately $31,000 for the year
ended December 31, 1995.
The defined contribution plan contained a qualified cash or deferred
arrangement pursuant to Internal Revenue Code Section 401(k). This plan provided
that eligible employees may contribute from 2% to 10% of their compensation to
the plan. The Combined Systems matched contributions of up to 4% of the
employees' compensation. The expense for this plan amounted to approximately
$96,000 for the year ended December 31, 1995.
The Combined Systems have no material obligations for other post retirement
benefits.
F-155
<PAGE> 367
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. RELATED PARTIES
In the normal course of conducting business, the Combined Systems had
various transactions with Time Warner and its affiliates, generally on terms
resulting from a negotiation between the affected units that in management's
view resulted in reasonable allocations.
PROGRAMMING
Included in the Combined Systems' 1996 and 1997 operating expenses are
charges for programming and promotional services provided by Home Box Office,
Turner Broadcasting System, Inc. and other affiliates of Time Warner. These
charges are based on customary rates and are in the ordinary course of business.
For the year ended December 31, 1996 and 1997, these charges totaled $3,260,000
and $3,458,000, respectively. Accrued related party expenses for these
programming and promotional services included in accrued programming expenses
approximated $327,000 and $291,000 for the years ended December 31, 1996 and
1997, respectively. There were no such programming and promotional service
related party transactions in 1995.
MANAGEMENT FEES
TWI Cable entered into a management service arrangement with Time Warner
Cable ("TWC"), pursuant to which TWC is responsible for the management and
operation of TWI Cable, which includes the Combined Systems. The management fees
paid to TWC by TWI Cable are based on an allocation of the corporate expenses of
TWC's cable division in proportion to the respective number of subscribers of
all cable systems managed by TWC's cable division. The allocation of the TWI
Cable management fee to the Combined Systems approximated $1,432,000 and
$1,715,000 for the years ended December 31, 1996 and 1997, respectively.
Other divisional expenses allocated to the Combined Systems approximated
$1,301,000 and $1,067,000 for the years ended December 31, 1996 and 1997,
respectively.
4. INTEREST EXPENSE
Prior to the CVI Merger, the Jackson, Tennessee system was included in
Cablevision Industries Limited Partnership and Combined Entities ("CILP"). The
Jackson system was charged interest expense in connection with CILP's (a) senior
and subordinated bank credit agreements; and (b) senior unsecured subordinated
Series A and Series B notes payable to CVI. The remaining five systems
comprising the Combined Systems were included in Cablevision Industries of the
Southeast, Inc. and Combined Entities ("CIOS"). These systems were charged
interest expense in connection with CIOS's (a) bank revolving credit agreement;
and (b) junior and senior subordinated debt to CVI.
5. INCOME TAXES
Effective January 4, 1996, the Combined Systems are included in the
consolidated federal income tax return of Time Warner. Prior to January 4, 1996,
the Combined Systems were included in the consolidated federal income tax return
of CVI. The provision (benefit) for income
F-156
<PAGE> 368
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
taxes has been calculated on a separate company basis. The components of the
provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
FEDERAL:
Current............................. $ -- $ -- $ --
Deferred............................ (2,881) 1,213 1,826
STATE:
Current............................. -- -- --
Deferred............................ (686) 289 436
------- ------ ------
Net provision (benefit) for income
taxes............................ $(3,567) $1,502 $2,262
======= ====== ======
</TABLE>
The Combined Systems did not, and will not, have a tax sharing agreement
with either Time Warner, TWI Cable or CVI. Therefore, the Combined Systems have
not and will not be compensated for the utilization of the Combined Systems' tax
losses, by Time Warner, TWI Cable or CVI. In addition, the Combined Systems have
not and will not be required to make payments to either Time Warner or TWI Cable
for the current tax provision of the Combined Systems.
The differences between the income tax provision (benefit) expected at the
U.S. federal statutory income tax rate and the total income tax provision
(benefit) are due to nondeductible goodwill amortization and state taxes.
Significant components of the Combined Systems' deferred tax assets and
liabilities, as calculated on a separate company basis, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Amortization............................... $61,266 $58,507
Depreciation............................... 3,576 4,060
------- -------
Total gross deferred tax
liabilities...................... 64,842 62,567
------- -------
DEFERRED TAX ASSETS:
Tax loss carryforwards..................... 6,474 1,920
Allowance for doubtful accounts............ 28 46
------- -------
Total deferred tax assets.......... 6,502 1,966
------- -------
Net deferred tax liability................. $58,340 $60,601
======= =======
</TABLE>
On a separate company basis, the Combined Systems have tax loss
carryforwards of approximately $4.8 million at December 31, 1997. However, if
the Combined Systems are acquired in an asset purchase, the tax loss
carryforwards, and net deferred tax liabilities relating to temporary
differences will not carry over to Renaissance (see Note 8).
F-157
<PAGE> 369
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
The Combined Systems had rental expense of approximately $642,000,
$824,000, and $843,000 for the years ended December 31, 1995, 1996 and 1997,
respectively, under various lease and rental agreements for offices, utility
poles, warehouses and computer equipment. Future minimum annual rental payments
under noncancellable leases will approximate $1,000,000 annually over the next
five years.
In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996, TWC
has agreed with the Federal Communications Commission ("FCC") to invest in
certain upgrades to its cable infrastructure (consisting primarily of materials
and labor in connection with the plant upgrades up to 750 megahertz) over the
next three years (approximately $22 million). This agreement with the FCC, which
extends to the Combined Systems, will be assumed by Renaissance as it relates to
the Combined Systems in accordance with the Asset Purchase Agreement.
7. OTHER LIABILITIES
Other liabilities consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Compensation................................................ $217 $250
Data Processing Costs....................................... 100 90
Sales and other taxes....................................... 101 90
Copyright Fees.............................................. 85 83
Pole Rent................................................... 66 63
Other....................................................... 376 393
---- ----
Total.................................................. $945 $969
==== ====
</TABLE>
8. SUBSEQUENT EVENT (UNAUDITED)
The sale of the Combined Systems, in connection with the Asset Purchase
Agreement with Renaissance, closed on April 9, 1998 at the purchase price of
$309,500,000.
F-158
<PAGE> 370
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Greater Media, Inc.:
We have audited the accompanying combined statements of income, changes in
net assets and cash flows of Greater Media Cablevision Systems (see Note 1)
(collectively, the "Combined Systems") included in Greater Media, Inc., for the
nine months ended June 30, 1999. These combined financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations of the Combined
Systems and their cash flows for the nine months ended June 30, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 6, 2000
F-159
<PAGE> 371
GREATER MEDIA CABLEVISION SYSTEMS
COMBINED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 30,
1999
-----------
<S> <C>
REVENUES.................................................... $62,469
-------
OPERATING EXPENSES:
Operating................................................. 26,248
General and administrative................................ 9,150
Corporate charges- related party.......................... 3,175
Depreciation and amortization............................. 7,398
-------
45,971
-------
Income from operations................................. 16,498
-------
OTHER EXPENSE:
Interest expense, net..................................... (705)
Other..................................................... (365)
-------
INCOME BEFORE PROVISION IN LIEU OF INCOME TAXES............. 15,428
PROVISION IN LIEU OF INCOME TAXES........................... 6,646
-------
NET INCOME.................................................. $ 8,782
=======
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-160
<PAGE> 372
GREATER MEDIA CABLEVISION SYSTEMS
COMBINED STATEMENT OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, September 30, 1998................................. $54,131
Net income................................................ 8,782
Provision in lieu of income taxes......................... 6,646
Net payments to affiliates................................ (34)
-------
BALANCE, June 30, 1999...................................... $69,525
=======
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-161
<PAGE> 373
GREATER MEDIA CABLEVISION SYSTEMS
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
JUNE 30,
1999
-----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 8,782
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 7,398
Provision in lieu of income taxes...................... 6,646
Loss on sale of fixed assets........................... 465
Changes in assets and liabilities --
Accounts receivable, prepaid expenses and other
current assets...................................... (1,431)
Other assets......................................... 10
Accounts payable and accrued expenses................ (178)
Customers' prepayments and deferred installation
revenue............................................. 218
--------
Net cash provided by operating activities......... 21,910
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (13,797)
Other.................................................. (512)
--------
Net cash used in investing activities............. (14,309)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments to affiliates................................ (34)
--------
Net cash used in financing activities............. (34)
--------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 7,567
CASH AND CASH EQUIVALENTS, beginning of period.............. 4,080
--------
CASH AND CASH EQUIVALENTS, end of period.................... $ 11,647
========
CASH PAID FOR NON-AFFILIATE INTEREST........................ $ 264
========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-162
<PAGE> 374
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization, Basis of Presentation and Operations
Greater Media Cablevision Systems is comprised of the following
Massachusetts-based cable television systems: Auburn, Boylston, Chicopee,
Dudley, East Longmeadow, Easthampton, Grafton, Hampden, Holden, Leicester,
Ludlow, Millbury, Northborough, Northbridge, Oxford, Paxton, Southampton,
Southborough, Southbridge, Spencer, Sturbridge, Upton, Webster, West Boylston,
West Brookfield, Westborough, Wilbraham and Worcester (the "Combined Systems").
The Combined Systems are wholly-owned by Greater Media Cablevision, Inc. (the
"Company"). The combined financial statements do not include the accounts of
Greater Philadelphia Cablevision, Inc. or Greater Philadelphia Cablevision
Limited Partnership, which are also wholly-owned by the Company. The Company is
a wholly-owned subsidiary of Greater Media, Inc. (the "Parent"). On June 30,
1999, Charter Communications Entertainment I, LLC, an indirect subsidiary of
Charter Communications Holdings Company, LLC purchased the Combined Systems for
an aggregate purchase price of $500 million plus a working capital adjustment
(the "Charter Sale"). Effective with this change of ownership, the Combined
Systems will be managed by Charter Investment, Inc.
Significant intercompany accounts and transactions between the Combined
Systems have been eliminated in the combined financial statements.
The Combined Systems primarily provide cable television services to
subscribers in central and western Massachusetts.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Property, Plant and Equipment
Maintenance and repair costs are expensed when incurred. For financial
reporting purposes, depreciation is provided on the straight-line method based
on the following estimated useful lives:
<TABLE>
<S> <C>
Land improvements........................................... 20 years
Furniture, fixtures and equipment........................... 3-15 years
Buildings................................................... 15-40 years
Trunk and distribution systems.............................. 7-12 years
</TABLE>
Depreciation expense for the nine months ended June 30, 1999, was $7,343.
Intangible Assets
Intangible assets consist primarily of goodwill, which is amortized over
forty years, and costs incurred in obtaining and renewing cable franchises,
which are amortized over the life of the respective franchise agreements.
Amortization expense for the nine months ended June 30, 1999, was $55.
F-163
<PAGE> 375
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
Revenues
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Segments
Segments have been identified based upon management responsibility. The
Company operates in one segment, cable services.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. INCOME TAXES
The Combined Systems are included in the consolidated federal income tax
return of the Parent. The Parent is responsible for tax payments applicable to
the Combined Systems. The combined financial statements reflect a provision in
lieu of income taxes as if the Combined Systems were filing on a separate
company basis. Accordingly, the Combined Systems have included the provision in
lieu of income taxes as a component of net assets.
The provision in lieu of income taxes approximates the amount of tax
computed using U.S. statutory rates, after reflecting state income tax expense.
3. RELATED PARTY TRANSACTIONS
The Company and each of its subsidiaries are guarantors of the Parent's
debt.
The combined statements include charges for certain corporate expenses
incurred by the Parent on behalf of the Combined Systems. Such charges amounted
to $3,175 for the nine months ended June 30, 1999. Management believes that this
cost is reasonable and reflects costs of doing business that the Combined
Systems would have incurred on a stand-alone basis.
4. EMPLOYEE BENEFIT PLANS
401(k) Plan
The Combined Systems' employees participate in the Greater Media, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 12% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Combined Systems' contribute an amount equal to 50% of the participant's
contribution, limited to the lessor of 3% of the participant's compensation or
$1 per year. In connection with the Charter Sale, all employees became fully
vested. Following the Charter Sale, the Company's 401(k) plan was merged into
Charter Communication, Inc.'s.
The Combined Systems expense relating to the 401(k) Plan for the nine
months ended June 30, 1999, was $123.
F-164
<PAGE> 376
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
PENSION
Certain employees of the Combined Systems participate in a pension plan
sponsored by the Parent. The Combined Systems allocable share of the pension
expense amounted to $57 for the nine months ended June 30, 1999. As a result of
the Charter Sale, the Combined Systems' employees became fully vested with
respect to their plan benefits. No additional benefits will accrue to such
employees in the future. In addition, the Parent is responsible for the
allocable pension liability and will continue to administer the plan on behalf
of the Combined Systems' employees.
5. COMMITMENTS AND CONTINGENCIES
Leases
The Combined Systems lease certain facilities and equipment under
noncancelable operating leases. Rent expense incurred for the nine months ended
June 30, 1999, was $249.
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
nine months ended June 30, 1999, was $479.
Litigation
The Combined Systems are a party to lawsuits that arise in the ordinary
course of conducting its business. In the opinion of management, after
consulting with legal counsel, the outcome of these lawsuits will not have a
material adverse effect on the Combined Systems' combined financial position or
results of operations.
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Combined Systems cannot predict the
impact of future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. The Combined Systems
may be required to refund additional amounts in the future.
The Combined Systems believe that it has complied in all material respects
with the provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Combined Systems are unable to justify its basic rates. The
Combined Systems are unable to estimate at this time the amount of refunds, if
F-165
<PAGE> 377
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
any, that may be payable by the Combined Systems in the event certain of its
rates are successfully challenged by franchising authorities or found to be
unreasonable by the FCC. The Combined Systems do not believe that the amount of
any such refunds would have a material adverse effect on the financial position
or results of operations of the Combined Systems.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulated rates on the cable
programming service tier (CPST). The FCC has taken the position that it will
still adjudicate pending CPST complaints but will strictly limit its review, and
possible refund orders, to the time period predating the sunset date, March 31,
1999. The Combined Systems do not believe any adjudications regarding their
pre-sunset complaints will have a material adverse effect on the Combined
Systems' financial position or results of operations.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
F-166
<PAGE> 378
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Greater Media, Inc.:
We have audited the accompanying combined balance sheets of Greater Media
Cablevision Systems (see Note 1) (collectively, the "Combined Systems") included
in Greater Media, Inc., as of September 30, 1998 and 1997, and the related
combined statements of income, changes in net assets, and cash flows for each of
the three years in the period ended September 30, 1998. These combined financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Combined Systems, as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 2, 1999
F-167
<PAGE> 379
GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 4,080 $ 3,680
Accounts receivable (less allowance for doubtful accounts
of $308 (unaudited), $244 and $337).................... 2,755 2,739
Prepaid expenses and other current assets................. 2,746 1,949
------- -------
Total current assets.............................. 9,581 8,368
Property and equipment, net................................. 54,468 41,971
Intangible assets, net...................................... 2,690 1,647
Other assets................................................ 77 103
------- -------
Total assets...................................... $66,816 $52,089
======= =======
Current liabilities:
Accounts payable and accrued expenses..................... $ 7,125 $ 5,299
Customers' prepayments and deferred installation
revenue................................................ 1,910 1,815
------- -------
Total current liabilities......................... 9,035 7,114
Other long-term liabilities................................. 3,650 3,920
Net assets.................................................. 54,131 41,055
------- -------
Total liabilities and net assets.................. $66,816 $52,089
======= =======
</TABLE>
The accompanying notes are an integral part of these combined balance
sheets.
F-168
<PAGE> 380
GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1)
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET REVENUES.............................................. $77,127 $73,436 $66,816
------- ------- -------
OPERATING EXPENSES:
Operating expenses...................................... 32,665 31,115 29,460
General and administrative.............................. 10,869 11,211 10,321
Corporate charges....................................... 3,888 3,696 3,365
Depreciation and amortization........................... 8,183 7,368 7,353
------- ------- -------
55,605 53,390 50,499
------- ------- -------
Income from operations............................... 21,522 20,046 16,317
OTHER INCOME (EXPENSES):
Interest expense, net..................................... (504) (307) (764)
Other..................................................... (532) (957) (366)
------- ------- -------
INCOME BEFORE PROVISION IN LIEU OF INCOME TAXES........... 20,486 18,782 15,187
Provision in lieu of income taxes (Note 6)................ 8,008 7,964 5,987
------- ------- -------
Net income................................................ $12,478 $10,818 $ 9,200
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-169
<PAGE> 381
GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1)
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
-----
<S> <C>
Balance, September 30, 1995................................. $ 42,185
Net income................................................ 9,200
Provision in lieu of income taxes......................... 5,987
Net payments to affiliates................................ (17,038)
--------
Balance, September 30, 1996................................. 40,334
Net income................................................ 10,818
Provision in lieu of income taxes......................... 7,964
Net payments to affiliates................................ (18,061)
--------
Balance, September 30, 1997................................. 41,055
Net income................................................ 12,478
Provision in lieu of income taxes......................... 8,008
Net payments to affiliates................................ (7,410)
--------
Balance, September 30, 1998................................. $ 54,131
========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-170
<PAGE> 382
GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income................................................. $12,478 $10,818 $ 9,200
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision in lieu of income taxes........................ 8,008 7,964 5,987
Depreciation and amortization............................ 8,183 7,368 7,353
(Gain) loss on sale of fixed assets...................... 300 715 274
Changes in assets and liabilities:
Accounts receivable, prepaid expenses and other assets... (813) (1,115) (498)
Other assets............................................. 24 (30) (11)
Accounts payable and accrued expenses.................... 1,825 (440) (1,900)
Customers' prepayments and deferred
installation revenue.................................. 96 367 94
Customers' deposits and deferred revenue................. (270) (69) 466
------- ------- --------
Net cash provided by operating activities.................. 29,831 25,578 20,965
------- ------- --------
Cash flow from investing activities:
Capital expenditures....................................... (21,049) (7,587) (5,122)
Proceeds from disposition of property and equipment........ 72 -- 128
Purchase of licenses....................................... (1,044) (99) --
------- ------- --------
Net cash used in investing activities...................... (22,021) (7,686) (4,994)
------- ------- --------
Cash flow from financing activities:
Net payments to affiliates................................. (7,410) (18,061) (17,038)
------- ------- --------
Net increase (decrease) in cash and cash equivalents....... 400 (169) (1,067)
Cash and cash equivalents, beginning of year............... 3,680 3,849 4,916
------- ------- --------
Cash and cash equivalents, end of year..................... $ 4,080 $ 3,680 $ 3,849
======= ======= ========
Supplemental disclosure of cash flow information:
Non-affiliate interest paid during the year.............. $ 296 $ 155 $ 447
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-171
<PAGE> 383
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, BASIS OF PRESENTATION AND OPERATIONS
Greater Media Cablevision Systems is the owner and operator of the
following Massachusetts-based cable television systems: Auburn, Boylston,
Chicopee, Dudley, East Longmeadow, Easthampton, Grafton, Hampden, Holden,
Leicester, Ludlow, Millbury, Northborough, Northbridge, Oxford, Paxton,
Southampton, Southborough, Southbridge, Spencer, Sturbridge, Upton, Webster,
West Boylston, West Brookfield, Westborough, Wilbraham and Worcester ("the
Combined Systems"). The Combined Systems are wholly-owned by Greater Media
Cablevision, Inc. ("the Company"). The combined financial statements do not
include the accounts of Greater Philadelphia Cablevision, Inc. or Greater
Philadelphia Cablevision Limited Partnership (the "Philadelphia System"), which
are also wholly-owned by the Company. The Company is a wholly-owned subsidiary
of Greater Media, Inc. ("the Parent"). In February 1999, the Parent and the
Company entered into an agreement ("Sales Agreement") to sell the net assets of
the Company including the Combined Systems but excluding the Philadelphia
Systems to Charter Communications Holdings, LLC.
Significant intercompany accounts and transactions between the Combined
Systems have been eliminated in the combined financial statements. Significant
accounts and transactions with the Parent and other affiliates are disclosed as
related party transactions (See Note 7).
The Combined Systems primarily provide cable television services to
subscribers in central and western Massachusetts.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Maintenance and repair costs are expensed when incurred. For financial
reporting purposes, depreciation is provided on the straight-line method based
on the following estimated useful lives:
<TABLE>
<CAPTION>
CLASSIFICATION YEARS
-------------- -----
<S> <C>
Land improvements........................................... 20
Buildings................................................... 15-40
Furniture, fixtures and equipment........................... 3-15
Trunk and distribution systems.............................. 7-12
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill amortized over forty years
and costs incurred in obtaining and renewing cable franchises which are
amortized over the life of the respective franchise agreements.
REVENUES
Cable revenues from basic and premium services are recognized when the
related services are provided.
F-172
<PAGE> 384
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
QUARTERLY RESULTS
The financial statements included herein as of December 31, 1998 and for
the three months ended December 31, 1998 and 1997 have been prepared by the
Company without audit. In the opinion of management, all adjustments have been
made which are of a normal recurring nature necessary to present fairly the
Combined Systems' financial position as of December 31, 1998 and the results of
operations, changes in net assets and cash flows for the three months ended
December 31, 1998 and 1997. Certain information and footnote disclosures have
been condensed or omitted for these periods. The results for interim periods are
not necessarily indicative of results for the entire year.
2. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid and other current assets consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Franchise grant.......................................... $1,445 $ 604
Corporate business tax................................... 1,015 882
Other.................................................... 286 463
------ ------
Prepaid expenses and other current assets................ $2,746 $1,949
====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and land improvements........................... $ 1,229 $ 1,134
Buildings............................................ 4,521 4,521
Furniture, fixtures and equipment.................... 5,503 4,822
Trunk and distribution systems....................... 109,253 97,042
Construction in progress............................. 9,026 4,450
-------- --------
129,532 111,969
Accumulated depreciation............................. (75,064) (69,998)
-------- --------
Property and equipment, net.......................... $ 54,468 $ 41,971
======== ========
</TABLE>
Depreciation expense for the years ended September 30, 1998, 1997 and 1996
was $8,081, $7,337, and $7,314, respectively. Construction in progress results
primarily from costs to upgrade the systems to fiber optic technologies in the
areas served by the Combined Systems.
F-173
<PAGE> 385
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. INTANGIBLE ASSETS
Intangible assets consist of the following at September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Franchise agreements..................................... $3,230 $2,883
Customer lists........................................... 1,751 1,751
Organization expenses.................................... 146 146
Goodwill................................................. 2,260 1,510
Covenant not to compete.................................. 40 40
------ ------
7,427 6,330
Accumulated amortization................................. 4,737 4,683
------ ------
Intangible assets, net................................... $2,690 $1,647
====== ======
</TABLE>
Amortization expense for the years ended September 30, 1998, 1997 and 1996
was $102, $31 and $39, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at September
30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accounts payable......................................... $4,733 $3,544
Rate refund liability.................................... 923 481
Programming expenses..................................... 586 557
Other.................................................... 883 717
------ ------
$7,125 $5,299
====== ======
</TABLE>
6. INCOME TAXES
The Combined Systems are included in the consolidated federal income tax
return of the Parent. However, the Parent is responsible for tax payments
applicable to the Combined Systems. The combined financial statements reflect a
provision in lieu of income taxes as if the combined systems were filing on a
separate company basis. Accordingly, the Combined Systems have included the
provision in lieu of income taxes as a component of net assets for all periods
presented.
The provision in lieu of income taxes approximates the amount of tax
computed using U.S. statutory rates, after reflecting state income tax expense
of $2,053, $1,924 and $1,486, for 1998, 1997 and 1996, respectively.
As the Sales Agreement represents a sale of assets, Charter Communications
Holdings, LLC will have new tax basis in the Combined Systems' assets and
liabilities acquired.
7. RELATED PARTY TRANSACTIONS
The Company and each of its subsidiaries are guarantors of the Parent
Company's debt.
F-174
<PAGE> 386
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The combined statements include the charge for certain corporate expenses
incurred by the Parent on behalf of the Combined Systems. Such charges amounted
to $3,888, $3,696, and $3,365 for the three years ended September 30, 1998, 1997
and 1996. Management believes that these costs are reasonable and reflect costs
of doing business that the Combined Systems would have incurred on a stand-alone
basis.
The Combined Systems charge an affiliate interest on certain balances,
aggregating $15,000 per year, at an annual rate of 12%. Interest income on such
balances amounted to $1,800 for each of the three years in the period ended
September 30, 1998. In addition, the Combined Systems are required to pay the
Parent interest on certain balances, at an annual rate of 12%. Interest expense
on such balances amounted to $2,340 for each of these years in the period ended
September 30, 1998, all which were due during the periods presented. The amounts
described above and certain non-interest bearing amounts due affiliates are
included in Net Assets in the Combined Systems balance sheet. As a result of the
Sales Agreement, such amounts will be assumed by the Parent. The interest income
and expense have been netted in the accompanying statement of operations.
8. EMPLOYEE BENEFIT PLAN
401(k) PLAN
The Combined Systems' employees participate in the Greater Media, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 12% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Parent contributes an amount equal to 50% of the participant's contribution,
limited to the lessor of 3% of the participant's compensation or $1 per year.
The Combined Systems expense relating to the 401(k) Plan was $140, $127,
and $96 in 1998, 1997, and 1996, respectively.
PENSION
Employees of the Combined Systems participate in a pension plan sponsored
by the Parent. The Combined Systems allocable share of the pension expense
amounted to $105, $204 and $217 during the years ended September 30, 1998, 1997
and 1996, respectively. As a result of the Sales Agreement, the Combined
Systems' employees will be fully vested with respect to their plan benefits,
although no additional benefits will accrue to such employees in the future. In
addition, the Parent will be responsible for the allocable pension liability
($838 at September 30, 1998) and will continue to administer the plan on behalf
of the Combined Systems' employees after the sale is consummated.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment under noncancellable
operating leases. Leases and rental costs charged to expense for the years ended
September 30, 1998, 1997 and 1996, was $2,124, $2,133 and $1,636, respectively.
Rent expense incurred under leases for the
F-175
<PAGE> 387
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
years ended September 30, 1998, 1997 and 1996, was $678, $665 and $660,
respectively. Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1999................................................. $ 690
2000................................................. 618
2001................................................. 524
2002................................................. 402
2003................................................. 396
Thereafter........................................... 3,267
</TABLE>
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
years ended September 30, 1998, 1997 and 1996, was $1,008, $840 and $578,
respectively.
LITIGATION
The Company is party to lawsuits that arise in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's combined financial position or results of operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. The Company may be
required to refund additional amounts in the future.
The Combined Systems believe that they have complied in all material
respects with the provisions of the 1992 Cable Act, including the rate setting
provisions promulgated by the FCC. However, in jurisdictions that have chosen
not to certify, refunds covering the previous twelve-month period may be ordered
upon certification if a company is unable to justify its basic rates. The
Combined Systems are unable to estimate at this time the amount of refunds, if
any, that may be payable by the Combined Systems in the event certain of its
rates are successfully
F-176
<PAGE> 388
GREATER MEDIA CABLEVISION SYSTEMS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
challenged by franchising authorities or found to be unreasonable by the FCC.
The Combined Systems do not believe that the amount of any such refunds would
have a material adverse effect on their financial position or results of
operations.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Combined Systems cannot predict the ultimate effect of the 1996 Telecom
Act on their financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Combined Systems.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation. The Combined Systems are subject to state
regulation in Massachusetts.
10. SUBSEQUENT EVENT (UNAUDITED)
On June 30, 1999, Charter Communications Entertainment I, LLC, an indirect
subsidiary of Charter Communications Holdings Company, LLC purchased the
Combined Systems for an aggregate purchase price of $500 million plus a working
capital adjustment. Effective with this change of ownership, the Combined
Systems will be managed by Charter Investment, Inc.
F-177
<PAGE> 389
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Helicon Partners I, L.P.:
We have audited the accompanying combined statements of operations, changes
in net assets and cash flows of Helicon Partners I, L.P. and affiliates for the
seven months ended July 30, 1999. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations of Helicon Partners
I, L.P. and affiliates and their cash flows for the seven months ended July 30,
1999 in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 6, 2000
F-178
<PAGE> 390
HELICON PARTNERS I, L.P. AND AFFILIATES
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 30,
1999
------------
<S> <C>
REVENUES.................................................... $ 49,564,581
------------
OPERATING EXPENSES:
Operating expenses........................................ 16,358,995
General and administrative expenses....................... 13,877,357
Marketing expenses........................................ 1,327,669
Depreciation and amortization............................. 16,616,529
Management fee charged by affiliate....................... 2,511,416
------------
Total operating expenses............................. 50,691,966
------------
Operating income.................................. (1,127,385)
------------
INTEREST INCOME (EXPENSE):
Interest expense.......................................... (20,681,592)
Interest income........................................... 124,486
------------
NET LOSS.................................................... $(21,684,491)
============
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-179
<PAGE> 391
HELICON PARTNERS I, L.P. AND AFFILIATES
COMBINED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED CLASS A CLASS B CAPITAL
LIMITED GENERAL LIMITED LIMITED CONTRIBUTION PARTNERS'
PARTNERS PARTNER PARTNERS PARTNER RECEIVABLE DEFICIT
--------- ------- -------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1998........... $8,567,467 $ (989,962) $(134,807,570) -- $(1,000) $(127,231,065)
Distribution of
additional
preferred
partnership
interests.......... 609,621 (6,097) (603,524) -- -- --
Accretion of
redeemable
partnership
interests.......... -- (269,961) (26,726,132) -- -- (26,996,093)
Capital
contribution....... -- -- -- 3,628,250 -- 3,628,250
Net loss............. -- (216,845) (21,467,646) -- -- (21,684,491)
---------- ----------- ------------- ---------- ------- -------------
Balance at July 30,
1999............... $9,177,088 $(1,482,865) $(183,604,872) $3,628,250 $(1,000) $(172,283,399)
========== =========== ============= ========== ======= =============
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-180
<PAGE> 392
HELICON PARTNERS I, L.P. AND AFFILIATES
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
JULY 30,
1999
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(21,684,491)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization.......................... 16,616,529
Amortization of debt discount and deferred financing
costs................................................. 2,801,895
Gain on sale of equipment.............................. (22,536)
Interest on 12% subordinated notes paid through the
issuance of additional notes.......................... 2,706,044
Changes in operating assets and liabilities-
Receivables from subscribers......................... (1,544,469)
Prepaid expenses and other assets.................... 2,773,825
Accounts payable and accrued expenses................ (2,937,602)
Subscriptions received in advance.................... 803,151
Accrued interest..................................... 2,557,212
------------
Net cash provided by operating activities......... 2,069,558
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (6,332,987)
Proceeds from sale of equipment........................ 32,288
Cash paid for net assets of cable television systems, net
of cash acquired....................................... (6,217,143)
Increase in intangible assets............................. (487,595)
------------
Net cash used in investing activities............. (13,005,437)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loans.................................. 13,000,000
Repayments of bank loans and other notes.................. (483,178)
Capital contribution...................................... 3,628,250
Advances to affiliates, net............................... (247,043)
Payment of financing costs................................ (240,000)
------------
Net cash provided by financing activities......... 15,658,029
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 4,722,150
CASH AND CASH EQUIVALENTS, beginning of period.............. 5,130,561
------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 9,852,711
============
CASH PAID FOR INTEREST...................................... $ 12,582,725
============
ACQUISITION OF PROPERTY, PLANT AND EQUIPMENT THROUGH THE
ISSUANCE OF OTHER NOTES PAYABLE........................... $ 389,223
============
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-181
<PAGE> 393
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Helicon Partners I, L.P. ("the Partnership") was organized as a limited
partnership under the laws of the State of Delaware. The Partnership owns all of
the limited partnership interests in THGLP, representing a 99% ownership, and
Baum Investment, Inc. ("Baum"), the general partner of THGLP, owns the 1%
general partnership interest in THGLP. The Partnership also owns a 99% interest
and THGLP owns a 1% interest in HPI Acquisition Co., LLC ("HPIAC"). The
Partnership also owns an 89% limited partnership interest and Baum a 1% general
partnership interest in Helicon OnLine, L.P. ("HOL"). The Partnership, THGLP,
HPIAC and HOL are referred to collectively herein as the Company.
The Company operates in one business segment offering cable television
services in the states of Pennsylvania, West Virginia, North Carolina, South
Carolina, Louisiana, Vermont, New Hampshire, Georgia and Tennessee. The Company
also offers to customers advanced services, such as paging and private data
network systems, including dial up access and a broad range of Internet access
services in Pennsylvania and Vermont, dedicated high speed access, high speed
cable modem access, world wide web design, and hosting services.
On July 30, 1999, Charter-Helicon, LLC ("Charter-Helicon"), acquired a 1%
interest in THGLP previously owned by Baum and became the General Partner of
THGLP. Concurrently, Charter-Helicon and Charter Communications, LLC ("CC-LLC"),
parent of Charter-Helicon, acquired all of the partnership interests of the
Partnership. These transactions are collectively referred to as the
"Helicon/Charter Deal" herein. In connection with the Helicon/Charter Deal,
$228,985,000 of cash was paid to the equity holders; Baum retained a $25,000,000
limited liability company membership interest in Charter-Helicon; debt of
$197,447,000 was repaid; debt of $115,000,000 was assumed; and other costs
totaling $4,285,000 were incurred by CC-LLC.
The post-closing process associated with the Helicon/Charter Deal has not
been finished. Accordingly, the accompanying combined financial statements may
not give effect to all adjustments arising from the change of ownership of the
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying financial statements include the accounts of the
Partnership, THGLP, HPIAC and HOL, which have been combined because of common
ownership and control. They also reflect the accounts of THGLP's subsidiary,
Helicon Capital Corp., which has nominal assets and no operations since its
incorporation. All intercompany accounts and transactions have been eliminated
in combination.
Partnership Profits, Losses and Distributions
Under the terms of the partnership agreements of the Partnership and THGLP,
profits, losses and distributions will be made to the general and Class A
Limited Partners pro-rata based on their respective partnership interest.
Holders of Preferred Limited Partnership Interests are entitled to an aggregate
preference on liquidation of $6,250,000 plus cumulative in-kind distributions of
additional Preferred Limited Partnership interests at an annual rate of 12%.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
F-182
<PAGE> 394
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
Revenue Recognition
Revenue is recognized as services are provided to subscribers. Subscription
revenues billed in advance for services are deferred and recorded as income in
the period in which services are rendered.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and are depreciated using
the straight-line method over the estimated useful lives of the respective
assets.
Intangible Assets and Deferred Costs
Intangible assets and deferred costs are carried at cost and are amortized
using the straight-line method over the estimated useful lives of the respective
assets. When changes in events or circumstances warrant, the Company reviews the
amortization periods of their intangible assets and deferred costs. The Company
evaluates whether there has been a permanent impairment in the value of these
assets by considering such factors including the projected undiscounted cash
flows, current market conditions and changes in the cable television industry
that would impact the recoverability of such assets.
Income Taxes
No provision for Federal or state income taxes has been made in the
accompanying combined financial statements since any liability for such income
taxes is that of the partners and not of the Company.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. ACQUISITIONS
On January 7, 1999, THGLP acquired cable television systems serving
subscribers in the North Carolina counties of Carter, Johnson and Unicol. The
aggregate purchase price was $5,228,097 and was allocated to the net assets
acquired, which included property, plant and equipment and intangible assets,
based on their estimated fair values.
On March 1, 1999, HPIAC acquired a cable television system serving
subscribers in the communities of Abbeville, Donalds and Due West, South
Carolina. The aggregate purchase price was $723,356 and was allocated to the net
assets acquired, which included property, plant and equipment, and intangible
assets, based on their estimated fair value.
The operating results relating to the above acquisitions are included in
the accompanying combined financial statements from the acquisition dates
forward. Pro forma operating results for 1999 as though the acquisitions had
occurred on January 1, 1999, would not be materially different than historical
operating results.
F-183
<PAGE> 395
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
4. TRANSACTIONS WITH AFFILIATES
Amounts due from/to affiliates result from management fees, expense
allocations and temporary non-interest bearing loans. The affiliates are related
to the Company through common ownership. Effective upon the execution of the
Charter/Helicon Deal, Charter Investment, Inc. is the manager of the Company's
operations.
The Partnership was managed by Helicon Corp., an affiliated management
company. During the seven months ended July 30, 1999, the Partnership was
charged a management fee of $2,511,416. Management fees are calculated based on
the gross revenues of the systems.
5. SENIOR SECURED NOTES
THGLP and HCC (the "Issuers"), through a private placement offering, issued
$115,000,000 aggregate principal amount of 11% Senior Secured Notes due 2003
(the "Senior Secured Notes"), secured by substantially all the assets of THGLP.
Interest is payable on a semi-annual basis in arrears on November 1 and May 1.
The discount on the Senior Secured Notes is being amortized over the term of the
Senior Secured Notes so as to result in an effective interest rate of 11% per
annum.
6. LOANS PAYABLE TO BANKS
On January 5, 1999, THGLP entered into a $12,000,000 Senior Subordinated
Loan Agreement with Paribas Capital Funding, LLC (the "1999 Credit Facility").
Initial borrowings of $7,000,000 under the 1999 Credit Facility financed the
acquisition of certain cable television systems in North Carolina. On February
19, 1999, the Company borrowed the remaining $5,000,000 available under the 1999
Credit Facility. Interest on the 1999 Credit Facility is payable at 11.5% per
annum. On July 30, 1999, the amounts outstanding were repaid and the 1999 Credit
Facility was terminated in connection with the Helicon/Charter Deal.
7. REDEEMABLE PARTNERSHIP INTERESTS
In April 1996, the Partnership sold to unrelated investors, $34,000,000
aggregate principal amount of 12% Subordinated Notes (the "Subordinated Notes")
and warrants (the "Warrants") to purchase 2,419.1 units of Class B Limited
Partnership Interests (the "Units").
The Subordinated Notes are subordinated to the senior indebtedness of the
Partnership and are due April 1, 2004. Interest is payable semi-annually on each
October 1 and April 1 in cash or through the issuance of additional Subordinated
Notes, at the option of the Partnership. In the past, the Partnership has
elected to satisfy interest due through the issuance of additional Subordinated
Notes. The Partnership issued $2,706,044 of additional Subordinated Notes to pay
interest due in April 1999.
Holders of the Warrants had the right to acquire the Units at any time for
a price of $1,500 per Unit. The Partnership estimated the Net Equity Value of
the Warrants to be approximately $43,250,000 at December 31, 1998. The Net
Equity Value, pursuant to the terms of the agreement, is the estimated amount of
cash that would be available for distribution to the Partnership interests upon
a sale of all the assets of the Partnership and its subsequent dissolution and
liquidation. Such estimate as of December 31, 1998 reflects the amount that the
holders of the Warrants have agreed to accept for their interests assuming a
proposed sale of all of the interests of the Partnership is consummated. The
increase in the Net Equity Value over the original carrying value of the
Warrants is being accreted evenly over the period beginning with the date of the
increase through September 2001. Such accretion is being reflected in the
F-184
<PAGE> 396
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
accompanying financial statements as an increase in the carrying value of the
Warrants and the corresponding reduction in the carrying value of the capital
accounts of the General and Class A Limited Partners.
Immediately prior to the closing of the Helicon/Charter Deal. Baum
contributed $3,628, 250 to exercise the Warrants and received 2,419.1 Units.
This transaction triggered the acceleration of the accretion of the Units to
their estimated Net Equity Value. Upon the close of the Charter/ Helicon Deal,
the holders received $43,250,000 in exchange for the Units.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases telephone and utility poles on an annual basis. The
leases are self-renewing. Pole rental expenses for the seven months ended July
30, 1999 was $687.
The Company utilizes certain office space under operating lease agreements,
which expire at various dates through August 2013 and contain renewal options.
Office rent expense was $192 for the seven months ended July 30, 1999.
Litigation
The Company is a party to lawsuits that arise in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's combined financial position or results of operations.
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. The Company may be
required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The
F-185
<PAGE> 397
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- CONTINUED
Company is unable to estimate at this time the amount of refunds, if any, that
may be payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulated rates on the cable
programming service tier (CPST). The FCC has taken the position that it will
still adjudicate pending CPST complaints but will strictly limit its review, and
possible refund orders, to the time period predating the sunset date, March 31,
1999. The Company does not believe any adjudications regarding their pre-sunset
complaints will have a material adverse effect on the Company's financial
position or results of operations.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
F-186
<PAGE> 398
INDEPENDENT AUDITORS' REPORT
The Partners
Helicon Partners I, L.P.:
We have audited the accompanying combined balance sheets of Helicon Partners I,
L.P. and affiliates as of December 31, 1997 and 1998, and the related combined
statements of operations, changes in partners' deficit, and cash flows for each
of the years in the three-year period ended December 31, 1998. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Helicon Partners I,
L.P. and affiliates as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
March 26, 1999
F-187
<PAGE> 399
HELICON PARTNERS I, L.P. AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
ASSETS (NOTES 8 AND 9)
Cash and cash equivalents (note 2)..................... $ 4,372,281 $ 5,130,561
Receivables from subscribers........................... 1,439,720 1,631,931
Prepaid expenses and other assets...................... 2,205,794 3,469,228
Property, plant and equipment, net (notes 3, 4, and
11).................................................. 80,104,377 86,737,580
Intangible assets and deferred costs, net (notes 3 and
5)................................................... 85,066,665 94,876,847
------------- -------------
Total assets................................. $ 173,188,837 $ 191,846,147
============= =============
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accounts payable..................................... $ 7,416,901 $ 8,037,193
Accrued expenses..................................... 1,539,116 1,589,240
Subscriptions received in advance.................... 1,018,310 819,564
Accrued interest..................................... 3,760,360 3,742,456
Due to principal owner (note 7)...................... 5,000,000 5,000,000
Senior secured notes (note 8)........................ 115,000,000 115,000,000
Loans payable to banks (note 9)...................... 85,776,641 120,266,922
12% subordinated notes, net of unamortized discount
of $2,889,541 in 1997 and $2,543,869 in 1998 (note
10)............................................... 37,249,948 42,672,085
Redeemable partnership interests (note 10)........... 6,437,142 16,253,906
Other notes payable (note 11)........................ 5,747,076 5,448,804
Due to affiliates, net (note 6)...................... 71,474 247,042
------------- -------------
Total liabilities............................ 269,016,968 319,077,212
------------- -------------
Commitments (notes 8, 9, 10, 11 and 13)
Partners' deficit (note 12):
Preferred limited partners........................... 7,649,988 8,567,467
Accumulated partners' deficit........................ (103,477,119) (135,797,532)
Less capital contribution receivable................. (1,000) (1,000)
------------- -------------
Total partners' deficit...................... (95,828,131) (127,231,065)
------------- -------------
Total liabilities and partners' deficit...... $ 173,188,837 $ 191,846,147
============= =============
</TABLE>
See accompanying notes to combined financial statements.
F-188
<PAGE> 400
HELICON PARTNERS I, L.P. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues.................................... $ 42,061,537 $ 59,957,434 $ 75,576,810
------------ ------------ ------------
Operating expenses:
Operating expenses (note 13).............. 11,395,509 17,408,265 22,687,850
General and administrative expenses (notes
6 and 13).............................. 7,244,663 9,762,931 13,365,824
Marketing expenses........................ 1,235,553 2,266,627 3,521,893
Depreciation and amortization............. 12,556,023 19,411,813 24,290,088
Management fee charged by affiliate (note
6)..................................... 2,103,077 2,997,872 3,496,271
Corporate and other expenses.............. 426,672 549,222 602,987
------------ ------------ ------------
Total operating expenses.......... 34,961,497 52,396,730 67,964,913
------------ ------------ ------------
Operating income.......................... 7,100,040 7,560,704 7,611,897
------------ ------------ ------------
Interest expense (note 7)................... (17,418,266) (23,586,227) (27,633,714)
Interest income............................. 563,362 154,037 92,967
------------ ------------ ------------
(16,854,904) (23,432,190) (27,540,747)
------------ ------------ ------------
Loss before extraordinary item............ (9,754,864) (15,871,486) (19,928,850)
------------ ------------ ------------
Extraordinary item -- write-off of deferred
financing costs (note 9).................. -- -- (1,657,320)
------------ ------------ ------------
Net loss.................................. $ (9,754,864) $(15,871,486) $(21,586,170)
============ ============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-189
<PAGE> 401
HELICON PARTNERS I, L.P. AND AFFILIATES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
PARTNERS' DEFICIT
-------------------------
PREFERRED CLASS A CAPITAL
LIMITED GENERAL LIMITED CONTRIBUTION
PARTNERS PARTNER PARTNERS RECEIVABLE TOTAL
---------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... $ -- $(307,994) $ (67,144,287) $(1,000) $ (67,453,281)
Issuance of preferred limited
partnership interests (note
10)........................... 6,250,000 (62,500) (6,187,500) -- --
Partner capital contributions
(note 10)..................... -- 1,500 -- -- 1,500
Distribution of additional
preferred partnership
interests (note 10)........... 558,430 (5,584) (552,846) -- --
Net loss........................ -- (97,549) (9,657,315) -- (9,754,864)
---------- --------- ------------- ------- -------------
Balance at December 31, 1996.... 6,808,430 (472,127) (83,541,948) (1,000) (77,206,645)
Distribution of additional
preferred partnership
interests (note 10)........... 841,558 (8,416) (833,142) -- --
Accretion of redeemable
partnership interests (note
10)........................... -- (27,500) (2,722,500) -- (2,750,000)
Net loss........................ -- (158,715) (15,712,771) -- (15,871,486)
---------- --------- ------------- ------- -------------
Balance at December 31, 1997.... 7,649,988 (666,758) (102,810,361) (1,000) (95,828,131)
Distribution of additional
preferred partnership
interests (note 10)........... 917,479 (9,175) (908,304) -- --
Accretion of redeemable
partnership interests (note
10)........................... -- (98,168) (9,718,596) -- (9,816,764)
Net loss........................ -- (215,861) (21,370,309) -- (21,586,170)
---------- --------- ------------- ------- -------------
Balance at December 31, 1998.... $8,567,467 $(989,962) $(134,807,570) $(1,000) $(127,231,065)
========== ========= ============= ======= =============
</TABLE>
See accompanying notes to combined financial statements.
F-190
<PAGE> 402
HELICON PARTNERS I, L.P. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (9,754,864) $(15,871,486) $(21,586,170)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Extraordinary item...................................... -- -- 1,657,320
Depreciation and amortization........................... 12,556,023 19,411,813 24,290,088
Gain on sale of equipment............................... (20,375) (1,069) (29,323)
Interest on 12% subordinated notes paid through the
issuance of additional notes.......................... 1,945,667 4,193,819 4,961,241
Interest on other notes payable added to principal...... 168,328 185,160 --
Amortization of debt discount and deferred financing
costs................................................. 2,115,392 849,826 919,439
Change in operating assets and liabilities, net of
acquisitions:
Decrease (increase) in receivables from subscribers... 176,432 (496,146) (79,535)
Increase in prepaid expenses and other assets......... (269,156) (976,491) (1,255,018)
Increase in financing costs incurred.................. (4,525,331) (434,000) (2,200,000)
Increase in accounts payable and accrued expenses..... 2,182,762 2,957,524 681,037
Increase (decrease) in subscriptions received in
advance............................................ 119,277 325,815 (208,803)
Increase (decrease) in accrued interest............... 1,613,630 376,158 (17,904)
------------ ------------ ------------
Total adjustments.................................. 16,062,649 26,392,409 28,718,542
------------ ------------ ------------
Net cash provided by operating activities.......... 6,307,785 10,520,923 7,132,372
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment................ (8,987,766) (15,824,306) (13,538,978)
Proceeds from sale of equipment........................... 21,947 23,270 118,953
Cash paid for net assets of cable television systems
acquired................................................ (35,829,389) (70,275,153) (26,063,284)
Cash paid for net assets of internet businesses
acquired................................................ (40,000) (993,760) --
Increase in intangible assets and deferred costs.......... (127,673) (308,759) (183,018)
------------ ------------ ------------
Net cash used in investing activities.............. (44,962,881) (87,378,708) (39,666,327)
------------ ------------ ------------
Cash flows from financing activities:
Capital contributions..................................... 1,500 -- --
Decrease in restricted cash............................... -- 1,000,000 --
Proceeds from issuance of 12% subordinated notes and
redeemable partnership interests........................ 34,000,000 -- --
Proceeds from bank loans.................................. 8,900,000 77,285,000 104,000,000
Repayment of bank loans................................... (952,777) (1,505,581) (69,509,719)
Repayment of other notes payable.......................... (527,514) (1,145,989) (1,362,995)
Advances to affiliates.................................... (3,207,996) (3,412,411) (8,856,491)
Repayments of advances to affiliates...................... 3,479,336 2,986,778 9,021,440
------------ ------------ ------------
Net cash provided by financing activities.......... 41,692,549 75,207,797 33,292,235
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... 3,037,453 (1,649,988) 758,280
Cash and cash equivalents at beginning of year.............. 2,984,816 6,022,269 4,372,281
------------ ------------ ------------
Cash and cash equivalents at end of year.................... $ 6,022,269 $ 4,372,281 $ 5,130,561
============ ============ ============
Supplemental cash flow information:
Interest paid............................................. $ 11,575,250 $ 17,981,264 $ 21,770,938
============ ============ ============
Other non-cash items:
Acquisition of property, plant and equipment through
issuance of other notes payable....................... $ 1,222,000 $ 917,815 $ 1,025,319
============ ============ ============
Issuance of notes payable in connection with the
acquisition of cable television and internet systems,
net of imputed interest............................... $ 569,500 $ 1,914,479 --
============ ============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-191
<PAGE> 403
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
1. ORGANIZATION AND NATURE OF BUSINESS
Helicon Partners I, L.P. ("the Partnership") was organized as a limited
partnership on November 30, 1994 under the laws of the State of Delaware. On
April 8, 1996, Baum Investments, Inc. acquired a 1% general partnership interest
in the Partnership through an initial capital contribution of $1,500 and the
existing limited partners of The Helicon Group, L.P. ("THGLP"), formed in 1993,
exchanged their limited partnership interests in THGLP for all Class A Common
Limited Partnership Interests and Preferred Limited Partnership Interests in the
Partnership. As a result of this exchange, THGLP became 99% owned by the
Partnership. The Partnership now owns all of the limited partnership interests
in THGLP and Baum Investments, Inc. continues to be the general partner of THGLP
and to own a 1% general partnership interest in THGLP. The Partnership also owns
a 99% interest and THGLP a 1% interest in HPI Acquisition Co., LLC ("HPIAC"), a
Delaware limited liability company formed on February 7, 1996. The Partnership
also owned an 89% limited partnership interest and Baum Investments, Inc. a 1%
general partnership interest in Helicon OnLine, L. P. ("HOL"), a Delaware
limited partnership formed May 31, 1997. On June 29, 1998, the net assets of HOL
were transferred to THGLP in settlement of the inter-company loans THGLP had
made to HOL. The Partnership, THGLP, HPIAC and HOL are referred to collectively
herein as the Company.
On March 22, 1999, Helicon Partners I, L. P. (HPI), Baum Investments, Inc.
and all the holders of partnership interests in HPI entered into a purchase
agreement by and among Charter Communications, Inc, Charter Communications, LLC
and Charter Helicon, LLC (collectively the "Charter Entities") providing for the
sale of all such partnership interests and Helicon Corp.'s interest in the
management agreements with THGLP and HPIAC to the Charter Entities. The sale
price is $550 million which amount will be reduced by any outstanding
indebtedness assumed by the Charter Entities.
The Company operates cable television systems located in Pennsylvania, West
Virginia, North Carolina, South Carolina, Louisiana, Vermont, New Hampshire,
Georgia and Tennessee. The Company also offers a broad range of Internet access
service, including dial-up access, dedicated high speed access, both two-way and
asymmetrical ("Hybrid"), high speed cable modem access, World Wide Web design
and hosting services and other value added services such as paging and private
network systems within the Company's cable service and contiguous areas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) PRINCIPLES OF COMBINATION
The accompanying financial statements include the accounts of the
Partnership, THGLP and HPIAC and HOL which have been combined because of common
ownership and control. They also reflect the accounts of THGLP's subsidiary,
Helicon Capital Corp. ("HCC"), which has nominal assets and no operations since
its incorporation. All intercompany accounts and transactions have been
eliminated in combination.
b) PARTNERSHIP PROFITS, LOSSES AND DISTRIBUTIONS
Under the terms of the partnership agreements of the Partnership and THGLP,
profits, losses and distributions will be made to the general and Class A
Limited Partners pro-rata based on their respective partnership interest.
F-192
<PAGE> 404
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Holders of Preferred Limited Partnership Interests are entitled to an
aggregate preference on liquidation of $6,250,000 plus cumulative in-kind
distributions of additional Preferred Limited Partnership interests at an annual
rate of 12%.
c) REVENUE RECOGNITION
Revenue is recognized as services are provided to subscribers. Subscription
revenues billed in advance for services are deferred and recorded as income in
the period in which services are rendered.
d) Property, Plant and Equipment
Property, plant and equipment are carried at cost and are depreciated using
the straight-line method over the estimated useful lives of the respective
assets.
e) INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs are carried at cost and are amortized
using the straight-line method over the estimated useful lives of the respective
assets. The Company periodically reviews the amortization periods of their
intangible assets and deferred costs. The Company evaluates whether there has
been a permanent impairment in the value of these assets by considering such
factors including projected undiscounted cash flows, current market conditions
and changes in the cable television industry that would impact the
recoverability of such assets, among other things.
f) INCOME TAXES
No provision for Federal or state income taxes has been made in the
accompanying combined financial statements since any liability for such income
taxes is that of the partners and not of the Partnership or its affiliates.
Certain assets have a basis for income tax purposes that differs from the
carrying value for financial reporting purposes, primarily due to differences in
depreciation methods. As a result of these differences, at December 31, 1997 and
1998 the net carrying value of these assets for financial reporting purposes
exceeded the net basis for income tax purposes by approximately $22 million and
$27 million respectively.
g) CASH AND CASH EQUIVALENTS
Cash and cash equivalents, consisting of amounts on deposit in money market
accounts, checking accounts and certificates of deposit, were $4,372,281 and
$5,130,561 at December 31, 1997 and 1998, respectively.
h) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues, expenses and the
disclosure of contingent assets and liabilities to prepare these combined
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
i) INTEREST RATE CAP AGREEMENTS
The cost paid is amortized over the life of the agreements.
F-193
<PAGE> 405
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
j) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Receivables, Accounts Payable and Accrued Expenses
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, current receivables, notes receivable, accounts payable,
and accrued expenses approximate fair values.
Senior Secured Notes and Long-term Debt
For the Senior Secured Notes, fair values are based on quoted market
prices. The fair market value at December 31, 1997 and 1998 was approximately
$123,000,000 and $120,000,000, respectively. For long-term debt, their values
approximate carrying value due to the short-term maturity of the debt and/or
fluctuating interest.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the consolidated
statements of stockholder's equity and comprehensive income. The Statement
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of operations.
The Company has no items that qualify as comprehensive income.
3. ACQUISITIONS
Cable Acquisitions
On January 31, 1995, THGLP acquired a cable television system, serving
approximately 1,100 (unaudited) subscribers in the Vermont communities of
Bradford, South Royalton and Chelsea. The aggregate purchase price was
approximately $350,000 and was allocated to the net assets acquired which
included property and equipment and intangible assets.
In June and July, 1996, HPIAC completed the acquisitions of all the
operating assets of the cable television systems, serving approximately 26,000
(unaudited) subscribers, in the areas of Jasper and Skyline, Tennessee and
Summerville, Trenton, Menlo, Decatur and Chatsworth, Georgia (collectively
referred to as the Tennessee cluster).
The aggregate purchase price of $36,398,889, including acquisition costs of
$742,837, was allocated to the net assets acquired based on their estimated fair
value. Such allocation is summarized as follows:
<TABLE>
<S> <C>
Land.................................................... $ 25,000
Cable television system................................. 17,876,244
Other property, plant and equipment..................... 185,000
Subscriber lists........................................ 17,474,762
Noncompete agreement.................................... 1,000
Other intangible assets................................. 742,837
Other net operating items............................... 94,046
-----------
Total aggregate purchase price.......................... $36,398,889
===========
</TABLE>
F-194
<PAGE> 406
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A portion of the purchase price was paid through the issuance of notes to
the sellers of one of the systems totaling $750,000. Such notes were reported
net of imputed interest of $180,500 computed at 9% per annum (see note 11).
On January 16, 1997, HPIAC acquired an adjacent cable television system
serving approximately 2,256 (unaudited) subscribers in the communities of Ten
Mile and Hamilton, Tennessee. The aggregate purchase price was approximately
$2,960,294 and was allocated to the net assets acquired which included property,
equipment and intangible assets, based on their estimated fair value.
On January 31, 1997, THGLP acquired a cable television system, serving
approximately 823 (unaudited) subscribers in the West Virginia counties of Wirt
and Wood. The aggregate purchase price was approximately $1,053,457, and was
allocated to the net assets acquired which included property, equipment and
intangible assets, based on their estimated fair value.
On April 18, 1997, HPIAC acquired a cable television system serving
approximately 839 (unaudited) subscribers in the communities of Charleston and
Calhoun, Tennessee. The aggregate purchase price was approximately $1,055,693
and was allocated to the net assets acquired which included property and
equipment and intangible assets, based on their estimated fair value.
On June 26, 1997, HPIAC acquired the net assets of cable television systems
serving approximately 21,500 (unaudited) subscribers primarily in the North
Carolina communities of Avery County and surrounding areas and in the South
Carolina community of Anderson County. The aggregate purchase price was
approximately $45,258,279, including acquisition costs of $547,235, and was
allocated to the net assets acquired which included property, plant, equipment
and intangible assets, based on their estimated fair value.
On June 26, 1997, THGLP acquired the net assets of a cable television
system serving approximately 11,000 (unaudited) subscribers in the North
Carolina communities of Watauga County, Blowing Rock, Beech Mountain and the
town of Boone. The aggregate purchase price was $19,947,430 and was allocated to
the net assets acquired which included, property, plant, equipment and
intangible assets, based on their estimated fair value.
The aggregate purchase price of the 1997 cable acquisitions was $70,275,153
and was allocated to the net assets acquired based on their estimated fair
market value as follows:
<TABLE>
<S> <C>
Land...................................................... $ 158,500
Cable television system................................... 21,320,900
Vehicles.................................................. 1,473,600
Computer equipment........................................ 240,000
Subscriber lists.......................................... 46,925,173
Organization and other costs.............................. 688,816
Other net operating items................................. (531,836)
-----------
Total aggregate purchase price............................ $70,275,153
===========
</TABLE>
On December 31, 1998, HPIAC acquired the net assets of cable television
systems serving approximately 11,225 (unaudited) subscribers primarily in the
North Carolina community of Roanoke Rapids. The aggregate purchase price was
$26,063,284 including acquisition costs of
F-195
<PAGE> 407
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
$535,875 and was allocated to the net assets acquired, which included, property,
equipment and intangible assets, based on their estimated fair value.
<TABLE>
<S> <C>
Land...................................................... $ 250,000
Cable television system................................... 4,258,000
Other property, plant and equipment....................... 1,103,375
Subscriber lists.......................................... 19,805,000
Organization and other costs.............................. 535,875
Other net operating items................................. 111,034
-----------
Total aggregate purchase price............................ $26,063,284
===========
</TABLE>
Internet Acquisitions
On March 22, 1996, THGLP acquired the net assets of a telephone dial-up
internet access provider ("ISP") serving approximately 350 (unaudited) customers
in and around the area of Uniontown, Pennsylvania. The aggregate purchase price
was approximately $40,000.
On April 1, 1997, the Partnership acquired the net assets of a telephone
dial-up ISP serving approximately 2,500 (unaudited) customers in and around the
area of Uniontown, Pennsylvania. The aggregate purchase price was $757,029.
On May 31, 1997, the Partnership acquired the net assets of a telephone
dial-up ISP serving approximately 1,800 (unaudited) customers in and around the
area of Uniontown, Pennsylvania. The aggregate purchase price was $213,629.
On November 14, 1997, HOL acquired the net assets of a telephone dial-up
ISP serving approximately 1,744 (unaudited) customers in and around the area of
Johnstown, Pennsylvania. The aggregate purchase price was $348,927.
On December 17, 1997, HOL acquired the net assets of a telephone dial-up
ISP serving 1,571 (unaudited) customers in and around the area of Plainfield,
Vermont. The aggregate purchase price was $497,307.
On December 17, 1997, HOL acquired the net assets of a telephone dial-up
ISP serving approximately 2,110 (unaudited) customers in and around the area of
Wells River, Vermont. The aggregate purchase price was $673,170.
The aggregate purchase price of the 1997 ISP acquisitions was $2,490,062
and was allocated to the net assets acquired, based on their estimated fair
value. Such allocation is summarized as follows:
<TABLE>
<S> <C>
Internet service equipment................................. $ 237,064
Customer lists............................................. 1,409,768
Non-compete Agreement...................................... 883,097
Other intangible assets.................................... 35,000
Other net operating items.................................. (74,867)
----------
Total aggregate purchase price............................. $2,490,062
==========
</TABLE>
F-196
<PAGE> 408
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A portion of the purchase price was paid through the issuance of notes to
the Sellers totaling $1,801,000. Such notes were reported net of imputed
interest of $304,698 computed at 9% per annum (see Note 11).
The operating results relating to the above acquisitions, effective with
their acquisition dates, are included in the accompanying combined financial
statements.
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net is summarized as follows at December 31:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
1997 1998 LIFE IN YEARS
------------ ------------ ----------------
<S> <C> <C> <C>
Land........................... $ 121,689 $ 320,689 --
Cable television system........ 124,684,403 140,441,324 5 to 20
Internet service equipment..... 1,281,362 2,483,602 2 to 3
Office furniture and
fixtures..................... 677,672 728,253 5 and 10
Vehicles....................... 3,536,358 4,570,990 3 and 5
Building....................... 805,525 1,585,384 5 and 10
Building and leasehold
Improvements................. 398,843 445,820 1 to 5
Computers...................... 3,232,355 4,159,506 3 to 5
------------ ------------
134,738,207 154,735,568
Less accumulated
depreciation................. (54,633,830) (67,997,988)
------------ ------------
$ 80,104,377 $ 86,737,580
============ ============
</TABLE>
5. INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs are summarized as follows at December
31:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
1997 1998 LIFE IN YEARS
------------ ------------ ----------------
<S> <C> <C> <C>
Covenants not-to-compete......... $ 14,270,120 $ 14,270,120 5
Franchise agreements............. 19,650,889 19,650,889 9 to 17
Goodwill......................... 1,703,760 1,703,760 20
Subscriber lists................. 82,292,573 102,097,574 6 to 10
Financing costs.................. 9,414,809 9,291,640 8 to 10
Organization and other costs..... 3,631,650 4,306,777 5 to 10
------------ ------------
130,963,801 151,320,760
Less accumulated amortization.... (45,897,136) (56,443,913)
------------ ------------
$ 85,066,665 $ 94,876,847
============ ============
</TABLE>
F-197
<PAGE> 409
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. TRANSACTIONS WITH AFFILIATES
Amounts due from/to affiliates result from management fees, expense
allocations and temporary non-interest bearing loans. The affiliates are related
to the Company through common-ownership.
The Partnership is managed by Helicon Corp., an affiliated management
company. During 1996, 1997 and 1998, the Partnership was charged management fees
of $2,103,077, $2,997,872, and $3,496,271, respectively. In 1997 and 1998,
$2,685,172 and $3,231,362 of the management fees were paid and $312,700 and
$172,476 were deferred, in accordance with the terms of the Partnership's credit
agreements, respectively. Management fees are calculated based on the gross
revenues of the systems. Additionally, during 1996, 1997 and 1998, THGLP was
also charged $980,000, $713,906, and $1,315,315, respectively, for certain costs
incurred by this related party on their behalf.
In May 1997, immediately after the formation of HOL, HPI sold 10% of its
limited partner interest in HOL to certain employees of Helicon Corp. Such
interests were sold at HPI's proportionate carrying value of HOL of $83,631 in
exchange for notes receivable from these individuals. These notes are due upon
the liquidation of HOL or the sale of all or substantially all of its assets.
On June 26, 1998, the notes were cancelled in consideration of the return
by the Helicon employees of their 10% limited partnership interests.
7. DUE TO PRINCIPAL OWNER
Mr. Theodore Baum, directly or indirectly, is the principal owner of 96.17%
of the general and limited partnership interests of the Partnership (the
"Principal Owner"). Due to Principal Owner consists of $5,000,000 at December
31, 1997 and 1998 payable by THGLP. Beginning on November 3, 1993, interest on
the $5,000,000 due to the Principal Owner did not accrue and in accordance with
the provisions of the Senior Secured Notes was not paid for twenty four months.
Interest resumed on November 3, 1995 (see Note 8). The principal may only be
repaid thereafter subject to the passage of certain limiting tests under the
covenants of the Senior Secured Notes. Prior to the issuance of the Senior
Secured Notes, amounts due to Principal Owner bore interest at varying rates per
annum based on the prime rate and were due on demand. Interest expense includes
$521,701 in 1996 and $530,082 in 1997 and $524,880 in 1998 related to this debt.
8. SENIOR SECURED NOTES
On November 3, 1993, THGLP and HCC (the "Issuers"), through a private
placement offering, issued $115,000,000 aggregate principal amount of 11% Senior
Secured Notes due 2003 (the "Senior Secured Notes"), secured by substantially
all the assets of THGLP. The Senior Secured Notes were issued at a substantial
discount from their principal amount and generated net proceeds to the Issuers
of approximately $105,699,000. Interest is payable on a semi-annual basis in
arrears on November 1 and May 1, beginning on May 1, 1994. Until November 1,
1996 the Senior Secured Notes bore interest at the rate of 9% per annum. After
November 1, 1996, the Senior Secured Notes bear interest at the rate of 11% per
annum. The discount on the Senior Secured Notes has been amortized over the term
of the Senior Secured Notes so as to result in an effective interest rate of 11%
per annum.
F-198
<PAGE> 410
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Senior Secured Notes may be redeemed at the option of the Issuers in
whole or in part at any time on or after November 1, 1997 at the redemption
price of 108% reducing ratably to 100% of the principal amount, in each case
together with accrued interest to the redemption date. The Issuers are required
to redeem $25,000,000 principal amount of the Senior Secured Notes on each of
November 1, 2001 and November 1, 2002. The indenture under which the Senior
Secured Notes were issued contains various restrictive covenants, the more
significant of which are, limitations on distributions to partners, the
incurrence or guarantee of indebtedness, the payment of management fees, other
transactions with officers, directors and affiliates, and the issuance of
certain types of equity interests or distributions relating thereto.
9. LOANS PAYABLE TO BANKS
On July 12, 1996, HPIAC entered into $85,000,000 of senior secured credit
facilities ("Facilities") with a group of banks and The First National Bank of
Chicago, as agent. The Facilities were comprised of a $55,000,000 senior secured
two and one-half year revolving credit facility, converting on December 31, 1998
to a five and one-half year amortizing term loan due June 30, 2004 ("Facility
A"); and, a $30,000,000 senior secured, amortizing, multiple draw nine year term
loan facility due June 30, 2005 ("Facility B"). The Facilities financed certain
permitted acquisitions, transaction expenses and general corporate purposes.
Interest on outstanding borrowings was payable at specified margins over either
LIBOR or the higher of the corporate base rate of The First National Bank of
Chicago or the rates on overnight Federal funds transactions with members of the
Federal Reserve System. The margins varied based on the Company's total leverage
ratio, as defined, at the time of an advance. As of December 31, 1997, the
amounts outstanding were $30,000,000 under Facility B and $35,500,000
outstanding under Facility A. Interest was payable at LIBOR plus 3.50% for
Facility B and LIBOR plus 3.00% for Facility A. In addition, HPIAC paid a
commitment fee of .5% of the unused balance of the Facilities.
On December 15, 1998, the Facilities were repaid in full together with
accrued interest thereon from the proceeds of the new credit agreements (see
below).
In connection with the early retirement of the aforementioned bank debt,
HPIAC wrote off related unamortized deferred financing costs totaling
$1,657,320. Such amount has been classified as an extraordinary item in the
accompanying 1998 combined statement of operations.
In connection with the aforementioned Facilities, HPIAC entered into an
interest rate cap agreement to reduce its exposure to interest rate risk.
Interest rate cap transactions generally involve the exchange of fixed and
floating rate interest payment obligations and provide for a ceiling on interest
to be paid, respectively, without the exchange of the underlying notional
principal amount. These types of transactions involve risk of counterpart
nonperformance under the terms of the contract. At December 31, 1997, HPIAC had
cap agreements with aggregate notional amounts of $42,500,000 expiring through
March 29, 2000. On December 15, 1998, in connection with the early retirement of
the related bank debt, the cap agreements were terminated and HPIAC wrote off
the unamortized costs of these cap agreements.
On December 15, 1998, HPIAC entered into credit agreements with a group of
banks and Paribas, as agent, providing maximum borrowings of $110,000,000 (the
1998 Credit Facilities). The agreements include (i) a senior secured Credit
Agreement consisting of a $35,000,000 A Term Loan, maturing on December 31,
2005, $45,000,000 B Term Loan, maturing on December 31, 2006 and a $10,000,000
Revolving Commitment, maturing on December 31, 2005 and (ii) a Loan Agreement
consisting of a $20,000,000 Hybrid Facility, maturing on December 31, 2007.
F-199
<PAGE> 411
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998, the A Term Loan, B Term Loan and Hybrid Facility
were fully drawn down and there was nothing outstanding under the Revolving
Commitment. The principal cash payments required under the Company's credit
agreements for the fiscal years ended December 31, 1999, 2000, 2001, 2002 and
2003 are estimated to aggregate $0, $812,500, $3,950,000, $5,700,000 and
$7,450,000, respectively.
Interest is payable at LIBOR plus an applicable margin, which is based on a
ratio of loans outstanding to annualized EBITDAM, as defined in the agreement
and can not exceed 3.00% for A Term Loan and Revolving Commitments, 3.25% for B
Term Loan and 4.50% for the Hybrid Facility. In addition, the Company pays a
commitment fee of .50% of the unused balance of the Revolving Commitment.
The 1998 Credit Facilities are secured by a first perfected security
interest in all of the assets of HPIAC and a pledge of all equity interests of
HPIAC. The credit agreement contains various restrictive covenants that include
the achievement of certain financial ratios relating to interest, fixed charges,
leverage, limitations on capital expenditures, incurrence or guarantee of
indebtedness, other transactions with affiliates and distributions to members.
In addition, management fees in the aggregate cannot exceed 5% of gross revenues
of HPIAC.
On June 26, 1997, THGLP entered into a $20,000,000 senior secured credit
facility with Banque Paribas, as Agent (the 1997 Credit Facility). On January 5,
1999, the 1997 Credit Facility was restated and amended. The facility is
non-amortizing and is due November 1, 2000. Borrowings under the facility
financed the acquisition of certain cable television assets in North Carolina
(see note 3). Interest on the $20,000,000 outstanding is payable at specified
margins over either LIBOR or the rate of interest publicly announced in New York
City by The Chase Manhattan Bank from time to time as its prime commercial
lending rate. The margins vary based on the THGLP's total leverage ratio, as
defined, at the time of an advance. Currently interest is payable at LIBOR plus
2.75%.
The 1997 Credit Facility is secured by a first perfected security interest
in all of the assets of the Partnership and a pledge of all equity interests of
the THGLP. The credit agreement contains various restrictive covenants that
include the achievement of certain financial ratios relating to interest, fixed
charges, leverage, limitations on capital expenditures, incurrence or guarantee
of indebtedness, transactions with affiliates, distributions to members and
management fees which accrue at 5% of gross revenues.
Also included in loans payable to banks is a mortgage note of $266,922
payable to a bank that is secured by THGLP's office building in Vermont. The
interest is payable at Prime plus 1% and the mortgage note is due March 1, 2012.
Principal payments on the mortgage note are summarized as follows at
December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- - - ----------------------- --------
<S> <C>
1999........................................................ $ 10,581
2000........................................................ 11,631
2001........................................................ 12,786
2002........................................................ 14,055
2003 and thereafter......................................... 217,869
--------
$266,922
========
</TABLE>
F-200
<PAGE> 412
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBORDINATED NOTES AND REDEEMABLE PARTNERSHIP INTERESTS
In April 1996 the Partnership sold to unrelated investors, $34,000,000
aggregate principal amount of its 12% Subordinated Notes (the "Subordinated
Notes") and warrants to purchase 2,419.1 units (the "Units") of Class B Common
Limited Partnership Interests representing in the aggregate 24.191% of the
outstanding limited partner interests of the Partnership on a fully diluted
basis (the "Warrants"). Of the $34,000,000 of gross proceeds, $3,687,142 was
determined to be the value of the Warrants, and $30,312,858 was allocated to the
Subordinated Notes. The discount on the Subordinated Notes is being amortized
over the term of these Notes.
The Subordinated Notes are subordinated to the senior indebtedness of the
Partnership and are due April 1, 2004. Interest is payable semi-annually on each
October 1 and April 1 in cash or through the issuance of additional Subordinated
Notes, at the option of the Partnership. In October 1996, April 1997, October
1997, April 1998 and October 1998, the Partnership elected to satisfy interest
due through the issuance of $1,945,667, $2,156,740, $2,037,079, $2,408,370 and
$2,552,871, respectively, additional Subordinated Notes. After September 2001, a
holder or holders of no less than 33 1/3% of the aggregate principal amount of
the Subordinated Notes can require the Partnership to repurchase their
Subordinated Notes at a price equal to the principal amount thereof plus accrued
interest. The Partnership has an option to redeem the Subordinated Notes at 102%
of the aggregate principal amount after the fifth anniversary of their issuance,
at 101% of the aggregate principal amount after the sixth anniversary of
issuance and at 100% of the aggregate principal amount after the seventh
anniversary of issuance.
Holders of the Warrants have the right to acquire the Units at any time for
a price of $1,500 per Unit. After September 2001, a holder or holders of at
least 33 1/3% of the Warrants can require the Partnership to either purchase
their Warrants at their interest in the Net Equity Value of the Partnership or
seek a purchaser for all of the assets or equity interests of the Partnership.
Net Equity Value pursuant to the terms of the underlying agreements is the
estimated amount of cash that would be available for distribution to the
Partnership interests upon a sale of all of the assets of the Partnership and
its subsequent dissolution and liquidation. The Net Equity Value is the amount
agreed to by the Partnership and 66 2/3% of the holders of the Subordinated
Notes and Warrants or, absent such agreement, determined through a specified
appraisal process.
The Partnership estimated the Net Equity Value of the Warrants to be
approximately $43,250,000 at December 31, 1998 and $16,750,000 at December 31,
1997. Such estimate as of December 31, 1998 reflects the amount that the holders
of the warrants have agreed to accept for their interests assuming the proposed
sale of all of the interests of the partnership is consummated (see note 14).
The increase in the estimated Net Equity Value over the original carrying value
of the Warrants is being accreted evenly over the period beginning with the date
of the increase and September 2001. Such accretion is being reflected in the
accompanying financial statements as an increase in the carrying value of the
Warrants and a corresponding reduction in the carrying value of the capital
accounts of the General and Class A Limited Partners.
The agreements underlying the Subordinated Notes and the Warrants contain
various restrictive covenants that include limitations on incurrence or
guarantee of indebtedness, transactions with affiliates, and distributions to
partners. In addition, management fees in the aggregate cannot exceed 5% of
gross revenues of the Partnership.
F-201
<PAGE> 413
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. OTHER NOTES PAYABLE
Other Notes payable consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Promissory note in consideration for acquisition of a cable
television system, accruing interest at 10% per annum on
principal and accrued interest which is added to principal
on certain specified dates; interest becomes payable on
January 1, 1998 and the principal is payable in full on
August 20, 2000 $2,036,765 $2,036,765
Non-interest bearing promissory notes issued in connection
with the acquisition of a cable television system.
Principal payments begin on July 16, 1997, in the amount
of $70,000 and four installments in the amount of $170,000
on each July 16 thereafter. Such notes are reported net of
imputed interest of $141,116 and $101,732 in 1997 and
1998, respectively, computed at 9% per annum 538,884 408,268
Non-interest bearing promissory notes issued in connection
with the acquisitions of the internet businesses.
Principal payments are due in January, February, and March
of each year and continue quarterly thereafter through
June, 2001. Such notes are reported net of imputed
interest of $180,727 and $146,441 in the 1997 and 1998,
respectively, computed at 9% per annum 1,398,478 1,021,474
Installment notes, collateralized by vehicles and other
equipment and payable in monthly installments, at interest
rates between 5.5% to 14.25% per annum, through January,
2003 1,772,949 1,982,297
---------- ----------
$5,747,076 $5,448,804
========== ==========
</TABLE>
Principal payments due on the above notes payable are summarized as follows
at December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
- - - ----------------------- ----------
<S> <C>
1999..................................................... $1,337,476
2000..................................................... 3,276,529
2001..................................................... 678,349
2002..................................................... 140,944
2003..................................................... 15,506
----------
$5,448,804
==========
</TABLE>
12. PARTNERS' DEFICIT
During 1993, the Principal Owner contributed a $6,500,000 unsecured,
non-interest bearing personal promissory note due on demand to the general
partner of THGLP. Additionally, the
F-202
<PAGE> 414
HELICON PARTNERS I, L.P. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Principal Owner contributed to THGLP an unsecured, non-interest bearing personal
promissory note in the aggregate principal amount of $24,000,000 (together with
the $6,500,000 note, the "Baum Notes"). The Baum Notes have been issued for the
purpose of THGLP's credit enhancement. Although the Baum Notes are
unconditional, they do not become payable except (i) in increasing amounts
presently up to $19,500,000 and in installments thereafter to a maximum of
$30,500,000 on December 16, 1996 and (ii) at such time after such dates as
THGLP's creditors shall have exhausted all claims against THGLP's assets.
13. COMMITMENTS
The Partnership and affiliates leases telephone and utility poles on an
annual basis. The leases are self renewing. Pole rental expense for the years
ended December 31, 1996, 1997 and 1998 was $609,075, $873,264 and $982,306,
respectively.
In connection with certain lease and franchise agreements, the Partnership,
from time to time, issues security bonds.
The Partnership and affiliates utilizes certain office space under
operating lease agreements which expire at various dates through August 2013 and
contain renewal options. At December 31, 1998 the future minimum rental
commitments under such leases were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- - - -----------------------
<S> <C>
1999..................................................... $ 166,825
2000..................................................... 142,136
2001..................................................... 141,727
2002..................................................... 147,912
2003..................................................... 151,412
Thereafter............................................... 1,418,017
----------
$2,168,029
==========
</TABLE>
Office rent expense was $102,801 in 1996, $203,506 in 1997 and $254,955 in
1998.
14. SUBSEQUENT EVENTS
On March 22, 1999, Helicon Partners I, L. P. (HPI), Baum Investments, Inc.
and all the holders of partnership interests in HPI entered into a purchase
agreement by and among Charter Communications, Inc, Charter Communications, LLC
and Charter Helicon, LLC (collectively the "Charter Entities") providing for the
sale of all such partnership interests and Helicon Corp.'s interest in the
management agreements with THGLP and HPIAC to the Charter Entities. The sale
price is $550 million which amount will be reduced by any outstanding
indebtedness assumed by the Charter Entities.
F-203
<PAGE> 415
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Rifkin Cable Income Partners L.P.
In our opinion, the accompanying balance sheet and the related statements
of operations, of equity and of cash flows present fairly, in all material
respects, the financial position of Rifkin Cable Income Partners L.P. (the
"Partnership") at September 13, 1999, and the results of its operations and its
cash flows for the period January 1, 1999 to September 13, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
On September 13, 1999, all of the Partnership's interest were sold to
Charter Communications, LLC. These financial statements represent the
Partnership just prior to that transaction and do not reflect any adjustments
related thereto.
/s/ PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
February 15, 2000
F-204
<PAGE> 416
RIFKIN CABLE INCOME PARTNERS, L.P.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 13, 1999
------------------
<S> <C>
ASSETS
Cash...................................................... $ 145,036
Customer accounts receivable, net of allowance for
doubtful accounts of $2,349............................ 109,874
Accounts receivable, related party........................ 7,328
Accounts receivable, interpartnership..................... 13,638,312
Other receivables......................................... 96,318
Prepaid expenses and deposits............................. 20,920
Property, plant and equipment, at cost:
Transmission and distribution systems and related
equipment............................................. 11,038,202
Vehicles, office furniture and fixtures................ 426,977
Land, buildings and leasehold improvements............. 125,000
Construction in process and spare parts inventory...... 66,122
-----------
11,656,301
Less accumulated depreciation............................... (831,684)
-----------
Property, plant and equipment, net..................... 10,824,617
Franchise costs, net of accumulated amortization of
$792,708.................................................. 12,706,195
-----------
Total assets........................................... $37,548,600
===========
LIABILITIES AND EQUITY
Liabilities:
Accrued liabilities....................................... $ 161,084
Customer deposits and prepayments......................... 321,419
Interpartnership debt..................................... 15,621,000
-----------
Total liabilities...................................... 16,103,503
Commitments and contingencies (Notes 4 and 7)
Divisional equity......................................... 21,445,097
-----------
Total equity........................................... 21,445,097
-----------
Total liabilities and equity......................... $37,548,600
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-205
<PAGE> 417
RIFKIN CABLE INCOME PARTNERS, L.P.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1999
TO SEPTEMBER 13,
1999
---------------------
<S> <C>
REVENUE
Service................................................... $3,533,718
Installation and other.................................... 273,757
----------
Total revenue.......................................... 3,807,475
COSTS AND EXPENSES
Operating expense......................................... 455,528
Programming expense....................................... 862,317
Selling, general and administrative expense............... 472,088
Depreciation.............................................. 836,050
Amortization.............................................. 792,708
Management fees........................................... 190,374
Loss on disposal of assets................................ 52,885
----------
Total costs and expenses............................... 3,661,950
----------
Operating income.......................................... 145,525
Interest expense.......................................... 536,877
----------
Net loss............................................... $ (391,352)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-206
<PAGE> 418
RIFKIN CABLE INCOME PARTNERS, L.P.
STATEMENT OF EQUITY
<TABLE>
<CAPTION>
PERIOD JANUARY 1, 1999 TO
SEPTEMBER 13, 1999
-------------------------------------
DIVISIONAL
EQUITY TOTAL
----------------- -----------------
<S> <C> <C>
Equity contribution.................................... $21,836,449 $21,836,449
Net loss............................................. (391,352) (391,352)
----------- -----------
Equity, September 13, 1999............................. $21,445,097 $21,445,097
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-207
<PAGE> 419
RIFKIN CABLE INCOME PARTNERS, L.P.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD JANUARY 1, 1999 TO
SEPTEMBER 13, 1999
-------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (391,352)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 1,628,758
Loss on disposal of fixed assets.......................... 52,885
Increase in customer accounts receivable.................. (58,351)
Increase in accounts receivable, related party............ (7,328)
Increase in accounts receivable, interpartnership......... (13,638,312)
Decrease in other receivables............................. 36,960
Decrease in prepaid expenses and deposits................. 49,755
Decrease in accrued liabilities........................... (235,521)
Increase in customer deposits and prepayments............. 195,207
------------
Net cash used in operating activities.................. (12,367,299)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Initial cash acquisition cost, net of cash acquired....... (21,771,547)
Additions to property, plant and equipment................ (289,533)
Additions to franchise costs.............................. (20,108)
Net proceeds from sale of assets.......................... 1,500
------------
Net cash used in investing activities.................. (22,079,688)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions..................................... 21,836,449
Proceeds from interpartnership debt....................... 13,119,981
Payments on interpartnership debt......................... (364,407)
------------
Net cash provided by financing activities.............. 34,592,023
------------
Increase in cash.......................................... 145,036
Cash, beginning of period................................. --
------------
Cash, end of period....................................... $ 145,036
============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................. $ 536,877
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-208
<PAGE> 420
RIFKIN CABLE INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Rifkin Cable Income Partners L.P. (the "Partnership") was originally formed
in 1986 as a limited partnership under the laws of the State of Delaware. The
Partnership owns, operates and develops cable television systems in Missouri and
New Mexico.
ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP AND BASIS OF PRESENTATION
Effective December 31, 1998, Interlink Communications Partners, LLLP
("ICP") acquired all of the Partnership's limited partner interest, and agreed
to purchase all of the Partnership's interest for $21.7 million. This
transaction was accounted for as a purchase; as such, assets and liabilities
were written up to their fair value, resulting in an increase to property, plant
and equipment and franchise costs of $6.4 million and $11.7 million,
respectively.
Effective April 1, 1999, ICP completed the purchase of the remaining
general partner interest in the Partnership and the Partnership was merged into
ICP and ceased to exist as a separate legal entity. The Partnership's financial
statements subsequent to that date represent a divisional carve-out from ICP.
These financial statements include all the direct costs of operating its
business; however, certain assets, liabilities and costs not specifically
related to the Partnership's activities were allocated and reflected in the
financial position as of September 13, 1999, and the results of its operations
and its cash flows for the period January 1, 1999 to September 13, 1999.
Allocations from ICP include amounts for debt, interest expense and management
expense. Both debt and interest expense were allocated pro rata based on the
Partnership's percentage of subscribers to total ICP subscribers. Management
expense was allocated in accordance with the management agreement (Note 2). In
addition, receivables and payables to ICP are presented in the accompanying
financial statements net as amounts due to/from interpartnership. Management
believes these allocations were made on a reasonable basis. Nonetheless, the
financial information included herein may not necessarily reflect what the
financial position and results of operations of the Partnership would have been
as a stand-alone entity.
ACQUISITION BY CHARTER COMMUNICATIONS HOLDINGS, LLC
On February 12, 1999, ICP signed a letter of intent to sell all of ICP's
partnership interest to Charter Communications Holdings, LLC ("Charter"). On
April 26, 1999, ICP signed a definitive Purchase and Sales Agreement with
Charter for the sale of the individual partner's interest. The sales transaction
closed on September 13, 1999. These financial statements represent the
Partnership just prior to the transaction and do not reflect any related
adjustments.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost, which in
the case of assets constructed includes amounts for material, labor, overhead
and capitalized interest, if applicable. Upon sale or retirement of an asset,
the related costs and accumulated depreciation were removed from the accounts
and any gain or loss is recognized.
Depreciation expense is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Transmission and distribution systems and related
equipment................................................. 1-15 years
Vehicles, office furniture and fixtures..................... 1-5 years
Land, buildings and leasehold improvements.................. 1-30 years
</TABLE>
F-209
<PAGE> 421
RIFKIN CABLE INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FRANCHISE COSTS
Franchise costs are amortized using the straight-line method over the
remaining lives of the franchises as of the date they were acquired, ranging
from 1 to 18 years. The carrying value is assessed for recoverability by
management based on an analysis of undiscounted expected future cash flows. The
Partnership's management believes that there has been no impairment thereof as
of September 13, 1999.
INCOME TAXES
No provision for federal or state income taxes is necessary in the
financial statements of the Partnership, because as a partnership, it is not
subject to federal or state income tax as the tax effect of its activities
accrues to the partners.
REVENUE RECOGNITION
Customer fees are recorded as revenue in the period the service is
provided. The cost to acquire the rights to the programming generally is
recorded when the product is initially available to be viewed by the customer.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion expenses are charged to income during the year in
which they are incurred and were not significant for the period shown.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. MANAGEMENT AGREEMENT
The Partnership has a management agreement with R & A Management, LLC
("RML"). The management agreement provides that RML shall act as manager of the
Partnership's CATV systems, and shall be entitled to annual compensation of 5%
of the Partnership's CATV revenues, net of certain CATV programming costs. The
result of this transaction included the conveyance of the Rifkin management
agreement ("Rifkin Agreement") to RML ("RML Agreement"). Expenses incurred
pursuant to this agreement and the RML Agreement are disclosed in total on the
Statement of Operations.
3. DEBT
The Partnership has an interpartnership debt with ICP. Borrowings,
including both principal and interest, at September 13, 1999 were $15,621,000
and had an effective interest rate of 8.68%.
ICP has a term loan and revolving loan agreement with a bank. The amount of
the term loan is $150,000,000, and requires varying quarterly payments plus
interest commencing September 30, 2001 and continuing through March 31, 2007. On
February 1, 1999, the term loan agreement was amended to increase the loan
amount to $250,000,000. On July 16, 1999, the
F-210
<PAGE> 422
RIFKIN CABLE INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
term loan agreement was amended again to increase the loan amount to
$290,000,000. The interest rate on the term loan is generally the bank's prime
rate plus 0% to 1.50%. The weighted average effective rate at September 13, 1999
was 8.74%.
The revolving loan agreement provided for borrowing up to $100,000,000 at
the Company's discretion. At September 13, 1999, $91,000,000 had been drawn
against the $100,000,000 commitment. The revolving credit agreement expires on
March 31, 2007. The revolver bears an interest rate at the bank's prime rate
plus 0% to 1.50% or LIBOR plus 1.25% to 2.75%. The specific rate is dependent
upon the leverage ratio of ICP, which is recalculated quarterly. The weighted
average effective interest rate at September 13, 1999 was 8.5%.
The term loan and revolving loan agreement are collateralized by
substantially all assets of ICP and its consolidated entities, including the
Partnership.
4. LEASE COMMITMENTS
The Partnership leases certain real and personal property under
noncancelable operating leases. Future minimum lease payments under these
arrangements at September 13, 1999, were as follows:
<TABLE>
<S> <C>
1999........................................................ $ 60,870
2000........................................................ 30,825
2001........................................................ 30,000
2002........................................................ 8,750
--------
$130,445
========
</TABLE>
Total rent expense for the period January 1, 1999 to September 13, 1999 was
$60,870, including $38,239 relating to cancelable pole rental agreements.
5. RETIREMENT BENEFITS
The Partnership has a 401(k) plan for its employees that have been employed
by the Partnership for at least one year. Employees of the Partnership can
contribute up to 15% of their salary, on a before-tax basis, with a maximum 1999
contribution of $10,000 (as set by the Internal Revenue Service). The
Partnership matches participant contributions up to a maximum of 50% of the
first 3% of a participant's salary contributed. All participant contributions
and earnings are fully vested upon contribution and Partnership contributions
and earnings vest 20% per year of employment with the Partnership, becoming
fully vested after five years. The Partnership's matching contributions for the
period January 1, 1999 to September 13, 1999 were $3,850.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership has a number of financial instruments, none of which are
held for trading purposes. The following method and assumptions were used by the
Partnership to estimate the fair values of financial instruments as disclosed
herein:
Cash, customer accounts receivable, other receivables, accounts payable and
accrued liabilities and customer deposits and prepayments: The carrying value
amount approximates fair value because of the short period to maturity.
The interest rate on debt is adjusted at least quarterly; therefore, the
carrying value of debt approximates its fair value.
F-211
<PAGE> 423
RIFKIN CABLE INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. LITIGATION
The Partnership could possibly be named as defendant in various actions and
proceedings arising from the normal course of business. In all such cases, the
Partnership will vigorously defend itself against the litigation and, where
appropriate, will file counterclaims. Although the eventual outcome of potential
lawsuits cannot be predicted, it is management's opinion that any such lawsuit
will not result in liabilities that would have a material affect on the
Partnership's financial position or results of operations.
F-212
<PAGE> 424
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Rifkin Cable Income Partners L.P.
In our opinion, the accompanying balance sheet and the related statements of
operations, of partners' equity (deficit) and of cash flows present fairly, in
all material respects, the financial position of Rifkin Cable Income Partners
L.P. (the "Partnership") at December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
March 19, 1999
F-213
<PAGE> 425
RIFKIN CABLE INCOME PARTNERS L. P.
BALANCE SHEET
<TABLE>
<CAPTION>
12/31/97 12/31/98
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 381,378 $ 65,699
Customer accounts receivable, net of allowance for doubtful
accounts of $12,455 in 1997 and $18,278 in 1998.......... 49,585 51,523
Other receivables.......................................... 123,828 133,278
Prepaid expenses and deposits.............................. 81,114 70,675
Property, plant and equipment, at cost:
Cable television transmission and distribution systems
and related equipment................................. 8,536,060 8,758,525
Land, buildings, vehicles and furniture and fixtures..... 618,671 623,281
----------- -----------
9,154,731 9,381,806
Less accumulated depreciation............................ (3,847,679) (4,354,685)
----------- -----------
Net property, plant and equipment..................... 5,307,052 5,027,121
Franchise costs and other intangible assets, net of
accumulated amortization of $1,819,324 in 1997 and
$2,033,405 in 1998....................................... 2,005,342 1,772,345
----------- -----------
Total assets..................................... $ 7,948,299 $ 7,120,641
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued liabilities................... $ 365,392 $ 396,605
Customer deposits and prepayments.......................... 177,307 126,212
Interest payable........................................... 58,093 --
Long-term debt............................................. 4,914,000 --
Interpartnership debt...................................... -- 2,865,426
----------- -----------
Total liabilities................................ 5,514,792 3,388,243
Commitments and contingencies (Notes 4 and 8)
Partners' equity:
General partner.......................................... 263,171 822,837
Limited partners......................................... 2,170,336 2,909,561
----------- -----------
Total partner's equity........................... 2,433,507 3,732,398
----------- -----------
Total liabilities and partners' equity........... $ 7,948,299 $ 7,120,641
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-214
<PAGE> 426
RIFKIN CABLE INCOME PARTNERS L.P.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------
12/31/96 12/31/97 12/31/98
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE:
Service............................................ $4,104,841 $4,491,983 $4,790,052
Installation and other............................. 206,044 239,402 345,484
---------- ---------- ----------
Total revenue............................ 4,310,885 4,731,385 5,135,536
COSTS AND EXPENSES:
Operating expense.................................. 643,950 691,700 671,968
Programming expense................................ 787,124 879,939 1,077,540
Selling, general and administrative expense........ 683,571 663,903 622,774
Depreciation....................................... 535,559 602,863 628,515
Amortization....................................... 377,749 332,770 199,854
Management fees.................................... 215,544 236,569 256,777
Loss (gain) on disposal of assets.................. 1,530 2,980 (2,138)
---------- ---------- ----------
Total costs and expenses................. 3,245,027 3,410,724 3,455,290
---------- ---------- ----------
Operating income................................... 1,065,858 1,320,661 1,680,246
Interest expense................................... 533,294 448,530 362,439
---------- ---------- ----------
Net income before extraordinary item............... 532,564 872,131 1,317,807
Extraordinary item -- Loss on early retirement of
debt (Note 1).................................... -- -- 18,916
---------- ---------- ----------
Net income......................................... $ 532,564 $ 872,131 $1,298,891
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-215
<PAGE> 427
RIFKIN CABLE INCOME PARTNERS L.P.
STATEMENT OF PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
Partners' equity (deficit), December 31, 1995... $(299,131) $1,427,630 $1,128,499
Net income...................................... 229,471 303,093 532,564
Equity distribution............................. (42,953) (56,734) (99,687)
--------- ---------- ----------
Partners' equity (deficit), December 31, 1996... (112,613) 1,673,989 1,561,376
Net income...................................... 375,784 496,347 872,131
--------- ---------- ----------
Partners' equity, December 31, 1997............. 263,171 2,170,336 2,433,507
Net income...................................... 559,666 739,225 1,298,891
--------- ---------- ----------
Partners' equity December 31, 1998.............. $ 822,837 $2,909,561 $3,732,398
========= ========== ==========
</TABLE>
The partners' capital accounts for financial reporting purposes vary from
the tax capital accounts.
The accompanying notes are an integral part of the financial statements.
F-216
<PAGE> 428
RIFKIN CABLE INCOME PARTNERS L.P.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------
12/31/96 12/31/97 12/31/98
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 532,564 $ 872,131 $ 1,298,891
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............... 913,308 935,633 828,369
Amortization of deferred loan cost.......... 18,970 18,970 14,228
Loss on early retirement of debt............ -- -- 18,916
Loss (gain) on disposal of fixed assets..... 1,530 2,980 (2,138)
Decrease (increase) in customer accounts
receivables............................... 521 (5,729) (1,938)
Increase in other receivables............... (45,274) (56,059) (9,450)
Decrease in prepaid expense and other....... 40,737 13,230 10,439
Increase (decrease) in accounts payable and
accrued liabilities....................... (207,035) 61,625 31,213
Increase (decrease) in customer deposits and
prepayment................................ 673 (63,524) (51,095)
Increase (decrease) in interest payable..... 35,638 (3,145) (58,093)
---------- ---------- -----------
Net cash provided by operating
activities............................. 1,291,632 1,776,112 2,079,342
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment..... (824,359) (679,394) (415,534)
Additions to other intangible assets, net of
refranchises................................ -- (112) --
Net proceeds from the sale of assets........... 18,255 57,113 69,087
Sales tax related to Florida assets sold in
1994........................................ (14,694) -- --
---------- ---------- -----------
Net cash used in investing activities..... (820,798) (622,393) (346,447)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from interpartnership debt............ -- -- 4,265,426
Payments of long-term debt..................... (715,000) (871,000) (4,914,000)
Payments of interpartnership debt.............. -- -- (1,400,000)
Partners' capital distributions................ (99,687) -- --
---------- ---------- -----------
Net cash used in financing activities..... (814,687) (871,000) (2,048,574)
---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents.................................... (343,853) 282,719 (315,679)
Cash and cash equivalents at beginning of
period......................................... 442,512 98,659 381,378
---------- ---------- -----------
Cash and cash equivalents at end of period....... $ 98,659 $ 381,378 $ 65,699
========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................. $ 455,124 $ 431,722 $ 406,304
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-217
<PAGE> 429
RIFKIN CABLE INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Rifkin Cable Income Partners L.P. (the "Partnership") was formed in 1986 as
a limited partnership under the laws of the State of Delaware. The Partnership
owns, operates and develops cable television systems in Missouri and New Mexico.
Rifkin Cable Management Partners L.P., an affiliate of Rifkin & Associates, Inc.
(Note 3), is the general partner of the Partnership.
The Partnership Agreement (the "Agreement") establishes the respective
rights, obligations and interests of the partners. The Agreement provides that
net income or loss, certain capital events, and cash distributions (all as
defined in the Agreement) are generally allocated 43% to the general partner and
57% to the limited partners.
ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP
During 1998, Interlink Communications Partners, LLLP ("ICP") agreed to
purchase all of the interests of the Partnership. ICP acquired the limited
partner interests, effective December 31, 1998, and is currently in the process
of obtaining the necessary consents to transfer all of the Partnership's
franchises to ICP. Once obtained, ICP will then purchase the general partner
interest in the Partnership, and the Partnership will, by operation of law, be
consolidated into ICP.
REVENUE RECOGNITION
Customer fees are recorded as revenue in the period the service is
provided. The cost to acquire the rights to the programming generally is
recorded when the product is initially available to be viewed by the customer.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion expenses are charged to income during the year in
which they are incurred and were not significant for the periods shown.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost, which in
the case of assets constructed includes amounts for material, labor, overhead
and capitalized interest, if applicable. Upon sale or retirement of an asset,
the related costs and accumulated depreciation are removed from the accounts and
any gain or loss is recognized.
Depreciation expense is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings................................................. 21-30 years
Cable television transmission and distribution systems and
related equipment....................................... 3-15 years
Vehicles and furniture and fixtures....................... 3-5 years
</TABLE>
FRANCHISE COSTS
Franchise costs are amortized using the straight-line method over the
remaining lives of the franchises as of the date they were acquired, ranging
from eight to twenty-five years. The
F-218
<PAGE> 430
RIFKIN CABLE INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
carrying value of intangibles is assessed for recoverability by management based
on an analysis of undiscounted expected future cash flows. The Partnership's
management believes that there has been no impairment thereof as of December 31,
1998.
OTHER INTANGIBLE ASSETS
Loan costs of the Partnership have been deferred and have been amortized to
interest expense utilizing the straight-line method over the term of the related
debt. Use of the straight-line method approximates the results of the
application of the interest method. The net amount remaining at December 31,
1997 was $37,886.
On December 30, 1998, the loan with a financial institution was paid in
full (Note 2). The related deferred loan costs and associated accumulated
amortization were written off and an extraordinary loss of $18,916 was recorded.
CASH AND CASH EQUIVALENTS
All highly liquid debt instruments purchased with an original maturity of
three months or less are considered to be cash equivalents.
INCOME TAXES
No provision for Federal or State income taxes is necessary in the
financial statements of the Partnership, because as a partnership, it is not
subject to Federal or State income tax as the tax effect of its activities
accrues to the partners.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up
Activities," which requires the Partnership to expense all start up costs
related to opening a new facility, introduction of anew product or service, or
conducting business with a new class of customer or in a new territory. This
standard is effective for the Partnership's 1999 fiscal year. Management
believes that SOP 98-5 will have no material effect on its financial position or
the results of operations.
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform with the 1998 financial statement presentation.
2. DEBT
The Partnership had a term loan with a financial institution which required
varying quarterly payments. At December 31, 1997, the term loan had a balance of
$4,914,000. At December 30, 1998, the term loan had a balance of $4,216,875; at
that date, the total balance and accrued interest were paid in full.
On that same date, the Partnership obtained a new interpartnership loan
with ICP (Note 1). Borrowing under the interpartnership loan, as well as
interest and principle payments are due at
F-219
<PAGE> 431
RIFKIN CABLE INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the discretion of the management of ICP, resulting in no minimum required annual
principle payments. The balance of the interpartnership loan at December 31,
1998 was $2,865,426. The effective interest rate at December 31, 1998 was 8.5%.
3. MANAGEMENT AGREEMENT
The Partnership has entered into a management agreement with Rifkin and
Associates, Inc. (Rifkin). The management agreement provides that Rifkin shall
act as manager of the Partnership's CATV systems, and shall be entitled to
annual compensation of 5% of the Partnership's CATV revenues, net of certain
CATV programming costs. Effective September 1, 1998, Rifkin conveyed its CATV
management business to R & A Management, LLC (RML). The result of this
transaction included the conveyance of the Rifkin management agreement (Rifkin
Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin
Agreement and the RML Agreement are disclosed in total on the Statement of
Operations.
4. COMMITMENTS AND RENTAL EXPENSE
The Partnership leases certain real and personal property under
noncancelable operating leases expiring through the year 2001. Future minimum
lease payments under such noncancelable leases as of December 31, 1998 are:
$30,000 for each year 1999, 2000 and 2001, totaling $90,000.
Total rental expense for the years ended December 31, 1996, 1997 and 1998
was $60,323, $68,593 and $68,776, respectively, including $27,442, $36,822 and
$36,716, respectively, relating to cancelable pole rental agreements.
5. RETIREMENT BENEFITS
The Partnership has a 401(k) plan for its employees that have been employed
by the Partnership for at least one year. Employees of the Partnership can
contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998
contribution of $10,000 (as set by the Internal Revenue Service). The
Partnership matches participant contributions up to a maximum of 50% of the
first 3% of a participant's salary contributed. All participant contributions
and earnings are fully vested upon contribution and Partnership contributions
and earnings vest 20% per year of employment with the Partnership, becoming
fully vested after five years. The Partnership's matching contributions for the
years ended December 31, 1996, 1997 and 1998 were $2,693, $3,653 and $2,680,
respectively.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership has a number of financial instruments, none of which are
held for trading purposes. The following method and assumptions were used by the
Partnership to estimate the fair values of financial instruments as disclosed
herein:
Cash and Cash Equivalents, Customer Accounts Receivable, Other Receivables,
Accounts Payable and Accrued Liabilities and Customer Deposits and Prepayments:
The carrying value amount approximates fair value because of the short period to
maturity.
Debt: The carrying value amount approximates the fair value because the
Partnership's interpartnership debt was obtained on December 30, 1998.
F-220
<PAGE> 432
RIFKIN CABLE INCOME PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. CABLE REREGULATION
Congress enacted the Cable Television Consumer Protection and Competition
Act of 1992 (the Cable Act) and has amended it at various times since.
The total effects of the present law are, at this time, still unknown.
However, one provision of the present law further redefines a small cable
system, and exempts these systems from rate regulation on the upper tiers of
cable service. The Partnership is awaiting an FCC rulemaking implementing the
present law to determine whether its systems qualify as small cable systems.
8. LITIGATION
The Partnership could possibly be named as defendant in various actions and
proceedings arising from the normal course of business. In all such cases, the
Partnership will vigorously defend itself against the litigation and, where
appropriate, will file counterclaims. Although the eventual outcome of potential
lawsuits cannot be predicted, it is management's opinion that any such lawsuit
will not result in liabilities that would have a material affect on the
Partnership's financial position or results of operations.
F-221
<PAGE> 433
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Rifkin Acquisition Partners, L.L.L.P.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, partners' capital and cash flows present
fairly, in all material respects, the financial position of Rifkin Acquisition
Partners, L.L.L.P. and its subsidiaries (the "Company") at September 13, 1999,
and the results of their operations and their cash flows for the period from
January 1, 1999 through September 13, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the financial statements, the Partnership has
changed its method of accounting for start up costs in fiscal 1999.
On September 13, 1999, all of the Partnership's interest were sold to
Charter Communications, LLC. These financial statements represent the
Partnership just prior to that transaction and do not reflect any adjustments
related thereto.
/s/ PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
February 15, 2000
F-222
<PAGE> 434
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 13, 1999
------------------
<S> <C>
ASSETS
Cash........................................................ $ 4,475,108
Customer accounts receivable, net of allowance for doubtful
accounts of $292,183...................................... 1,258,522
Other receivables........................................... 3,384,472
Prepaid expenses and other.................................. 1,616,219
Property, plant and equipment, at cost:
Cable television transmission and distribution system and
related equipment...................................... 171,842,780
Land, buildings, vehicles and furniture and fixtures...... 8,946,860
------------
180,789,640
Less accumulated depreciation............................... (45,505,661)
------------
Net property, plant and equipment...................... 135,283,979
Franchise costs and other intangible assets, net of
accumulated amortization of $80,047,118................... 164,685,102
------------
Total assets......................................... $310,703,402
============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accounts payable and accrued liabilities.................. $ 21,110,015
Customer deposits and prepayments......................... 1,514,732
Payables to affiliates.................................... 303,047
Interest payable.......................................... 3,234,019
Deferred tax liability, net............................... 5,967,000
Notes payable............................................. 236,075,000
------------
Total liabilities.................................... 268,203,813
Commitments and contingencies (Notes 5 and 9)
Redeemable partners' interests.............................. 16,128,800
Partners' capital (deficit):
General partner........................................... (2,951,394)
Limited partners.......................................... 29,029,520
Preferred equity interest................................. 292,663
------------
Total partners' capital.............................. 26,370,789
------------
Total liabilities and partners' capital........... $310,703,402
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-223
<PAGE> 435
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1999 THROUGH
SEPTEMBER 13,
1999
-------------
<S> <C>
REVENUE
Service..................................................... $ 62,252,012
Installation and other...................................... 6,577,154
------------
Total revenue............................................. 68,829,166
COSTS AND EXPENSES
Operating expense........................................... 10,060,135
Programming expense......................................... 15,312,179
Selling, general and administrative expense................. 17,566,230
Depreciation................................................ 11,760,429
Amortization................................................ 17,681,246
Management fees............................................. 2,406,596
Loss on disposal of assets.................................. 996,459
------------
Total costs and expenses.................................. 75,783,274
------------
Operating loss.............................................. (6,954,108)
Interest expense............................................ 16,591,877
------------
Loss before income taxes.................................... (23,545,985)
Income tax benefit.......................................... (1,975,000)
------------
Loss before cumulative effect of accounting change.......... (21,570,985)
Cumulative effect of accounting change for organizational
costs..................................................... (111,607)
------------
Net loss.................................................. $(21,682,592)
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-224
<PAGE> 436
RIFKIN ACQUISITION PARTNERS, L.L.L.P
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
PREFERRED
EQUITY GENERAL LIMITED
INTEREST PARTNERS PARTNERS TOTAL
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Partners' capital (deficit), December
31, 1998............................ $ 422,758 $(1,991,018) $ 55,570,041 $ 54,001,781
Accretion of redeemable partners'
interest......................... -- (743,550) (5,204,850) (5,948,400)
Net loss............................ (130,095) (216,826) (21,335,671) (21,682,592)
--------- ----------- ------------ ------------
Partners' capital (deficit), September
13, 1999............................ $ 292,663 $(2,951,394) $ 29,029,520 $ 26,370,789
========= =========== ============ ============
</TABLE>
The partners' capital accounts for financial reporting purposes vary from
the tax capital accounts.
The accompanying notes are an integral part of these consolidated financial
statements.
F-225
<PAGE> 437
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1999 THROUGH
SEPTEMBER 13,
1999
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(21,682,592)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 29,441,675
Amortization of deferred loan costs....................... 684,095
Loss on disposal of fixed assets.......................... 996,459
Deferred tax benefit...................................... (1,975,000)
Changes in accounting for organizational costs............ 111,607
Decrease in customer accounts receivables................. 673,618
Decrease in other receivables............................. 2,253,299
Decrease in prepaid expenses and other.................... 782,309
Increase in accounts payable and accrued liabilities...... 9,425,421
Decrease in customer deposits and prepayments............. (162,168)
Decrease in interest payable.............................. (4,008,935)
Increase in payable to affiliates......................... 303,047
------------
Net cash provided by operating activities.............. 16,842,835
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment.................. (26,692,423)
Proceeds from purchase price adjustment for Tennessee
trade..................................................... 276,147
Net proceeds from the sale of other assets.................. 223,657
------------
Net cash used in investing activities.................. (26,192,619)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term bank debt........................... 11,500,000
------------
Net cash provided by financing activities.............. 11,500,000
------------
Net increase in cash........................................ 2,150,216
Cash, beginning of period................................... 2,324,892
------------
Cash, end of period......................................... $ 4,475,108
============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 13,357,858
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-226
<PAGE> 438
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL INFORMATION
Rifkin Acquisition Partners, L.L.L.P. ("the Partnership") was formed
pursuant to the laws of the State of Colorado. The Partnership and its
subsidiaries are hereinafter referred to on a consolidated basis as the
"Company." The Company owns, operates, and develops cable television systems in
Georgia, Tennessee and Illinois. Rifkin Acquisition Management, L.P., an
affiliate of R & A Management LLC (Note 4), is the general partner of the
Partnership ("General Partner").
The Partnership operates under a limited liability limited partnership
agreement (the "Partnership Agreement") which establishes contribution
requirements, enumerates the rights and responsibilities of the partners and
advisory committee, provides for allocations of income, losses and distributions
and defines certain items relating thereto. The Partnership Agreement provides
that net income or loss, certain defined capital events and cash distributions,
all as defined in the Partnership Agreement, are generally allocated 99% to the
limited partners and 1% to the General Partner.
ACQUISITION BY CHARTER COMMUNICATIONS, LLC
On February 12, 1999, the Company signed a letter of intent for the
partners to sell all of their partnership interests to Charter Communications,
LLC ("Charter"). On April 26, 1999, the Company signed a definitive Purchase and
Sale Agreement with Charter for the sale of the individual partners' interest.
The sales transaction closed on September 13, 1999. These statements represent
the Company just prior to the transaction and do not reflect any adjustment
related thereto.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the following
entities:
<TABLE>
<S> <C>
Rifkin Acquisition Partners, L.L.L.P. Cable Equities of Colorado ("CEC")
Cable Equities of Colorado, Ltd. Cable Equities, Inc. ("CEI")
Management Corp. ("CEM") Rifkin Acquisition Capital Corp. ("RACC")
</TABLE>
All significant intercompany accounts and transactions have been
eliminated.
REVENUE AND PROGRAMMING
Customer fees are recorded as revenue in the period the service is
provided. The cost to acquire the rights to the programming generally is
recorded when the product is initially available to be viewed by the customer.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion expenses are charged to income during the year in
which they are incurred and were not significant for the period shown.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost, which in
the case of assets constructed, includes amounts for material, labor, overhead
and interest, if applicable. Upon sale or retirement of an asset, the related
costs and accumulated depreciation are removed from the accounts and any gain or
loss is recognized. Capitalized interest was not significant for the period
shown.
F-227
<PAGE> 439
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings................................................... 27-30years
Cable television transmission and distribution systems and
related equipment......................................... 3-15years
Vehicles and furniture and fixtures......................... 3-5years
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
FRANCHISE COSTS
Franchise costs are amortized using the straight-line method over the
remaining lives of the franchises as of the date they were acquired, ranging
from one to twenty years. The carrying value of franchise costs is assessed for
recoverability by management based on an analysis of undiscounted future
expected cash flows from the underlying operations of the Company. Management
believes that there has been no impairment thereof as of September 13, 1999.
OTHER INTANGIBLE ASSETS
Certain loan costs have been deferred and are amortized to interest expense
utilizing the straight-line method over the remaining term of the related debt.
Use of the straight-line method approximates the results of the application of
the interest method. The net amounts remaining at September 13, 1999 were
$5,481,111.
REDEEMABLE PARTNERS' INTERESTS
The Partnership Agreement provides that if a certain partner dies or
becomes disabled, that partner (or his personal representative) shall have the
option, exercisable by notice given to the partners at any time within 270 days
after his death or disability (except that if that partner dies or becomes
disabled prior to August 31, 2000, the option may not be exercised until August
31, 2000 and then by notice by that partner or his personal representative given
to the partners within 270 days after August 31, 2000) to sell, and require the
General Partner and certain trusts controlled by that partner to sell, and the
Partnership to purchase, up to 50% of the partnership interests owned by any of
such partners and certain current and former members of management of R&A
Management LLC that requests to sell their interest, for a purchase price equal
to the fair market value of those interests determined by appraisal in
accordance with the Partnership Agreement. Accordingly, the current fair value
of such partnership interests have been reclassified outside of partners'
capital.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1999, the Company adopted, the Accounting Standards
Executive Committee's Statement of Position 98-5 ("SOP 98-5") Reporting on the
Costs of Start-Up
F-228
<PAGE> 440
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activities, which requires the Company to expense all start up costs related to
organizing a new business. During the first quarter of 1999, the Company wrote
off the net book value of organization costs capitalized in prior years
resulting in the recognition of a cumulative effect of accounting change of
$111,607.
2. INCOME TAXES
Although the Partnership is not a taxable entity, two corporations (the
"Subsidiaries") are included in the consolidated financial statements. These
subsidiaries are required to pay taxes on their taxable income, if any.
The following represents a reconciliation of pre-tax losses as reported in
accordance with accounting principles generally accepted in the United States
and the losses attributable to the partners and included in their individual
income tax returns for the period from January 1, 1999 through September 13,
1999:
<TABLE>
<S> <C>
Pre-tax loss as reported, including cumulative effect of
change in accounting principle............................ $ (23,657,592)
(Increase) decrease due to:
Separately taxed book results of corporate subsidiaries... 5,274,000
Effect of different depreciation and amortization methods
for tax and book purposes.............................. 672,000
Other....................................................... (68,408)
-------------
Tax loss attributed to the partners......................... $ (17,780,000)
=============
</TABLE>
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
As a result of a change in control in 1995, the book value of the Company's
net assets was increased to reflect their fair market value. In connection with
this revaluation, a deferred income tax liability in the amount of $22,801,000
was established to provide for future taxes payable on the revised valuation of
the net assets. A deferred tax benefit of $1,975,000 was recognized for the
period from January 1, 1999 through September 13, 1999, reducing the liability
to $5,967,000.
Deferred tax asset (liability) was comprised of the following at September
13, 1999:
<TABLE>
<S> <C>
Deferred tax assets resulting from loss carryforwards....... $ 13,006,000
Deferred tax liabilities resulting from depreciation and
amortization.............................................. (18,973,000)
-------------
Net deferred tax liability.................................. $ (5,967,000)
=============
</TABLE>
As of September 13, 1999, the Subsidiaries have net operating loss
carryforwards ("NOLs") for income tax purposes of $34,589,000 substantially all
of which are limited. The NOLs will expire at various times between the years
2000 and 2018. It is the opinion of management that the NOLs will be released
from this limitation prior to their expiration dates and, as such, have not been
limited in their calculation of deferred taxes. As the result of the sale of the
Partnership's interest to Charter, a change in control, as defined in Section
382 of the Internal Revenue Code, has occurred which may limit Charter's ability
to utilize these NOLs.
F-229
<PAGE> 441
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The benefit for taxes differs from the amount which would be computed by
applying the statutory federal income tax rate of 35% to the Company's pre-tax
loss before cumulative effect of change in accounting principle as a result of
the following for the period January 1, 1999 through September 13, 1999:
<TABLE>
<S> <C>
Tax benefit computed at statutory rate...................... $(8,241,095)
Increase (decrease) due to:
Tax benefit for non-corporate loss........................ 6,395,195
Permanent differences between financial statement income
and taxable income..................................... (36,200)
State income tax............................................ (139,800)
Other....................................................... 46,900
-----------
Income tax benefit.......................................... $(1,975,000)
===========
</TABLE>
3. NOTES PAYABLE
Debt consisted of the following at September 13, 1999:
<TABLE>
<S> <C>
Senior Subordinated Notes................................... $125,000,000
Tranche A Term Loan......................................... 21,575,000
Tranche B Term Loan......................................... 40,000,000
Reducing Revolving Loan..................................... 46,500,000
Senior Subordinated Debt.................................... 3,000,000
------------
$236,075,000
============
</TABLE>
The notes and loans are collateralized by substantially all of the assets
of the Company.
On January 26, 1996, the Company and its wholly owned subsidiary, RACC (the
"Issuers"), co-issued $125,000,000 of 11 1/8% Senior Subordinated Notes (the
"Notes") to institutional investors. These notes were subsequently exchanged on
June 18, 1996 for publicly registered notes with identical terms. Interest on
the Notes is payable semi-annually on January 15 and July 15 of each year. The
Notes, which mature on January 15, 2006, can be redeemed in whole or in part, at
the Issuers' option, at any time on or after January 15, 2001, at redeemable
prices contained in the Notes plus accrued interest. At September 13, 1999, all
of the Notes were outstanding (see also Note 8).
The Company has a $25,000,000 Tranche A term loan with a financial
institution. This loan requires quarterly payments of $1,875,000 plus interest
commencing on March 31, 2000. Any unpaid balance is due March 31, 2003. The
agreement requires what it defines as excess proceeds from the sale of a cable
system to be used to retire Tranche A term debt. As a result of the Company
selling its assets in the State of Michigan in a prior year, there was
$3,425,000 in excess proceeds which were used to pay principal. The interest
rate on the Tranche A term loan is either the bank's prime rate plus .25% to
1.75% or LIBOR plus 1.5% to 2.75%.
The specific rate is dependent upon the senior funded debt ratio which is
recalculated quarterly. The weighted average effective interest rate at
September 13, 1999 was 7.23%.
In addition, the Company has a $40,000,000 Tranche B term loan, which
requires principal payments of $2,000,000 on March 31, 2002, $18,000,000 on
March 31, 2003, and $20,000,000 on March 31, 2004. The Tranche B term loan bears
an interest rate of 9.75% and is payable quarterly.
F-230
<PAGE> 442
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also has a reducing revolving loan providing for borrowing up
to $20,000,000 at the Company's discretion, subject to certain restrictions, and
an additional $60,000,000 available to finance acquisitions subject to certain
restrictions. The additional financing amount available at September 13, 1999
was $40,000,000. At September 13, 1999, the full $20,000,000 available had been
borrowed, and $26,500,000 had been drawn against the $40,000,000 commitment. The
amount available for borrowing will decrease annually during its term with
changes over the three years following September 13, 1999 as follows:
1999 -- $2,500,000 reduction per quarter and 2000 through 2002 -- $3,625,000
reduction per quarter. Any unpaid balance is due on March 31, 2003. The
revolving loan bears an interest rate of either the bank's prime rate plus .25%
to 1.75% or LIBOR plus 1.5% to 2.75%. The specific rate is dependent upon the
senior funded debt ratio which is recalculated quarterly. The weighted average
effective interest rates at September 13, 1999 was 8.92%. The reducing revolving
loan includes a commitment fee of 1/2% per annum on the unborrowed balance.
Certain mandatory prepayments may also be required on the Tranche A term
loan, the Tranche B term loan, and the reducing revolving credit based on the
Company's cash flow calculations, proceeds from the sale of a cable system or
equity contributions. Optional prepayments are allowed, subject to certain
restrictions. The related loan agreement contains covenants limiting additional
indebtedness, dispositions of assets, investments in securities, distribution to
partners, management fees and capital expenditures. In addition, the Company
must maintain certain financial levels and ratios. At September 13, 1999, the
Company was in compliance with these covenants.
The Company also has $3,000,000 of senior subordinated debt payable to a
Rifkin Partner. The debt has a scheduled maturity, interest rate and interest
payment schedule identical to that of the Notes, as discussed above.
Based on the outstanding debt as of September 13, 1999, the minimum
aggregate maturities for the four years following 1999 are: $13,500,000 in 2000,
$22,000,000 in 2001, $23,075,000 in 2002, $29,500,000 in 2003 and $20,000,000 in
2004.
Subsequent to September 13, 1999, $124.1 million of the $125 million in
notes outstanding were purchased by Charter Communication and will be reflected
as intercompany payable between Charter and RAP. The remaining $900,000 of
outstanding notes were delisted and are no longer public.
4. RELATED PARTY TRANSACTIONS
The Company has a management agreement with R & A Management LLC ("RML").
The management agreement provides that RML shall manage the Company's CATV
systems and shall be entitled to annual compensation of 3.5% of the Company's
revenue. Expenses incurred pursuant to this agreement are disclosed in total in
the Consolidated Statement of Operations.
Certain Partnership expenses were paid by Charter and are reflected as
Payables to affiliates in the accompanying financial statements.
F-231
<PAGE> 443
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND RENTAL EXPENSE
The Company leases certain real and personal property under noncancelable
operating leases expiring through the year 2007. Future minimum lease payments
under such noncancelable leases as of September 13, 1999 are:
<TABLE>
<S> <C>
2000........................................................ $ 339,320
2001........................................................ 269,326
2002........................................................ 252,042
2003........................................................ 192,027
2004 and thereafter......................................... 393,479
----------
$1,446,194
==========
</TABLE>
Total rental expense and the amount included therein which pertains to
cancelable pole rental agreements were as follows for the period indicated:
<TABLE>
<CAPTION>
TOTAL RENTAL CANCELABLE
PERIOD EXPENSE POLE RENTAL
------ ------------ -----------
<S> <C> <C>
For the period January 1, 1999 through September 13, 1999... $1,105,840 $767,270
</TABLE>
6. COMPENSATION PLANS AND RETIREMENT PLANS
EQUITY INCENTIVE PLAN
The Company maintains an Equity Incentive Plan (the "Plan") in which
certain Rifkin executive officers and key employees, and certain key employees
of the Company are eligible to participate. Plan participants in the aggregate,
have the right to receive (i) cash payments of up to 2.0% of the aggregate value
of all partnership interests of the Company (the "Maximum Incentive
Percentage"), based upon the achievement of certain annual Operating Cash Flow
(as defined in the Plan) targets for the Company for each of the calendar years
1996 through 2000, and (ii) an additional cash payment equal to up to 0.5% of
the aggregate value of all partnership interests of the Company (the "Additional
Incentive Percentage"), based upon the achievement of certain cumulative
Operating Cash Flow targets for the Company for the five-year period ended
December 31, 2000. Subject to the achievement of such annual targets and the
satisfaction of certain other criteria based on the Company's operating
performance, up to 20% of the Maximum Incentive Percentage will vest in each
such year; provided, that in certain events vesting may accelerate. Payments
under the Plan are subject to certain restrictive covenants contained in the
Notes.
No amounts are payable under the Plan except upon (i) the sale of
substantially all of the assets or partnership interests of the Company or (ii)
termination of a Plan participant's employment with Rifkin or the Company, as
applicable, due to (a) the decision of the Advisory Committee to terminate such
participant's employment due to disability, (b) the retirement of such
participant with the Advisory Committee's approval or (c) the death of such
Participant. The value of amounts payable pursuant to clause (i) above will be
based upon the aggregate net proceeds received by the holders of all of the
partnership interests in the Company, as determined by the Advisory Committee,
and the amounts payable pursuant to clause (ii) above will be based upon the
Enterprise Value determined at the time of such payment. For purposes of the
Plan, Enterprise Value generally is defined as Operating Cash Flow for the
immediately preceding calendar year times a specified multiple and adjusted
based on the Company's working capital.
F-232
<PAGE> 444
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amount expensed for the period January 1, 1999 through September 13,
1999 relating to this plan was $7,440,964. The incentive accrual is recorded in
accounts payable and accrued liabilities in the accompanying financial
statements.
RETIREMENT BENEFITS
The Company has a 401(k) plan for employees that have been employed by the
Company for at least one year. Employees of the Company can contribute up to 15%
of their salary, on a before-tax basis, with a maximum 1999 contribution of
$10,000 (as set by the Internal Revenue Service). The Company matches
participant contributions up to a maximum of 50% of the first 3% of a
participant's salary contributed. All participant contributions and earnings are
fully vested upon contribution and Company contributions and earnings vest 20%
per year of employment with the Company, becoming fully vested after five years.
The Company's matching contribution for the period from January 1, 1999 through
September 13, 1999 was $61,178.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held
for trading purposes. The following method and assumptions were used by the
Company to estimate the fair values of financial instruments as disclosed
herein:
Cash, customer accounts receivable, other receivables, accounts payable and
accrued liabilities and customer deposits and prepayments: The carrying value
amount approximates fair value because of the short period to maturity.
Debt: The fair value of bank debt is estimated based on interest rates for
the same or similar debt offered to the Company having the same or similar
remaining maturities and collateral requirements. The fair value of public
Senior Subordinated Notes is based on the market quoted trading value. The fair
value of the Company's debt is estimated at $247,637,500 and is carried on the
balance sheet at $236,075,000.
8. SUMMARIZED FINANCIAL INFORMATION
CEM, CEI and CEC (collectively, the "Guarantors") are all wholly owned
subsidiaries of the Company and, together with RACC, constitute all of the
Partnership's direct and indirect subsidiaries. Each of the Guarantors provides
a full, unconditional, joint and several guaranty of the obligations under the
Notes discussed in Note 6. Separate financial statements of the Guarantors are
not presented because management has determined that they would not be material
to investors.
The following present summarized financial information of the Guarantors on
a combined basis as of September 13, 1999 and for the period January 1, 1999
through September 13, 1999.
F-233
<PAGE> 445
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 13,
1999
-------------
<S> <C>
Cash........................................................ $ 569,544
Accounts and other receivables, net......................... 2,907,837
Prepaid expenses............................................ 620,284
Property, plant and equipment, net.......................... 52,383,861
Franchise costs and other intangible assets, net............ 51,397,528
Accounts payable and accrued liabilities.................... 30,186,658
Other liabilities........................................... 669,223
Deferred taxes payable...................................... 5,967,000
Notes payable............................................... 140,846,262
Equity (deficit)............................................ (69,790,089)
</TABLE>
F-234
<PAGE> 446
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1999 THROUGH
SEPTEMBER 13,
1999
-------------
<S> <C>
Total revenue............................................... $24,183,281
Total costs and expenses.................................... 23,313,494
Interest expense............................................ 9,920,062
Income tax benefit.......................................... (1,975,000)
-----------
Net loss.................................................... $(7,075,275)
===========
</TABLE>
9. LITIGATION
The Company could possibly be named as defendant in various actions and
proceedings arising from the normal course of business. In all such cases, the
Company will vigorously defend itself against the litigation and, where
appropriate, will file counterclaims. Although the eventual outcome of potential
lawsuits cannot be predicted, it is management's opinion that any such lawsuit
will not result in liabilities that would have a material affect on the
Company's financial position or results of operations.
F-235
<PAGE> 447
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Rifkin Acquisition Partners, L.L.L.P.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, partners' capital (deficit) and cash
flows present fairly, in all material respects, the financial position of Rifkin
Acquisition Partners, L.L.L.P. and its subsidiaries (the "Company") at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
March 19, 1999
F-236
<PAGE> 448
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
12/31/98 12/31/97
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 2,324,892 $ 1,902,555
Customer accounts receivable, net of allowance for
doubtful accounts of $444,839 in 1998 and $425,843 in
1997................................................... 1,932,140 1,371,050
Other receivables........................................ 5,637,771 4,615,089
Prepaid expenses and other............................... 2,398,528 1,753,257
Property, plant and equipment at cost:
Cable television transmission and distribution systems
and related equipment............................... 149,376,914 131,806,310
Land, buildings, vehicles and furniture and fixtures... 7,421,960 7,123,429
------------ ------------
156,798,874 138,929,739
Less accumulated depreciation.......................... (35,226,773) (26,591,458)
------------ ------------
Net property, plant and equipment.............. 121,572,101 112,338,281
Franchise costs and other intangible assets, net of
accumulated amortization of $67,857,545 in 1998 and
$53,449,637 in 1997.................................... 183,438,197 180,059,655
------------ ------------
Total assets................................... $317,303,629 $302,039,887
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities................. $ 11,684,594 $ 11,690,894
Customer deposits and prepayments........................ 1,676,900 1,503,449
Interest payable......................................... 7,242,954 7,384,509
Deferred tax liability, net.............................. 7,942,000 12,138,000
Notes payable............................................ 224,575,000 229,500,000
------------ ------------
Total liabilities.............................. 253,121,448 262,216,852
Commitments and contingencies (Notes 8 and 14)
Redeemable partners' interests........................... 10,180,400 7,387,360
Partners' capital (deficit):
General partner........................................ (1,991,018) (1,885,480)
Limited partners....................................... 55,570,041 34,044,912
Preferred equity interest.............................. 422,758 276,243
------------ ------------
Total partners' capital.................................. 54,001,781 32,435,675
------------ ------------
Total liabilities and partners' capital........ $317,303,629 $302,039,887
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-237
<PAGE> 449
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
12/31/98 12/31/97 12/31/96
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
Service..................................... $ 82,498,638 $ 78,588,503 $ 66,433,321
Installation and other...................... 7,422,675 5,736,412 4,852,124
------------ ------------ ------------
Total revenue..................... 89,921,313 84,324,915 71,285,445
COSTS AND EXPENSES:
Operating expense........................... 13,305,376 14,147,031 10,362,671
Programming expense......................... 18,020,812 15,678,977 14,109,527
Selling, general and administrative
expense................................... 13,757,090 12,695,176 11,352,870
Depreciation................................ 15,109,327 14,422,631 11,725,246
Amortization................................ 22,104,249 24,208,169 23,572,457
Management fees............................. 3,147,246 2,951,372 2,475,381
Loss on disposal of assets.................. 3,436,739 7,834,968 1,357,180
------------ ------------ ------------
Total costs and expenses.......... 88,880,839 91,938,324 74,955,332
------------ ------------ ------------
Operating income (loss)..................... 1,040,474 (7,613,409) (3,669,887)
Gain from the sale of assets (Note 4)....... (42,863,060) -- --
Interest expense............................ 23,662,248 23,765,239 21,607,174
------------ ------------ ------------
Income (loss) before income taxes........... 20,241,286 (31,378,648) (25,277,061)
Income tax benefit.......................... (4,177,925) (5,335,000) (3,645,719)
------------ ------------ ------------
Net income (loss)........................... $ 24,419,211 $(26,043,648) $(21,631,342)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-238
<PAGE> 450
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
12/31/98 12/31/97 12/31/96
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 24,419,211 $(26,043,648) $(21,631,342)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................... 37,213,576 38,630,800 35,297,703
Amortization of deferred loan costs.............. 989,760 989,760 970,753
Gain on sale of assets (Note 4).................. (42,863,060) -- --
Loss on disposal of fixed assets................. 3,436,739 7,834,968 1,357,180
Deferred tax benefit............................. (4,196,000) (5,335,000) (3,654,000)
Increase in customer accounts receivables........ (300,823) (186,976) (117,278)
Increase in other receivables.................... (474,599) (1,992,714) (994,681)
(Increase) decrease in prepaid expenses and
other.......................................... (684,643) 23,015 (494,252)
Increase in accounts payable and accrued
liabilities.................................... 34,073 1,753,656 3,245,736
Increase (decrease) in customer deposits and
prepayments.................................... (86,648) 231,170 164,824
Increase (decrease) in interest payable.......... (141,555) 600,248 6,692,988
------------ ------------ ------------
Net cash provided by operating activities... 17,346,031 16,505,279 20,837,631
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems, net (Note 3).......... (2,212,958) (19,359,755) (71,797,038)
Additions to property, plant and equipment.......... (26,354,756) (28,009,253) (16,896,582)
Additions to cable television franchises, net of
retirements...................................... (151,695) 72,162 (1,182,311)
Net proceeds from the sale of cable systems (Note
4)............................................... 16,533,564 -- --
Net proceeds from the other sales of assets......... 247,216 306,890 197,523
------------ ------------ ------------
Net cash used in investing activities....... (11,938,629) (46,989,956) (89,678,408)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from isssuance of senior subordinated
notes............................................ -- -- 125,000,000
Proceeds from long-term bank debt................... 22,500,000 38,000,000 18,000,000
Deferred loan costs................................. -- -- (6,090,011)
Payments of long-term bank debt..................... (27,425,000) (7,000,000) (82,000,000)
Partners' capital contributions..................... -- -- 15,000,000
Equity distributions to partners.................... (60,065) -- --
------------ ------------ ------------
Net cash provided by (used in) financing
activities................................ (4,985,065) 31,000,000 69,909,989
------------ ------------ ------------
Net increase in cash.................................. 422,337 515,323 1,069,212
Cash and cash equivalents at beginning of period...... 1,902,555 1,387,232 318,020
------------ ------------ ------------
Cash and cash equivalents at end of period............ $ 2,324,892 $ 1,902,555 $ 1,387,232
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid....................................... $ 22,737,443 $ 22,098,732 $ 13,866,995
============ ============ ============
Noncash investing activities:
Proceeds from the sale of Michigan assets held in
escrow......................................... $ 500,000 $ -- $ --
============ ============ ============
Trade value related to the trade sale of
Tennessee assets............................... $ 46,668,000 $ -- $ --
============ ============ ============
Trade value related to trade acquisition of
Tennessee assets............................... $(46,668,000) $ -- $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-239
<PAGE> 451
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED GENERAL LIMITED
EQUITY INTEREST PARTNER PARTNERS TOTAL
--------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Partners' capital (deficit) at
December 31, 1995............. $ 562,293 $(1,085,311) $ 69,421,043 $ 68,898,025
Partners' capital
contributions................. -- 150,000 14,850,000 15,000,000
Accretion of redeemable
partners' interest............ -- (157,730) (1,104,110) (1,261,840)
Net loss........................ (129,788) (216,313) (21,285,241) (21,631,342)
--------- ----------- ------------ ------------
Partners' capital (deficit) at
December 31, 1996............. 432,505 (1,309,354) 61,881,692 61,004,843
Accretion of redeemable
partners' interest............ -- (315,690) (2,209,830) (2,525,520)
Net loss........................ (156,262) (260,436) (25,626,950) (26,043,648)
--------- ----------- ------------ ------------
Partners' capital (deficit) at
December 31, 1997............. 276,243 (1,885,480) 34,044,912 32,435,675
Accretion of redeemable
partners' interest............ -- (349,130) (2,443,910) (2,793,040)
Net income...................... 146,515 244,192 24,028,504 24,419,211
Partners' equity distribution... -- (600) (59,465) (60,065)
--------- ----------- ------------ ------------
Partners' capital (deficit) at
December 31, 1998............. $ 422,758 $(1,991,018) $ 55,570,041 $ 54,001,781
========= =========== ============ ============
</TABLE>
The Partners' capital accounts for financial reporting purposes vary from
the tax capital accounts.
The accompanying notes are an integral part of the consolidated financial
statements.
F-240
<PAGE> 452
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL INFORMATION
Rifkin Acquisition Partners, L.L.L.P. ("the Partnership") was formed
pursuant to the laws of the State of Colorado. The Partnership and its
subsidiaries are hereinafter referred to on a consolidated basis as the
"Company." The Company owns, operates, and develops cable television systems in
Georgia, Tennessee, and Illinois. Rifkin Acquisition Management, L.P., an
affiliate of Rifkin & Associates, Inc. (Note 7), is the general partner of the
Partnership ("General Partner").
The Partnership operates under a limited liability limited partnership
agreement (the "Partnership Agreement") which establishes contribution
requirements, enumerates the rights and responsibilities of the partners and
advisory committee, provides for allocations of income, losses and
distributions, and defines certain items relating thereto. The Partnership
Agreement provides that net income or loss, certain defined capital events, and
cash distributions, all as defined in the Partnership Agreement, are generally
allocated 99% to the limited partners and 1% to the general partner.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the following
entities:
<TABLE>
<S> <C>
- - - - Rifkin Acquisition Partners, L.L.L.P. - Cable Equities of Colorado, Ltd. (CEC)
- - - - Cable Equities of Colorado - Cable Equities, Inc. (CEI)
Management Corp. (CEM) - Rifkin Acquisition Capital Corp. (RACC)
</TABLE>
The financial statements for 1997 and 1996 also included the following
entities:
<TABLE>
<S> <C>
- - - - Rifkin/Tennessee, Ltd. (RTL) - FNI Management Corp. (FNI)
</TABLE>
Effective January 1, 1998, both the RTL and FNI entities were dissolved and
the assets were transferred to the Partnership.
All significant intercompany accounts and transactions have been
eliminated.
REVENUE AND PROGRAMMING
Customer fees are recorded as revenue in the period the service is
provided. The cost to acquire the rights to the programming generally is
recorded when the product is initially available to be viewed by the customer.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion expenses are charged to income during the year in
which they are incurred and were not significant for the periods shown.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost, which in
the case of assets constructed, includes amounts for material, labor, overhead
and interest, if applicable. Upon sale or retirement of an asset, the related
costs and accumulated depreciation are removed from the accounts and any gain or
loss is recognized. Capitalized interest was not significant for the periods
shown.
F-241
<PAGE> 453
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings................................................. 27-30 years
Cable television transmission and distribution systems and
related equipment....................................... 3-15 years
Vehicles and furniture and fixtures....................... 3-5 years
</TABLE>
Expenditures for maintenance and repairs are expensed as incurred.
FRANCHISE COSTS
Franchise costs are amortized using the straight-line method over the
remaining lives of the franchises as of the date they were acquired, ranging
from one to twenty years. The carrying value of franchise costs is assessed for
recoverability by management based on an analysis of undiscounted future
expected cash flows from the underlying operations of the Company. Management
believes that there has been no impairment thereof as of December 31, 1998.
OTHER INTANGIBLE ASSETS
Certain loan costs have been deferred and are amortized to interest expense
utilizing the straight-line method over the remaining term of the related debt.
Use of the straight-line method approximates the results of the application of
the interest method. The net amounts remaining at December 31, 1998 and 1997
were $6,176,690 and $7,166,450, respectively.
CASH AND CASH EQUIVALENTS
All highly liquid debt instruments purchased with an original maturity of
three months or less are considered to be cash equivalents.
REDEEMABLE PARTNERS' INTERESTS
The Partnership Agreement provides that if a certain partner dies or
becomes disabled, that partner (or his personal representative) shall have the
option, exercisable by notice given to the partners at any time within 270 days
after his death or disability (except that if that partner dies or becomes
disabled prior to August 31, 2000, the option may not be exercised until August
31, 2000 and then by notice by that partner or his personal representative given
to the partners within 270 days after August 31, 2000) to sell, and require the
General Partner and certain trusts controlled by that partner to sell, and the
Partnership to purchase, up to 50% of the partnership interests owned by any of
such partners and certain current and former members of management of Rifkin &
Associates, Inc. that requests to sell their interest, for a purchase price
equal to the fair market value of those interests determined by appraisal in
accordance with the Partnership Agreement. Accordingly, the current fair value
of such partnership interests have been reclassified outside of partners'
capital.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-242
<PAGE> 454
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENT
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up
Activities," which requires the Partnership to expense all start up costs
related to organizing a new business. This new standard also includes one-time
activities related to opening a new facility, introduction of a new product or
service, or conducting business with a new class of customer or in a new
territory. This standard is effective for the Partnership's 1999 fiscal year.
Management believes that SOP 98-5 will have no material effect on its financial
position or the results of operations.
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform with the 1998 financial statement presentation. Such
reclassification had no effect on the net loss as previously stated.
2. SUBSEQUENT EVENT
On February 12, 1999, the Company signed a letter of intent for the
partners to sell all of their partnership interests to Charter Communications
("Charter"). The Company and Charter are expected to sign a purchase agreement
and complete the sale during the third quarter of 1999.
3. ACQUISITION OF CABLE PROPERTIES
1998 ACQUISITIONS
At various times during the second half of 1998, the Company completed
three separate acquisitions of cable operating assets. Two of the acquisitions
serve communities in Gwinnett County, Georgia (the "Georgia Systems"). These
acquisitions were accounted for using the purchase method of accounting.
The third acquisition resulted from a trade of the Company's systems
serving the communities of Paris and Piney Flats, Tennessee for the operating
assets of another cable operator serving primarily the communities of Lewisburg
and Crossville, Tennessee (the "Tennessee Trade"). The trade was for cable
systems that are similar in size and was accounted for based on fair market
value. Fair market value was established at $3,000 per customer relinquished,
which was based on recent sales transactions of similar cable systems. The
transaction included the payment of approximately $719,000, net, of additional
cash (Note 4).
F-243
<PAGE> 455
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The combined purchase price was allocated based on estimated fair values
from an independent appraisal to property, plant and equipment and franchise
cost as follows (dollars in thousands):
<TABLE>
<CAPTION>
GEORGIA TENNESSEE
SYSTEMS TRADE TOTAL
------- --------- -------
<S> <C> <C> <C>
Fair value of assets relinquished (Note 4)............ $ -- $46,668 $46,668
Cash paid............................................. 1,392 719 2,111
Acquisition Costs (appraisal, transfer fees and direct
costs).............................................. 26 76 102
------ ------- -------
Total acquisition cost................................ $1,418 $47,463 $48,881
====== ======= =======
Allocation:
Current assets........................................ $ (2) $ 447 $ 445
Current liabilities................................... (1) (397) (398)
Property, plant and equipment......................... 333 11,811 12,144
Franchise Cost........................................ 1,088 35,602 36,690
------ ------- -------
Total cost allocated.................................. $1,418 $47,463 $48,881
====== ======= =======
</TABLE>
The fair value of assets relinquished from the Tennessee Trade was treated
as a noncash transaction on the Consolidated Statement of Cash Flows. The cash
acquisition costs were funded by proceeds from the Company's reducing revolving
loan with a financial institution.
The following combined pro forma information presents a summary of
consolidated results of operations for the Company as if the Tennessee Trade
acquisitions had occurred at the beginning of 1997, with pro forma adjustments
to show the effect on depreciation and amortization for the acquired assets,
management fees on additional revenues and interest expense on additional debt
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------
12/31/98 12/31/97
-------- -----------
(UNAUDITED)
<S> <C> <C>
Total revenues.................................. $89,921 $ 84,325
Net income (loss)............................... 19,447 (29,631)
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the Tennessee Trade actually been
acquired on January 1, 1997.
1997 ACQUISITIONS
On April 1, 1997, the Company acquired the cable operating assets of two
cable systems serving the Tennessee communities of Shelbyville and Manchester
(the "Manchester Systems"), for an aggregate purchase price of approximately
$19.7 million of which $495,000 was paid as escrow in 1996. The acquisition was
accounted for using the purchase method of accounting, and was funded by
proceeds from the Company's reducing revolving loan with a financial
institution. No pro forma information giving the effect of the acquisitions is
shown due to the results being immaterial.
F-244
<PAGE> 456
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 ACQUISITIONS
On March 1, 1996, the Company acquired certain cable operating assets
("Mid-Tennessee Systems") from Mid-Tennessee CATV, L.P., and on April 1, 1996
acquired the cable operating assets ("RCT Systems") from Rifkin Cablevision of
Tennessee, Ltd. Both Mid-Tennessee CATV, L.P. and Rifkin Cablevision of
Tennessee, Ltd. were affiliates of the General Partner. The acquisition costs
were funded by $15 million of additional partner contributions and the remainder
from a portion of the proceeds received from the issuance of $125 million of
11 1/8% Senior Subordinated Notes due 2006 (see Note 6).
The acquisitions were recorded using the purchase method of accounting. The
results of operations of the Mid-Tennessee Systems have been included in the
consolidated financial statements since March 1, 1996, and the results of the
RCT Systems have been included in the consolidated financial statements since
April 1, 1996. The combined purchase price was allocated based on estimated fair
values from an independent appraisal to property, plant and equipment and
franchise cost as follows (dollars in thousands):
<TABLE>
<S> <C>
Cash paid, net of acquired cash............................. $71,582
Acquisition costs (appraisal, transfer fees, and direct
costs).................................................... 215
-------
Total acquisition cost...................................... $71,797
=======
Allocation:
Current assets.............................................. $ 624
Current liabilities......................................... (969)
Property, plant and equipment............................... 24,033
Franchise cost and other intangible assets.................. 48,109
-------
Total cost allocated........................................ $71,797
=======
</TABLE>
The following combined pro forma information presents a summary of
consolidated results of operations for the Company as if the Mid-Tennessee
Systems and the RCT Systems acquisitions had occurred at the beginning of 1996,
with pro forma adjustments to show the effect on depreciation and amortization
for the acquired assets, management fees on additional revenues and interest
expense on additional debt (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
12/31/96
-----------
(UNAUDITED)
<S> <C>
Total revenues............................................. $ 74,346
Net loss................................................... (22,558)
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the Mid-Tennessee Systems and the
RCT Systems actually been acquired on January 1, 1996.
4. SALE OF ASSETS
On February 4, 1998, the Company sold all of its operating assets in the
state of Michigan (the "Michigan Sale") to another cable operator for cash. In
addition, on December 31, 1998,
F-245
<PAGE> 457
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company traded certain cable systems in Tennessee (the "Tennessee Trade")
for similar-sized cable systems (Note 3). Both sales resulted in a gain
recognized by the Company as follows (dollars in thousands):
<TABLE>
<CAPTION>
MICHIGAN TENNESSEE
SALE TRADE TOTAL
-------- --------- -------
<S> <C> <C> <C>
Fair value of assets relinquished............. $ -- $46,668 $46,668
Original cash proceeds........................ 16,931 -- 16,931
Adjustments for value of assets and
liabilities assumed......................... 120 (17) 103
------- ------- -------
Net proceeds.................................. 17,051 46,651 63,702
Net book value of assets sold................. 11,061 9,778 20,839
------- ------- -------
Net gain from sale............................ $ 5,990 $36,873 $42,863
======= ======= =======
</TABLE>
The Michigan Sale proceeds amount includes $500,000 that is currently being
held in escrow. This amount and the fair value of assets relinquished, related
to the Tennessee Trade, were both treated as noncash transactions on the
Consolidated Statement of Cash Flows.
The cash proceeds from the Michigan Sale were used by the Company to reduce
its revolving and term loans with a financial institution.
5. INCOME TAXES
Although the Partnership is not a taxable entity, two corporations (the
"subsidiaries") are included in the consolidated financial statements. These
subsidiaries are required to pay taxes on their taxable income, if any.
F-246
<PAGE> 458
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents a reconciliation of pre-tax losses as reported in
accordance with generally accepted accounting principles and the losses
attributable to the partners and included in their individual income tax
returns:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
12/31/98 12/31/97 12/31/96
------------ ------------ ------------
<S> <C> <C> <C>
Pre-tax income (loss) as reported....... $ 20,241,286 $(31,378,648) $(25,277,061)
(Increase) decrease due to:
Separately taxed book results of
corporate subsidiaries............. 9,397,000 15,512,000 9,716,000
Effect of different depreciation and
amortization methods for tax and
book purposes...................... (1,360,000) (2,973,000) (3,833,000)
Additional tax gain from the sale of
Michigan(Note 4)...................... 2,068,000 -- --
Book gain from trade sale of Tennessee
assets(Note 4)........................ (36,873,000) -- --
Additional tax loss from dissolution of
FNI stock............................. (7,235,000) -- --
Other................................... 81,714 (45,052) (22,539)
------------ ------------ ------------
Tax loss attributed to the partners..... $(13,680,000) $(18,884,700) $(19,416,600)
============ ============ ============
</TABLE>
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
As a result of a change in control in 1995, the book value of the Company's
net assets was increased to reflect their fair market value. In connection with
this revaluation, a deferred income tax liability in the amount of $22,801,000
was established to provide for future taxes payable on the revised valuation of
the net assets. A deferred tax benefit of $4,196,000, $5,335,000 and $3,654,000
was recognized for the years ended December 31, 1998, 1997 and 1996,
respectively, reducing the liability to $7,942,000.
Deferred tax assets (liabilities) were comprised of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
12/31/98 12/31/97
------------ ------------
<S> <C> <C>
Deferred tax assets resulting from loss
carryforwards.......................... $ 11,458,000 $ 9,499,000
Deferred tax liabilities resulting from
depreciation and amortization.......... (19,400,000) (21,637,000)
------------ ------------
Net deferred tax liability............... $ (7,942,000) $(12,138,000)
============ ============
</TABLE>
F-247
<PAGE> 459
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998 and 1997, the subsidiaries have net operating loss
carryforwards ("NOLs") for income tax purposes of $30,317,000 and $25,264,000,
respectively, substantially all of which are limited. The NOLs will expire at
various times between the years 2000 and 2013.
In 1998, one of the corporate entities was dissolved. The existing NOL's
were used to offset taxable income down to $87,751, resulting in a current tax
for 1998 of $18,075.
Under the Internal Revenue Code of 1986, as amended (the "Code"), the
subsidiaries generally would be entitled to reduce their future federal income
tax liabilities by carrying the unused NOLs forward for a period of 15 years to
offset their future income taxes. The subsidiaries' ability to utilize any NOLs
in future years may be restricted, however, in the event the subsidiaries
undergo an "ownership change" as defined in Section 382 of the Code. In the
event of an ownership change, the amount of NOLs attributable to the period
prior to the ownership change that may be used to offset taxable income in any
year thereafter generally may not exceed the fair market value of the subsidiary
immediately before the ownership change (subject to certain adjustments)
multiplied by the applicable long-term, tax exempt rate published by the
Internal Revenue Service for the date of the ownership change. Two of the
subsidiaries underwent an ownership change on September 1, 1995 pursuant to
Section 382 of the Code. As such, the NOLs of the subsidiaries are subject to
limitation from that date forward. It is the opinion of management that the NOLs
will be released from this limitation prior to their expiration dates and, as
such, have not been limited in their calculation of deferred taxes.
The provision for income tax expense (benefit) differs from the amount
which would be computed by applying the statutory federal income tax rate of 35%
to pre-tax income before extraordinary loss as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
12/31/98 12/31/97 12/31/96
------------ ------------ -----------
<S> <C> <C> <C>
Tax expense (benefit) computed at statutory
rate...................................... $ 7,084,450 $(10,982,527) $(8,846,971)
Increase (decrease) due to:
Tax benefit (expense) for non-corporate
loss................................... (10,373,252) 5,900,546 5,446,721
Permanent differences between financial
statement income and taxable income.... (36,200) 84,500 48,270
State income tax.......................... (247,000) (377,500) (252,590)
Tax benefit from dissolved corporation.... (148,925) -- --
Other..................................... (456,998) 39,981 (41,149)
------------ ------------ -----------
Income Tax Benefit........................ $ (4,177,925) $ (5,335,000) $(3,645,719)
============ ============ ===========
</TABLE>
F-248
<PAGE> 460
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE
Debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Senior Subordinated Notes................ $125,000,000 $125,000,000
Tranche A Term Loan...................... 21,575,000 25,000,000
Tranche B Term Loan...................... 40,000,000 40,000,000
Reducing Revolving Loan.................. 35,000,000 36,500,000
Senior Subordinated Debt................. 3,000,000 3,000,000
------------ ------------
$224,575,000 $229,500,000
============ ============
</TABLE>
The Notes and loans are collateralized by substantially all of the assets
of the Company.
On January 26, 1996, the Company and its wholly-owned subsidiary, RACC (the
"Issuers"), co-issued $125,000,000 of 11 1/8% Senior Subordinated Notes (the
"Notes") to institutional investors. These notes were subsequently exchanged on
June 18, 1996 for publicly registered notes with identical terms. Interest on
the Notes is payable semi-annually on January 15 and July 15 of each year. The
Notes, which mature on January 15, 2006, can be redeemed in whole or in part, at
the Issuers' option, at any time on or after January 15, 2001, at redeemable
prices contained in the Notes plus accrued interest. In addition, at any time on
or prior to January 15, 1999, the Issuers, at their option, may redeem up to 25%
of the principle amount of the Notes issued to institutional investors of not
less than $25,000,000. At December 31, 1998 and 1997, all of the Notes were
outstanding (see also Note 10).
The Company has a $25,000,000 Tranche A term loan with a financial
institution. This loan requires quarterly payments of $1,875,000 plus interest
commencing on March 31, 2000. Any unpaid balance is due March 31, 2003. The
agreement requires that what it defines as excess proceeds from the sale of a
cable system be used to retire Tranche A term debt. As a result of the Michigan
sale (Note 4), there was $3,425,000 of excess proceeds used to pay principal in
1998. The interest rate on the Tranche A term loan is either the bank's prime
rate plus .25% to 1.75% or LIBOR plus 1.5% to 2.75%.
The specific rate is dependent upon the senior funded debt ratio which is
recalculated quarterly. The weighted average effective interest rate at December
31, 1998 and 1997 was 7.59% and 8.24%, respectively.
In addition, the Company has a $40,000,000 Tranche B term loan, which
requires principal payments of $2,000,000 on March 31, 2002, $18,000,000 on
March 31, 2003, and $20,000,000 on March 31, 2004. The Tranche B term loan bears
an interest rate of 9.75% and is payable quarterly.
The Company also has a reducing revolving loan providing for borrowing up
to $20,000,000 at the Company's discretion, subject to certain restrictions, and
an additional $60,000,000 available to finance acquisitions subject to certain
restrictions. On March 4, 1998, the reducing revolving loan agreement was
amended to revise the scheduled reduction in revolving commitments. The
additional financing amounts available at December 31, 1998 and 1997 were
$45,000,000 and $52,500,000, respectively. At December 31, 1998, the full
$20,000,000 available had been borrowed, and $15,000,000 had been drawn against
the $45,000,000 commitment. At
F-249
<PAGE> 461
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997, the full $20,000,000 available had been borrowed, and
$16,500,000 had been drawn against the $52,500,000 commitment. The amount
available for borrowing will decrease annually during its term with changes over
the four years following December 31, 1998 as follows: 1999 -- $2,500,000
reduction per quarter, and 2000 through 2002 -- $3,625,000 per quarter. Any
unpaid balance is due on March 31, 2003. The revolving loan bears an interest
rate of either the bank's prime rate plus .25% to 1.75% or LIBOR plus 1.5% to
2.75%. The specific rate is dependent upon the senior funded debt ratio which is
recalculated quarterly. The weighted average effective interest rates at
December 31, 1998 and 1997 was 8.08% and 8.29%, respectively. The reducing
revolving loan includes a commitment fee of 1/2% per annum on the unborrowed
balance.
Certain mandatory prepayments may also be required, commencing in fiscal
1997, on the Tranche A term loan, the Tranche B term loan, and the reducing
revolving credit based on the Company's cash flow calculations, proceeds from
the sale of a cable system or equity contributions. Based on the 1998
calculation and the Michigan sale, $3,425,000 of prepayments were required.
Optional prepayments are allowed, subject to certain restrictions. The related
loan agreement contains covenants limiting additional indebtedness, dispositions
of assets, investments in securities, distribution to partners, management fees
and capital expenditures. In addition, the Company must maintain certain
financial levels and ratios. At December 31, 1998, the Company was in compliance
with these covenants.
The Company also has $3,000,000 of senior subordinated debt payable to a
Rifkin Partner. The debt has a scheduled maturity, interest rate and interest
payment schedule identical to that of the Notes, as discussed above.
Based on the outstanding debt as of December 31, 1998, the minimum
aggregate maturities for the five years following 1998 are none in 1999,
$7,500,000 in 2000, $16,500,000 in 2001, $23,075,000 in 2002 and $29,500,000 in
2003.
7. RELATED PARTY TRANSACTIONS
The Company entered into a management agreement with Rifkin & Associates,
Inc. (Rifkin). The management agreement provides that Rifkin will act as manager
of the Company's CATV systems and be entitled to annual compensation of 3.5% of
the Company's revenue. Effective September 1, 1998, Rifkin conveyed its CATV
management business to R & A Management, LLC (RML). The result of this
transaction included the conveyance of the Rifkin management agreement (Rifkin
Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin
Agreement and the RML Agreement are disclosed in total on the Consolidated
Statement of Operations.
The Company is associated with a company to purchase certain cable
television programming at a discount. Rifkin acted as the agent and held the
deposit funds required for the Company to participate.
Effective September 1, 1998, Rifkin conveyed this contract and deposit
amount to RML. The deposit amount recorded at December 31, 1998 and 1997 was
$2,139,274 and $1,225,274, respectively. The Company subsequently received
$1,225,274 of the December 31, 1998 balance.
The Company paid approximately $550,000 to a law firm in connection with
the public offering in 1996. A partner of this law firm is a relative of one of
the Company's partners.
F-250
<PAGE> 462
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND RENTAL EXPENSE
The Company leases certain real and personal property under noncancelable
operating leases expiring through the year 2007. Future minimum lease payments
under such noncancelable leases as of December 31, 1998 are: $316,091 in 1999;
$249,179 in 2000; $225,768 in 2001; $222,669 in 2002; and $139,910 in 2003; and
$344,153 thereafter, totaling $1,497,770.
Total rental expense and the amount included therein which pertains to
cancelable pole rental agreements were as follows for the periods indicated:
<TABLE>
<CAPTION>
TOTAL CANCELABLE
RENTAL POLE RENTAL
PERIOD EXPENSE EXPENSE
- - - ------ ---------- -----------
<S> <C> <C>
Year Ended December 31, 1998................. $1,592,080 $1,109,544
Year Ended December 31, 1997................. $1,577,743 $1,061,722
Year Ended December 31, 1996................. $1,294,084 $ 874,778
</TABLE>
9. COMPENSATION PLANS AND RETIREMENT PLANS
EQUITY INCENTIVE PLAN
In 1996, the Company implemented an Equity Incentive Plan (the "Plan") in
which certain Rifkin & Associates' executive officers and key employees, and
certain key employees of the Company are eligible to participate. Plan
participants in the aggregate, have the right to receive (i) cash payments of up
to 2.0% of the aggregate value of all partnership interests of the Company (the
"Maximum Incentive Percentage"), based upon the achievement of certain annual
Operating Cash Flow (as defined in the Plan) targets for the Company for each of
the calendar years 1996 through 2000, and (ii) an additional cash payment equal
to up to 0.5% of the aggregate value of all partnership interests of the Company
(the "Additional Incentive Percentage"), based upon the achievement of certain
cumulative Operating Cash Flow targets for the Company for the five-year period
ended December 31, 2000. Subject to the achievement of such annual targets and
the satisfaction of certain other criteria based on the Company's operating
performance, up to 20% of the Maximum Incentive Percentage will vest in each
such year; provided, that in certain events vesting may accelerate. Payments
under the Plan are subject to certain restrictive covenants contained in the
Notes.
No amounts are payable under the Plan except upon (i) the sale of
substantially all of the assets or partnership interests of the Company or (ii)
termination of a Plan participant's employment with Rifkin & Associates or the
Company, as applicable, due to (a) the decision of the Advisory Committee to
terminate such participant's employment due to disability, (b) the retirement of
such participant with the Advisory Committee's approval or (c) the death of such
Participant. The value of amounts payable pursuant to clause (i) above will be
based upon the aggregate net proceeds received by the holders of all of the
partnership interests in the Company, as determined by the Advisory Committee,
and the amounts payable pursuant to clause (ii) above will be based upon the
Enterprise Value determined at the time of such payment. For purposes of the
Plan, Enterprise Value generally is defined as Operating Cash Flow for the
immediately preceding calendar year times a specified multiple and adjusted
based on the Company's working capital.
F-251
<PAGE> 463
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amount expensed for the years ended December 31, 1998, 1997 and 1996
relating to this plan were $1,119,996, $859,992 and $660,000, respectively.
RETIREMENT BENEFITS
The Company has a 401(k) plan for employees that have been employed by the
Company for at least one year. Employees of the Company can contribute up to 15%
of their salary, on a before-tax basis, with a maximum 1998 contribution of
$10,000 (as set by the Internal Revenue Service). The Company matches
participant contributions up to a maximum of 50% of the first 3% of a
participant's salary contributed. All participant contributions and earnings are
fully vested upon contribution and Company contributions and earnings vest 20%
per year of employment with the Company, becoming fully vested after five years.
The Company's matching contributions for the years ended December 31, 1998, 1997
and 1996 were $50,335, $72,707 and $42,636, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held
for trading purposes. The following method and assumptions were used by the
Company to estimate the fair values of financial instruments as disclosed
herein:
Cash and Cash Equivalents, Customer Accounts Receivable, Other Receivables,
Accounts Payable and Accrued Liabilities and Customer Deposits and Prepayments:
The carrying value amount approximates fair value because of the short period to
maturity.
Debt: The fair value of bank debt is estimated based on interest rates for
the same or similar debt offered to the Company having the same or similar
remaining maturities and collateral requirements. The fair value of public
Senior Subordinated Notes is based on the market quoted trading value. The fair
value of the Company's debt is estimated at $236,137,500 and is carried on the
balance sheet at $224,575,000.
11. CABLE REREGULATION
Congress enacted the Cable Television Consumer Protection and Competition
Act of 1992 (the Cable Act) and has amended it at various times since.
The total effects of the present law are, at this time, still unknown.
However, one provision of the present law further redefines a small cable
system, and exempts these systems from rate regulation on the upper tiers of
cable service. The Partnership is awaiting an FCC rulemaking implementing the
present law to determine whether its systems qualify as small cable systems.
12. SUMMARIZED FINANCIAL INFORMATION
CEM, CEI and CEC (collective, the "Guarantors") are all wholly-owned
subsidiaries of the Company and, together with RACC, constitute all of the
Partnership's direct and indirect subsidiaries. As discussed in Note 1, RTL and
FNI were dissolved on January 1, 1998 and the assets were transferred to the
Company, however, prior thereto, RTL and FNI, as wholly-owned subsidiaries of
the Company, were Guarantors. Each of the Guarantors provides a full,
unconditional, joint and several guaranty of the obligations under the Notes
discussed in Note 6. Separate financial statements of the Guarantors are not
presented because management has determined that they would not be material to
investors.
F-252
<PAGE> 464
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present summarized financial information of the
Guarantors on a combined basis as of December 31, 1998 and 1997 and for the
years ended December 31, 1998, and 1997 and 1996.
<TABLE>
<CAPTION>
12/31/98 12/31/97
BALANCE SHEET ------------ ------------
<S> <C> <C> <C>
Cash............................ $ 373,543 $ 780,368
Accounts and other receivables,
net........................... 3,125,830 3,012,571
Prepaid expenses................ 791,492 970,154
Property, plant and equipment
net........................... 48,614,536 66,509,120
Franchise costs and other
intangible assets, net........ 56,965,148 103,293,631
Accounts payable and accrued
liabilities................... 22,843,354 18,040,588
Other liabilities............... 980,536 1,122,404
Deferred taxes payable.......... 7,942,000 12,138,000
Notes payable................... 140,050,373 167,200,500
Equity (deficit)................ (61,945,714) (23,935,648)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
12/31/98 12/31/97 12/31/96
STATEMENTS OF OPERATIONS ------------ ------------ ------------
<S> <C> <C> <C>
Total revenue................... $ 29,845,826 $ 47,523,592 $ 42,845,044
Total costs and
expenses........... (31,190,388) (53,049,962) (43,578,178)
Interest expense................ (14,398,939) (17,868,497) (16,238,221)
Income tax benefit.............. 4,177,925 5,335,000 3,645,719
------------ ------------ ------------
Net loss........................ $(11,565,576) $(18,059,867) $(13,325,636)
============ ============ ============
</TABLE>
13. QUARTERLY INFORMATION (UNAUDITED)
The following interim financial information of the Company presents the
1998 and 1997 consolidated results of operations on a quarterly basis (in
thousands):
<TABLE>
<CAPTION>
QUARTERS ENDED 1998
------------------------------------------------
MARCH 31(A) JUNE 30 SEPT. 30 DEC. 31(B)
----------- ------- -------- ----------
<S> <C> <C> <C> <C>
Revenue........................ $22,006 $22,296 $22,335 $23,284
Operating income (loss)........ 295 511 (1,522) 1,756
Net income (loss).............. 1,437 (4,458) (5,907) 33,347
</TABLE>
- - - -------------------------
(a) First quarter includes a $5,900 gain from the sale of Michigan assets
(Note 4).
(b) Fourth quarter includes a $36,873 gain from the trade sale of certain
Tennessee assets (Note 4).
F-253
<PAGE> 465
RIFKIN ACQUISITION PARTNERS, L.L.L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
QUARTERS ENDED 1997
------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue............................. $19,337 $21,331 $21,458 $22,199
Operating loss...................... (1,220) (2,818) (2,777) (798)
Net loss............................ (5,998) (6,890) (8,127) (5,029)
</TABLE>
14. LITIGATION
The Company could possibly be named as defendant in various actions and
proceedings arising from the normal course of business. In all such cases, the
Company will vigorously defend itself against the litigation and, where
appropriate, will file counterclaims. Although the eventual outcome of potential
lawsuits cannot be predicted, it is management's opinion that any such lawsuit
will not result in liabilities that would have a material affect on the
Company's financial position or results of operations.
F-254
<PAGE> 466
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Indiana Cable Associates, Ltd.
In our opinion, the accompanying balance sheet and the related statements
of operations, of equity and of cash flows present fairly, in all material
respects, the financial position of Rifkin Cable Income Partners L.P. (the
"Partnership") at September 13, 1999, and the results of its operations and its
cash flows for the period January 1, 1999 to September 13, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
On September 13, 1999, all of the Partnership's interest were sold to
Charter Communications, LLC. These financial statements represent the
Partnership just prior to that transaction and do not reflect any adjustments
related thereto.
/S/ PRICEWATERHOUSECOOPERS LLP
DENVER, COLORADO
FEBRUARY 15, 2000
F-255
<PAGE> 467
INDIANA CABLE ASSOCIATES, LTD.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 13,
1999
-----------------
<S> <C>
ASSETS
Cash........................................................ $ 166,550
Customer accounts receivable, less allowance for doubtful
accounts of $6,523........................................ 211,069
Accounts receivable, interpartnership....................... 13,814,907
Other receivables........................................... 436,723
Prepaid expenses and deposits............................... 50,196
Property, plant and equipment, at cost:
Transmission and distribution systems and related
equipment.............................................. 10,025,106
Buildings and leasehold improvements...................... 55,480
Vehicles, office furniture and fixtures................... 493,607
Spare parts and construction inventory.................... 101,334
-----------
10,675,527
Less accumulated depreciation............................... (838,673)
-----------
Property, plant and equipment, net..................... 9,836,854
Franchise costs, net of accumulated amortization of
$2,910,123................................................ 18,944,392
-----------
Total assets......................................... $43,460,691
===========
LIABILITIES AND EQUITY
Liabilities:
Accrued liabilities....................................... $ 263,342
Customer deposits and prepayments......................... 314,413
Accounts payable, related party........................... 20,514
Interpartnership debt..................................... 24,003,000
-----------
Total liabilities.................................... 24,601,269
Commitments and contingencies (Notes 4 and 8)
Divisional equity........................................... 18,859,422
-----------
Total equity......................................... 18,859,422
-----------
Total liabilities and equity...................... $43,460,691
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-256
<PAGE> 468
INDIANA CABLE ASSOCIATES, LTD.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 1, 1999 TO
SEPTEMBER 13, 1999
-------------------
<S> <C>
REVENUE
Service..................................................... $ 5,267,890
Installation and other...................................... 765,902
-----------
Total revenue............................................. 6,033,792
COSTS AND EXPENSES
Operating expense........................................... 631,956
Programming expense......................................... 1,268,904
Selling, general and administrative expense................. 1,143,407
Depreciation................................................ 1,009,515
Amortization................................................ 2,910,123
Management fees............................................. 301,890
Loss on disposal of assets.................................. 2,481,838
-----------
Total costs and expenses.................................. 9,747,633
-----------
Operating loss.............................................. (3,713,841)
Interest expense............................................ 621,956
-----------
Net loss.................................................. $(4,335,797)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-257
<PAGE> 469
INDIANA CABLE ASSOCIATES, LTD.
STATEMENT OF EQUITY
<TABLE>
<CAPTION>
JANUARY 1, 1999 TO
SEPTEMBER 13, 1999
-------------------------
DIVISIONAL
EQUITY TOTAL
----------- -----------
<S> <C> <C>
Equity contribution......................................... $23,195,219 $23,195,219
Net loss.................................................. (4,335,797) (4,335,797)
----------- -----------
Equity, September 13, 1999.................................. $18,859,422 $18,859,422
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-258
<PAGE> 470
INDIANA CABLE ASSOCIATES, LTD.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1, 1999 TO
SEPTEMBER 13, 1999
------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (4,335,797)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 3,919,638
Loss on disposal of assets................................ 2,481,838
Increase in customer accounts receivable.................. (125,274)
Increase in accounts receivable, interpartnership......... (13,814,907)
Increase in other receivables............................. (141,700)
Decrease in prepaid expenses and deposits................. 102,379
Increase in accrued liabilities........................... (634,431)
Increase in customer deposits and prepayments............. 266,955
Increase in accounts payable, related party............... 20,514
------------
Net cash used in operating activities.................. (12,260,785)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Initial cash acquisition cost, net of cash acquired......... (23,086,600)
Purchases of property, plant and equipment.................. (2,054,791)
Proceeds from sale of assets................................ 2,734
Additions to franchise costs................................ (25,597)
------------
Net cash used in investing activities.................. (25,164,254)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions....................................... 23,195,219
Proceeds from interpartnership debt......................... 14,807,682
Payments on interpartnership debt........................... (411,312)
------------
Net cash provided by financing activities.............. 37,591,589
------------
Increase in cash............................................ 166,550
Cash, beginning of period................................... --
------------
Cash, end of period......................................... $ 166,550
============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 621,956
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-259
<PAGE> 471
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Indiana Cable Associates, Ltd. (the "Partnership"), a Colorado limited
partnership, was originally organized in March 1987 for the purpose of acquiring
and operating cable television systems and related operations in Indiana and
Illinois.
ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP AND BASIS OF PRESENTATION
Effective December 31, 1998, Interlink Communications Partners, LLLP
("ICP") acquired all of the Partnership's limited partner interest, and agreed
to purchase all of the general Partners' interest for $23.1 million. This
transaction was accounted for as a purchase; as such, assets and liabilities
were written up to their fair value, resulting in an increase to property, plant
and equipment and franchise costs of $7.0 million and $16.8 million,
respectively.
Effective April 1, 1999, ICP completed the purchase of the remaining
general partner interest in the Partnership and the Partnership was merged into
ICP and ceased to exist as a separate legal entity. The Partnership's financial
statements subsequent to that date represent a divisional carve-out from ICP.
These financial statements include all the direct costs of operating its
business; however, certain assets, liabilities and costs not specifically
related to the Partnership's activities were allocated and reflected in the
financial position as of September 13, 1999, and the results of its operations
and its cash flows for the period January 1, 1999 to September 13, 1999.
Allocations from ICP include amounts for debt, interest expense and management
expense. Both debt and interest expense were allocated pro rata based on the
Partnership's percentage of subscribers to total ICP subscribers. Management
expense was allocated in accordance with the management agreement (Note 2). In
addition, receivables and payables to ICP are presented in the accompanying
financial statements net as amounts due to/from interpartnership. Management
believes these allocations were made on a reasonable basis. Nonetheless, the
financial information included herein may not necessarily reflect what the
financial position and results of operations of the Partnership would have been
as a stand-alone entity.
ACQUISITION BY CHARTER COMMUNICATIONS HOLDINGS, LLC
On February 12, 1999, ICP signed a letter of intent to sell all of ICP's
partnership interest to Charter Communications Holdings, LLC ("Charter"). On
April 26, 1999, ICP signed a definitive Purchase and Sales Agreement with
Charter for the sale of the individual partner's interest. The sales transaction
closed on September 13, 1999. These financial statements represent the
Partnership just prior to the transaction and do not reflect any related
adjustments.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost, which in
the case of assets constructed, include amounts for material, labor, overhead
and capitalized interest, if applicable. Upon sale or retirement of an asset,
the related costs and accumulated depreciation are removed from the accounts and
any gain or loss is recognized.
F-260
<PAGE> 472
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Depreciation expense is calculated using the straight-line method over the
estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Transmission and distribution systems and related
equipment................................................. 1-15 years
Buildings and leasehold improvements........................ 5-27 years
Vehicles, office furniture and fixtures..................... 2-5 years
</TABLE>
FRANCHISE COSTS
Franchise costs are amortized using the straight-line method over the
remaining lives of the franchises as of the date they were acquired, ranging
from 2 to 10 years. The carrying value is assessed for recoverability by
management based on an analysis of undiscounted expected future cash flows. The
Partnership's management believes that there has been no impairment thereof as
of September 13, 1999.
INCOME TAXES
No provision for federal or state income taxes is necessary in the
financial statements of the Partnership, because as a partnership, it is not
subject to federal or state income tax as the tax effect of its activities
accrues to the partners.
REVENUE RECOGNITION
Customer fees are recorded as revenue in the period the service is
provided. The cost to acquire the rights to the programming generally is
recorded when the product is initially available to be viewed by the customer.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion expenses are charged to income during the year in
which they are incurred and were not significant for the period shown.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. MANAGEMENT AGREEMENT
The Partnership has a management agreement with R & A Management, LLC
("RML"). The management agreement provides that RML shall manage the Partnership
and shall receive annual compensation equal to 5% of gross revenues and an
additional 5% if a defined cash flow level is met. The result of this
transaction included the conveyance of the Rifkin management agreement (the
"Rifkin Agreement") to RML (the "RML Agreement"). Expenses incurred pursuant to
this agreement are disclosed in the Consolidated Statement of Operations.
F-261
<PAGE> 473
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. DEBT
The Partnership has interpartnership debt with ICP. Borrowings, including
both principal and interest, at September 13, 1999 were $24,003,000 and had an
effective interest rate of 8.68%.
ICP has a term loan and revolving loan agreement with a bank. The amount of
the term loan is $150,000,000, and requires varying quarterly payments plus
interest commencing September 30, 2001 and continuing through March 31, 2007. On
February 1, 1999, the term loan agreement was amended to increase the loan
amount to $250,000,000. On July 16, 1999, the term loan agreement was amended
again to increase the loan amount to $290,000,000. The interest rate on the term
loan is generally the bank's prime rate plus 0% to 1.50%. The weighted average
effective rate at September 13, 1999 was 8.74%.
The revolving loan agreement provided for borrowing up to $100,000,000 at
the Company's discretion. At September 13, 1999, $91,000,000 had been drawn
against the $100,000,000 commitment. The revolving credit agreement expires on
March 31, 2007. The revolver bears an interest rate at the bank's prime rate
plus 0% to 1.50% or LIBOR plus 1.25% to 2.75%. The specific rate is dependent
upon the leverage ratio of ICP, which is recalculated quarterly. The weighted
average effective interest rate at September 13, 1999 was 8.5%.
The term loan and revolving loan agreement are collateralized by
substantially all assets of ICP and its consolidated entities, including the
Partnership.
4. LEASE COMMITMENTS
The Partnership leases certain real and personal property under
noncancelable operating leases. Future minimum lease payments under these
arrangements at September 13, 1999, were as follows:
<TABLE>
<S> <C>
1999........................................................ $ 77,802
2000........................................................ 57,386
2001........................................................ 45,749
2002........................................................ 43,500
2003........................................................ 43,500
Thereafter.................................................. 40,875
--------
$308,812
========
</TABLE>
Total rent expense for the period January 1, 1999 to September 13, 1999 was
$77,802, including $43,253 relating to cancelable pole rental agreements.
5. RETIREMENT BENEFITS
The Partnership has a 401(k) plan for its employees that have been employed
by the Partnership for at least one year. Employees of the Partnership can
contribute up to 15% of their salary, on a before-tax basis, with a maximum 1999
contribution of $10,000 (as set by the Internal Revenue Service). The
Partnership matches participant contributions up to a maximum of 50% of the
first 3% of a participant's salary contributed. All participant contributions
and earnings are fully vested upon contribution and Partnership contributions
and earnings vest 20% per year of employment with the Partnership, becoming
fully vested after five years. The Partnership's matching contributions for the
period January 1, 1999 to September 13, 1999 were $10,524.
F-262
<PAGE> 474
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership has a number of financial instruments, none of which are
held for trading purposes. The following method and assumptions were used by the
Partnership to estimate the fair values of financial instruments as disclosed
herein:
Cash, customer accounts receivable, other receivables, accounts payable and
accrued liabilities and customer deposits and prepayments: The carrying value
amount approximates fair value because of the short period to maturity.
The interest rate on debt is adjusted at least quarterly; therefore, the
carrying value of debt approximates its fair value.
7. RELATED PARTY TRANSACTIONS
Certain Partnership expenses were paid by Charter and are reflected as
Payables to affiliates in the accompanying financial statements.
8. LITIGATION
The Partnership could possibly be named as defendant in various actions and
proceedings arising from the normal course of business. In all such cases, the
Partnership will vigorously defend itself against the litigation and, where
appropriate, will file counterclaims. Although the eventual outcome of potential
lawsuits cannot be predicted, it is management's opinion that any such lawsuit
will not result in liabilities that would have a material affect on the
Partnership's financial position or results of operations.
F-263
<PAGE> 475
REPORT OF INDEPENDENT AUDITORS
The Partners
Indiana Cable Associates, Ltd.
We have audited the accompanying balance sheet of Indiana Cable Associates, Ltd.
as of December 31, 1997 and 1998, and the related statements of operations,
partners' deficit and cash flows for the years ended December 31, 1996, 1997 and
1998. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Indiana Cable Associates, Ltd.
at December 31, 1997 and 1998, and the results of its operations and its cash
flows for the years ended December 31, 1996, 1997 and 1998 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Denver, Colorado
February 19, 1999
F-264
<PAGE> 476
INDIANA CABLE ASSOCIATES, LTD.
BALANCE SHEET
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
ASSETS (PLEDGED)
Cash and cash equivalents.................................. $ 82,684 $ 108,619
Customer accounts receivable, less allowance for doubtful
accounts of $18,311 in 1997 and $24,729 in 1998.......... 87,154 85,795
Other receivables.......................................... 257,236 295,023
Prepaid expenses and deposits.............................. 172,614 152,575
Property, plant and equipment, at cost:
Buildings................................................ 78,740 91,682
Transmission and distribution systems and related
equipment............................................. 10,174,650 11,336,892
Office furniture and equipment........................... 144,137 161,327
Spare parts and construction inventory................... 435,554 742,022
----------- -----------
10,833,081 12,331,923
Less accumulated depreciation............................ 7,624,570 8,008,158
----------- -----------
Net property, plant and equipment..................... 3,208,511 4,323,765
Other assets, at cost less accumulated amortization (Note
3)....................................................... 5,817,422 5,083,029
----------- -----------
Total assets..................................... $ 9,625,621 $10,048,806
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accounts payable and accrued liabilities................. $ 718,716 $ 897,773
Customer prepayments..................................... 50,693 47,458
Interest payable......................................... 32,475 --
Long-term debt (Note 4).................................. 10,650,000 --
Interpartnership debt (Note 4)........................... -- 9,606,630
----------- -----------
Total liabilities................................ 11,451,884 10,551,861
Commitments (Notes 5 and 6)
Partners' deficit:
General partner.......................................... (66,418) (20,106)
Limited partner.......................................... (1,759,845) (482,949)
----------- -----------
Total partners' deficit.................................... (1,826,263) (503,055)
----------- -----------
Total liabilities and partners' deficit.......... $ 9,625,621 $10,048,806
=========== ===========
</TABLE>
See accompanying notes.
F-265
<PAGE> 477
INDIANA CABLE ASSOCIATES, LTD.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------
12/31/96 12/31/97 12/31/98
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE:
Service............................................ $6,272,049 $6,827,504 $7,165,843
Installation and other............................. 538,158 622,699 773,283
---------- ---------- ----------
Total revenue............................ 6,810,207 7,450,203 7,939,126
COSTS AND EXPENSES:
Operating expense.................................. 989,456 1,142,932 974,617
Programming expense................................ 1,474,067 1,485,943 1,727,089
Selling, general and administrative expense........ 1,112,441 1,142,247 1,128,957
Depreciation....................................... 889,854 602,554 537,884
Amortization....................................... 718,334 718,335 707,539
Management fees.................................... 340,510 372,510 396,956
Loss on disposal of assets......................... 6,266 639 74,714
---------- ---------- ----------
Total costs and expenses................. 5,530,928 5,465,160 5,547,756
---------- ---------- ----------
Operating income................................... 1,279,279 1,985,043 2,391,370
Interest expense................................... 1,361,415 1,292,469 970,160
---------- ---------- ----------
Net income (loss) before extraordinary item........ (82,136) 692,574 1,421,210
Extraordinary item--loss on early retirement of
debt (Note 3 and 4).............................. -- -- 98,002
---------- ---------- ----------
Net income (loss).................................. $ (82,136) $ 692,574 $1,323,208
========== ========== ==========
</TABLE>
See accompanying notes.
F-266
<PAGE> 478
INDIANA CABLE ASSOCIATES, LTD.
STATEMENT OF PARTNERS' DEFICIT
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
-------- ----------- -----------
<S> <C> <C> <C>
Partners' deficit at December 31, 1995......... $(87,783) $(2,348,918) $(2,436,701)
Net loss for the year ended December 31,
1996...................................... (2,875) (79,261) (82,136)
-------- ----------- -----------
Partners' deficit at December 31, 1996......... (90,658) (2,428,179) (2,518,837)
Net income for the year ended December 31,
1997...................................... 24,240 668,334 692,574
-------- ----------- -----------
Partners' deficit at December 31, 1997......... (66,418) (1,759,845) (1,826,263)
Net income for the year ended December 31,
1998...................................... 46,312 1,276,896 1,323,208
-------- ----------- -----------
Partners' deficit at December 31, 1998......... $(20,106) $ (482,949) $ (503,055)
======== =========== ===========
</TABLE>
The partners' capital accounts for financial reporting purposes vary from
the tax capital accounts.
See accompanying notes.
F-267
<PAGE> 479
INDIANA CABLE ASSOCIATES, LTD.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
12/31/96 12/31/97 12/31/98
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ (82,136) $ 692,574 $ 1,323,208
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................. 1,608,188 1,320,889 1,245,423
Amortization of deferred loan costs............ 48,764 72,922 23,149
Loss on disposal of assets..................... 6,266 639 74,714
Loss on write-off of deferred loan cost
associated with early retirement of debt..... -- -- 95,832
Decrease (increase) in customer accounts
receivable................................... (13,110) 1,536 1,359
Increase in other receivables.................. (80,843) (108,256) (37,787)
Decrease (increase) in prepaid expenses and
deposits..................................... (53,259) (5,928) 20,039
Increase (decrease) in accounts payable and
accrued liabilities.......................... (190,357) (147,971) 179,057
Increase (decrease) in customer prepayments.... 16,355 (13,190) (3,235)
Decrease in interest payable................... (12,314) (39,471) (32,475)
----------- ----------- ------------
Net cash provided by operating
activities.............................. 1,247,554 1,773,744 2,889,284
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........ (675,244) (592,685) (1,732,831)
Proceeds from sale of assets...................... 227,025 23,662 4,979
----------- ----------- ------------
Net cash used in investing activities..... (448,219) (569,023) (1,727,852)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt...................... 2,000,000 1,450,000 10,636,421
Proceeds from interpartnership debt............... -- -- 9,606,630
Deferred loan cost................................ (70,000) (29,776) (92,127)
Payments of long-term debt........................ (2,200,000) (3,100,000) (21,286,421)
----------- ----------- ------------
Net cash used in financing activities..... (270,000) (1,679,776) (1,135,497)
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents....................................... 529,335 (475,055) 25,935
Cash and cash equivalents at beginning of year...... 28,404 557,739 82,684
----------- ----------- ------------
Cash and cash equivalents at end of year............ $ 557,739 $ 82,684 $ 108,619
=========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid..................................... $ 1,324,965 $ 1,258,078 $ 947,606
=========== =========== ============
</TABLE>
See accompanying notes.
F-268
<PAGE> 480
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL INFORMATION
GENERAL INFORMATION:
Indiana Cable Associates, Ltd. (the "Partnership"), a Colorado limited
partnership, was organized in March 1987 for the purpose of acquiring and
operating cable television systems and related operations in Indiana and
Illinois.
For financial reporting purposes, Partnership profits or losses are
allocated 3.5% to the general partners and 96.5% to the limited partners.
Limited partners are not required to fund any losses in excess of their capital
contributions.
ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP:
Interlink Communications Partners, LLLP ("ICP") agreed to purchase all of
the interests of the Partnership. ICP acquired all of the limited partner
interests, effective December 31, 1998, and is currently in the process of
obtaining the necessary consents to transfer all of the Partnership's franchises
to ICP. Once these are obtained, ICP will then purchase the general partner
interest in the Partnership, and the Partnership will, by operation of law, be
consolidated into ICP.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY, PLANT AND EQUIPMENT:
The Partnership records additions to property, plant and equipment at cost,
which in the case of assets constructed includes amounts for material, labor,
overhead and capitalized interest, if applicable.
For financial reporting purposes, the Partnership uses the straight-line
method of depreciation over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings and improvements................................. 5-30 years
Transmission and distribution systems and related
equipment................................................ 3-15 years
Office furniture and equipment............................. 5 years
</TABLE>
OTHER ASSETS:
Other assets are carried at cost and are amortized on a straight-line basis
over the following lives:
<TABLE>
<S> <C> <C>
Franchises -- the terms of the franchises
(10-19 1/2 years)
Goodwill -- the term of the Partnership agreement
(12 3/4 years)
Deferred loan costs -- the term of the debt (1-6 years)
Organization costs -- 5 years
</TABLE>
F-269
<PAGE> 481
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES:
No provision for the payment or refund of income taxes has been provided
for the Partnership since the partners are responsible for reporting their
distributive share of Partnership net income or loss in their personal
capacities.
CASH AND CASH EQUIVALENTS:
The Partnership considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION:
Customer fees are recorded as revenue in the period the service is
provided.
FAIR VALUE OF FINANCIAL INVESTMENTS:
The carrying values of cash and cash equivalents, customer accounts
receivable, accounts payable and interpartnership debt approximate fair value.
USE OF ESTIMATES:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
IMPACT OF YEAR 2000 (UNAUDITED):
The Partnership recognizes that certain of its time-sensitive computer
programs and product distribution equipment may be affected by conversion to the
year 2000. During 1998, management began their evaluation of the information
systems, product distribution facilities, and vendor and supplier readiness. To
date, considerable progress has been made to complete the evaluation process, to
integrate and test compliance installations, and to prepare contingency plans.
In addition, third party suppliers are either fully compliant or are expected to
be compliant by December 31, 1999. Management expects to have all systems
compliant, or have a contingency plan in effect that will result in minimal
impact on the operations.
NEW ACCOUNTING PRONOUNCEMENT:
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up
Activities," which requires the Partnerships to expense all start-up costs
related to organizing a new business. This new standard also includes one-time
activities related to opening a new facility, introduction of a new product or
service, or conducting business with a new class of customer or in a new
territory. This standard is effective for the Partnerships' 1999 fiscal year.
Organization costs are all fully amortized resulting in SOP 98-5 having no
material effect on its financial position or the results of operations.
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION:
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform with the 1998 financial statement presentation. Such
reclassifications had no effect on the net income or loss as previously stated.
F-270
<PAGE> 482
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. OTHER ASSETS
At December 31, 1997 and 1998, other assets consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Franchises......................................... $13,144,332 $12,996,580
Goodwill........................................... 378,336 378,336
Deferred loan costs................................ 26,854 --
Organization costs................................. 63,393 63,393
----------- -----------
13,612,915 13,438,309
Less accumulated amortization...................... 7,795,493 8,355,280
----------- -----------
$ 5,817,422 $ 5,083,029
=========== ===========
</TABLE>
On December 31, 1997, the loan agreement with a financial institution was
amended (Note 4). At that time, the original loan's costs, which were fully
amortized, and the accumulated amortization were written off. The bank loan
amendment required the payment of additional loan costs which will be amortized
over the remaining term of the bank loan.
On August 31, 1998, the loan with a financial institution and the
subordinated debt loan with two investor groups were paid in full (Note 4). The
related deferred loan costs and associated accumulated amortization were written
off and $9,263 was recorded as an extraordinary loss. On December 30, 1998, the
new loan agreement with a financial institution was paid in full (Note 4). The
related deferred loan costs and associated accumulated amortization were written
off and $86,569 was recorded as an extraordinary loss.
4. DEBT
The Partnership had a revolving credit agreement with a financial
institution which provided for borrowing up to $7,000,000 with a maturity date
of December 31, 1997, at which time the balance of the loan was $4,650,000. On
December 31, 1997, the credit agreement was amended to reduce the amount
available to borrow to $5,200,000 and extend the maturity date to December 31,
1998. The Partnership also had subordinated term notes with two investors
totalling $6,000,000 at December 31, 1997. Total outstanding loans at December
31, 1997 were $10,650,000. On August 31, 1998, the revolving credit loan and
subordinated term notes had a balance of $3,450,000 and $6,000,000,
respectively; at that date, the total balance of $10,650,000 and accrued
interest were paid in full. On that same date, the Partnership obtained a new
credit agreement with a financial institution. The new credit agreement provided
for a senior term note payable in the amount of $7,500,000 and a revolving
credit loan which provided for borrowing up to $7,500,000. At December 30, 1998,
the term note and revolving credit had a balance of $7,500,000 and $1,950,000,
respectively; at that date, the total balance of $9,450,000 and accrued interest
were paid in full. The Partnership also incurred a LIBOR break fee of $2,170 in
conjunction with the retirement of debt which was recorded as an extraordinary
item.
Also on December 30, 1998, the Partnership obtained a new interpartnership
loan agreement with ICP (Note 1). Borrowing under the interpartnership loan, as
well as interest and principal payments are due at the discretion of the
management of ICP, resulting in no minimum required annual principal payments.
The balance of the interpartnership loan at December 31, 1998 was $9,606,630.
The effective interest rate at December 31, 1998 was 8.5%.
F-271
<PAGE> 483
INDIANA CABLE ASSOCIATES, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. MANAGEMENT AGREEMENT
The Partnership has entered into a management agreement with Rifkin and
Associates, Inc., (Rifkin) whose sole stockholder is affiliated with a general
partner of the Partnership. The agreement provides that Rifkin shall manage the
Partnership and shall receive annual compensation equal to 2 1/2% of gross
revenues and an additional 2 1/2% if a defined cash flow level is met. Effective
September 1, 1998, Rifkin conveyed its CATV management business to R & A
Management, LLC (RML). The result of this transaction was the conveyance of the
Rifkin management agreement (Rifkin Agreement) to RML (RML Agreement). Expenses
incurred pursuant to the Rifkin Agreement and the RML Agreement are disclosed on
the Statement of Operations.
6. LEASE COMMITMENTS
At December 31, 1998, the Partnership had lease commitments under long-term
operating leases as follows:
<TABLE>
<S> <C>
1999........................................................ $27,408
2000........................................................ 6,300
2001........................................................ 2,700
2002........................................................ 1,500
2003........................................................ 1,500
Thereafter.................................................. 10,500
-------
Total............................................. $49,908
=======
</TABLE>
Rent expense, including pole rent, was as follows for the periods
indicated:
<TABLE>
<CAPTION>
TOTAL
RENTAL
PERIOD EXPENSE
- - - ------ --------
<S> <C>
Year Ended December 31, 1996................................ $105,590
Year Ended December 31, 1997................................ 98,693
Year Ended December 31, 1998................................ 104,155
</TABLE>
7. RETIREMENT BENEFITS
The Partnership has a 401(k) plan for its employees that have been employed
by the Partnership for at least one year. Employees of the Partnership can
contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998
contribution of $10,000 (as set by the Internal Revenue Service). The
Partnership matches participant contributions up to a maximum of 50% of the
first 3% of a participant's salary contributed. All participant contributions
and earnings are fully vested upon contribution and Partnership contributions
and earnings vest 20% per year of employment with the Partnership, becoming
fully vested after five years. The Partnership's matching contributions for the
years ended December 31, 1996, 1997 and 1998 were $4,723, $8,769 and $8,639,
respectively.
F-272
<PAGE> 484
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
R/N South Florida Cable Management Limited Partnership
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of equity and of cash flows present
fairly, in all material respects, the financial position of R/N South Florida
Cable Management Limited Partnership and its subsidiaries (the "Partnership") at
September 13, 1999, and the results of their operations and their cash flows for
the period January 1, 1999 to September 13, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
On September 13, 1999, all of the Partnership's interest were sold to
Charter Communications, LLC. These financial statements represent the
Partnership just prior to that transaction and do not reflect any adjustments
related thereto.
/s/ PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
February 15, 2000
F-273
<PAGE> 485
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 13, 1999
------------------
<S> <C>
ASSETS
Cash........................................................ $ 453,963
Customer accounts receivable, less allowance for doubtful
accounts of $27,131....................................... 933,646
Accounts receivable, related party.......................... 394,142
Accounts receivable, interpartnership....................... 30,273,104
Other receivables........................................... 780,723
Prepaid expenses and deposits............................... 195,198
Property, plant and equipment, at cost:
Transmission and distribution systems and related
equipment.............................................. 24,629,591
Vehicles, office furniture and equipment.................. 1,131,040
Leasehold improvements.................................... 6,759
Construction in process and spare parts inventory......... 1,519,099
------------
27,286,489
Less accumulated depreciation............................... (1,935,932)
------------
Property, plant and equipment, net..................... 25,350,557
Franchise costs, less accumulated amortization of
$17,527,564............................................... 65,160,673
Total assets...................................... $123,542,006
============
LIABILITIES AND EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 2,074,095
Customer deposits and prepayments......................... 1,209,481
Interpartnership debt..................................... 60,960,000
------------
Total liabilities................................. 64,243,576
Commitments and contingencies (Notes 4 and 7) Divisional
equity.................................................... 59,298,430
------------
Total equity...................................... 59,298,430
------------
Total liabilities and equity...................... $123,542,006
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-274
<PAGE> 486
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1999
TO SEPTEMBER 13, 1999
---------------------
<S> <C>
REVENUE
Service................................................... $ 14,790,346
Installation and other.................................... 2,725,293
------------
Total revenue..................................... 17,515,639
COSTS AND EXPENSES
Operating expense......................................... 2,958,925
Programming expense....................................... 3,957,126
Selling, general and administrative expense............... 4,532,320
Depreciation.............................................. 1,997,656
Amortization.............................................. 17,527,564
Management fees........................................... 700,626
Loss on disposal of assets................................ 685,800
------------
Total costs and expenses.......................... 32,360,017
------------
Operating loss............................................ (14,844,378)
Interest expense.......................................... 760,517
------------
Net loss............................................... $(15,604,895)
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-275
<PAGE> 487
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF EQUITY
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1999
TO SEPTEMBER 13, 1999
-------------------------------
DIVISIONAL
EQUITY TOTAL
------------ ------------
<S> <C> <C>
<CAPTION>
<S> <C> <C>
Equity contribution......................................... $ 74,903,325 $ 74,903,325
Net loss.................................................. (15,604,895) (15,604,895)
------------ ------------
Divisional equity, September 13, 1999....................... $ 59,298,430 $ 59,298,430
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-276
<PAGE> 488
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 1, 1999
TO SEPTEMBER 13, 1999
---------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $(15,604,895)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 19,525,221
Loss on disposal of assets............................. 685,800
Increase in customer accounts receivable............... (478,307)
Increase in accounts receivable, related party......... (394,142)
Increase in accounts receivable, intercompany.......... (30,273,104)
Decrease in other receivables.......................... 910,870
Decrease in prepaid expenses and deposits.............. 197,824
Decrease in accounts payable and accrued liabilities... (282,445)
Increase in customer prepayments and deposits.......... 519,116
------------
Net cash used in operating activities................ (25,194,062)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Initial cash acquisition cost, net of cash acquired....... (74,224,586)
Purchases of property, plant and equipment................ (4,487,237)
Additions to franchise costs.............................. (383,932)
Proceeds from the sale of assets.......................... 102,891
------------
Net cash used in investing activities................ (78,992,864)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions..................................... 74,903,325
Proceeds from interpartnership debt....................... 30,587,226
Payments on interpartnership debt......................... (849,662)
------------
Net cash provided by financing activities............ 104,640,889
------------
Increase in cash............................................ 453,963
Cash, beginning of period................................... --
Cash, end of period......................................... $ 453,963
============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................. $ 760,517
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-277
<PAGE> 489
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
PRINCIPLES OF CONSOLIDATION AND ORGANIZATION
The accompanying consolidated financial statements include the accounts of
R/N South Florida Cable Management Limited Partnership (the "Partnership") and
its substantially wholly owned subsidiary, Rifkin/Narragansett South Florida
CATV Limited Partnership (the "Operating Partnership"). Each partnership is a
Florida Limited Partnership. The Partnership was originally organized in 1988
for the purpose of being the general partner to the Operating Partnership which
is engaged in the installation, ownership, operation and management of cable
television systems in Florida.
ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP AND BASIS OF PRESENTATION
Effective December 31, 1998, Interlink Communications Partners, LLLP
("ICP") acquired all of the Partnership's limited partner interest, and agreed
to purchase all of the Partnership's interest for $74.2 million. This
transaction was accounted for as a purchase; as such, assets and liabilities
were written up to their fair value, resulting in an increase to property, plant
and equipment and franchise costs of $5.0 million $77.1 million, respectively.
Effective July 1, 1999, ICP completed the purchase of the remaining general
partner interest in the Partnership and the Partnership was merged into ICP and
ceased to exist as a separate legal entity. The Partnership's financial
statements subsequent to that date represent a divisional carve-out from ICP.
These financial statements include all the direct costs of operating its
business; however, certain assets, liabilities and costs not specifically
related to the Partnership's activities were allocated and reflected in the
financial position as of September 13, 1999, and the results of its operations
and its cash flows for the period January 1, 1999 to September 13, 1999.
Allocations from ICP include amounts for debt, interest expense and management
expense. Both debt and interest expense were allocated pro rata based on the
Partnership's percentage of subscribers to total ICP subscribers. Management
expense was allocated in accordance with the management agreement (Note 2). In
addition, receivables and payables to ICP are presented in the accompanying
financial statements net as amounts due to/from interpartnership. Management
believes these allocations were made on a reasonable basis. Nonetheless, the
financial information included herein may not necessarily reflect what the
financial position and results of operations of the Partnership would have been
as a stand-alone entity.
ACQUISITION BY CHARTER COMMUNICATIONS HOLDINGS, LLC
On February 12, 1999, ICP signed a letter of intent to sell all of ICP's
partnership interest to Charter Communications Holdings, LLC ("Charter"). On
April 26, 1999, ICP signed a definitive Purchase and Sales Agreement with
Charter for the sale of the individual partner's interest. The sales transaction
closed on September 13, 1999. These financial statements represent the
Partnership just prior to the transaction and do not reflect any related
adjustments.
PROPERTY, PLANT AND EQUIPMENT
Additions to property, plant and equipment are recorded at cost, which in
the case of assets constructed, include amounts for material, labor, overhead
and capitalized interest, if applicable. Upon sale or retirement of an asset,
the related costs and accumulated depreciation are removed from the accounts and
any gain or loss is recognized.
F-278
<PAGE> 490
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense is calculated using the straight-line method of
depreciation over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Transmission and distribution systems and related
equipment................................................. 1-15 years
Vehicles, office furniture and equipment.................... 2-5 years
Leasehold improvements...................................... 5 years
</TABLE>
FRANCHISE COSTS
Franchise costs are amortized using the straight-line method over the
remaining lives of the franchises as of the date they were acquired, ranging
from 2 to 10 years. The carrying value is assessed for recoverability by
management based on an analysis of undiscounted expected future cash flows. The
Partnership's management believes that there has been no impairment thereof as
of September 13, 1999.
INCOME TAXES
No provision for federal or state income taxes is necessary in the
financial statements of the Partnership, because as a partnership, it is not
subject to federal or state income tax as the tax effect of its activities
accrues to the partners.
REVENUE RECOGNITION
Customer fees are recorded as revenue in the period the service is
provided. The cost to acquire the rights to the programming generally is
recorded when the product is initially available to be viewed by the customer.
ADVERTISING AND PROMOTION EXPENSES
Advertising and promotion expenses are charged to income during the year in
which they are incurred and were not significant for the period shown.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. MANAGEMENT AGREEMENT
The Partnership has a management agreement with R & A Management, LLC
("RML"). The management agreement provides that RML shall manage the Operating
Partnership and shall be entitled to annual compensation of 4% of gross
revenues. The result of this transaction included the conveyance of the Rifkin
management agreement (the "Rifkin Agreement") to RML (the "RML Agreement").
Expenses incurred pursuant to this agreement are disclosed in the Consolidated
Statement of Operations.
F-279
<PAGE> 491
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT
The Partnership has an interpartnership debt with ICP. Borrowings,
including both principal and interest, at September 13, 1999 were $60,960,000
and had an effective interest rate of 8.68%.
ICP has a term loan and revolving loan agreement with a bank. The amount of
the term loan is $150,000,000, and requires varying quarterly payments plus
interest commencing September 30, 2001 and continuing through March 31, 2007. On
February 1, 1999, the term loan agreement was amended to increase the loan
amount to $250,000,000. On July 16, 1999, the term loan agreement was amended
again to increase the loan amount to $290,000,000. The interest rate on the term
loan is generally the bank's prime rate plus 0% to 1.50%. The weighted average
effective rate at September 13, 1999 was 8.74%.
The revolving loan agreement provided for borrowing up to $100,000,000 at
the Company's discretion. At September 13, 1999, $91,000,000 had been drawn
against the $100,000,000 commitment. The revolving credit agreement expires on
March 31, 2007. The revolver bears an interest rate at the bank's prime rate
plus 0% to 1.50% or LIBOR plus 1.25% to 2.75%. The specific rate is dependent
upon the leverage ratio of ICP, which is recalculated quarterly. The weighted
average effective interest rate at September 13, 1999 was 8.5%.
The term loan and revolving loan agreement are collateralized by
substantially all assets of ICP and its consolidated entities, including the
Partnership.
4. LEASE COMMITMENTS
The Partnership leases certain real and personal property under
noncancelable operating leases. Future minimum lease payments under these
arrangements at September 13, 1999, were as follows:
<TABLE>
<S> <C>
1999........................................................ $203,667
2000........................................................ 178,432
2001........................................................ 148,399
--------
$530,498
========
</TABLE>
Total rent expense for the period January 1, 1999 to September 13, 1999 was
$187,831, including $68,806 relating to cancelable pole rental agreements.
5. RETIREMENT BENEFITS
The Operating Partnership has a 401(k) plan for its employees that have
been employed by the Operating Partnership for at least one year. Employees of
the Operating Partnership can contribute up to 15% of their salary, on a
before-tax basis, with a maximum 1999 contribution of $10,000 (as set by the
Internal Revenue Service). The Operating Partnership matches participant
contributions up to a maximum of 50% of the first 3% of a participant's salary
contributed. All participant contributions and earnings are fully vested upon
contribution and Operating Partnership contributions and earnings vest 20% per
year of employment with the Operating Partnership, becoming fully vested after
five years. The Operating Partnership's matching contributions for the period
January 1, 1999 to September 13, 1999 were $19,721.
F-280
<PAGE> 492
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership has a number of financial instruments, none of which are
held for trading purposes. The following method and assumptions were used by the
Partnership to estimate the fair values of financial instruments as disclosed
herein:
Cash, customer accounts receivable, other receivables, accounts payable and
accrued liabilities and customer deposits and prepayments: The carrying value
amount approximates fair value because of the short period to maturity.
The interest rate on debt is adjusted at least quarterly; therefore, the
carrying value of debt approximates its fair value.
7. LITIGATION
The Partnership could possibly be named as defendant in various actions and
proceedings arising from the normal course of business. In all such cases, the
Partnership will vigorously defend itself against the litigation and, where
appropriate, will file counterclaims. Although the eventual outcome of potential
lawsuits cannot be predicted, it is management's opinion that any such lawsuit
will not result in liabilities that would have a material affect on the
Partnership's financial position or results of operations.
F-281
<PAGE> 493
REPORT OF INDEPENDENT AUDITORS
The Partners
R/N South Florida Cable Management
Limited Partnership
We have audited the accompanying consolidated balance sheet of R/N South Florida
Cable Management Limited Partnership as of December 31, 1997 and 1998, and the
related consolidated statements of operations, partners' equity (deficit) and
cash flows for the years ended December 31, 1996, 1997 and 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of R/N
South Florida Cable Management Limited Partnership at December 31, 1997 and
1998, and the consolidated results of its operations and its cash flows for the
years ended December 31, 1996, 1997 and 1998 in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 19, 1999
F-282
<PAGE> 494
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
ASSETS (PLEDGED) ----------- -----------
<S> <C> <C>
Cash and cash equivalents.................................. $ 362,619 $ 678,739
Customer accounts receivable, less allowance for doubtful
accounts of $85,867 in 1997 and $84,474 in 1998.......... 569,296 455,339
Other receivables.......................................... 1,180,507 1,691,593
Prepaid expenses and deposits.............................. 416,455 393,022
Property, plant and equipment, at cost:
Transmission and distribution system and related
equipment................................................ 22,836,588 27,981,959
Office furniture and equipment............................. 704,135 755,398
Leasehold improvements..................................... 546,909 549,969
Construction in process and spare parts inventory.......... 718,165 744,806
----------- -----------
24,805,797 30,032,132
Less accumulated depreciation.............................. 9,530,513 11,368,764
----------- -----------
Net property, plant and equipment................ 15,275,284 18,663,368
Other assets, at cost less accumulated amortization (Note
2)....................................................... 6,806,578 5,181,012
----------- -----------
Total assets..................................... $24,610,739 $27,063,073
=========== ===========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable and accrued liabilities................... $ 2,994,797 $ 2,356,540
Interest payable........................................... 287,343 --
Customer prepayments....................................... 699,332 690,365
Long-term debt (Note 3).................................... 29,437,500 --
Interpartnership debt (Note 3)............................. -- 31,222,436
----------- -----------
Total liabilities................................ 33,418,972 34,269,341
Commitments (Notes 4 and 5)
Partners' equity (deficit):
General partner.......................................... (96,602) (81,688)
Limited partner.......................................... (9,582,050) (8,104,718)
Special limited partner.................................. 870,419 980,138
----------- -----------
Total partners' equity (deficit)........................... (8,808,233) (7,206,268)
----------- -----------
Total liabilities and partners' deficit.......... $24,610,739 $27,063,073
=========== ===========
</TABLE>
See accompanying notes.
F-283
<PAGE> 495
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
12/31/96 12/31/97 12/31/98
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Service......................................... $16,615,767 $17,520,883 $18,890,202
Installation and other.......................... 1,732,681 2,425,742 3,158,742
----------- ----------- -----------
18,348,448 19,946,625 22,048,944
COSTS AND EXPENSES:
Operating expense............................... 2,758,704 3,489,285 3,707,802
Programming expense............................. 4,075,555 4,014,850 4,573,296
Selling, general and administrative expense..... 3,979,002 4,087,845 4,537,535
Depreciation.................................... 1,787,003 1,912,905 2,256,765
Amortization.................................... 1,350,195 1,287,588 1,293,674
Management fees................................. 733,938 797,863 881,958
Loss on disposal of assets...................... 373,860 513,177 178,142
----------- ----------- -----------
Total costs and expenses.............. 15,058,257 16,103,513 17,429,172
----------- ----------- -----------
Operating income................................ 3,290,191 3,843,112 4,619,772
Interest expense................................ 2,528,617 2,571,976 2,583,338
----------- ----------- -----------
Net income before extraordinary item............ 761,574 1,271,136 2,036,434
Extraordinary item -- loss on early retirement
of debt (Note 2).............................. -- -- 434,469
----------- ----------- -----------
Net income...................................... $ 761,574 $ 1,271,136 $ 1,601,965
=========== =========== ===========
</TABLE>
See accompanying notes.
F-284
<PAGE> 496
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SPECIAL
GENERAL LIMITED LIMITED
PARTNERS PARTNERS PARTNERS TOTAL
--------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Partners' equity (deficit) at December
31, 1995............................ $(115,526) $(11,456,616) $731,199 $(10,840,943)
Net income for the year ended
December 31, 1996................ 7,090 702,324 52,160 761,574
--------- ------------ -------- ------------
Partners' equity (deficit) at December
31, 1996............................ (108,436) (10,754,292) 783,359 (10,079,369)
Net income for the year ended
December 31, 1997................ 11,834 1,172,242 87,060 1,271,136
--------- ------------ -------- ------------
Partners' equity (deficit) at December
31, 1997............................ (96,602) (9,582,050) 870,419 (8,808,233)
Net income for the year ended
December 31, 1998................ 14,914 1,477,332 109,719 1,601,965
--------- ------------ -------- ------------
Partners' equity (deficit) at December
31, 1998............................ $ (81,688) $ (8,104,718) $980,138 $ (7,206,268)
========= ============ ======== ============
</TABLE>
The partners' capital accounts for financial reporting purposes vary from
the tax capital accounts.
See accompanying notes.
F-285
<PAGE> 497
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
12/31/96 12/31/97 12/31/98
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 761,574 $ 1,271,136 $ 1,601,965
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 3,137,198 3,200,493 3,550,439
Amortization of deferred loan cost.... 68,898 79,108 89,788
Loss on early retirement of debt...... -- -- 434,469
Loss on disposal of assets............ 373,860 513,177 178,142
Decrease (increase) in customer
accounts receivable................. 1,420 (152,229) 113,957
Increase in other receivables......... (377,553) (506,325) (511,086)
Decrease (increase) in prepaid
expenses and deposits............... (114,720) 115,734 23,433
Increase (decrease) in accounts
payable and accrued liabilities..... 122,512 513,839 (638,257)
Increase (decrease) in customer
prepayments......................... 362 208,021 (8,967)
Increase (decrease) in interest
payable............................. 180 16,207 (287,343)
----------- ----------- ------------
Net cash provided by operating
activities.................... 3,973,731 5,259,161 4,546,540
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment............................. (4,000,631) (4,288,776) (5,915,434)
Additions to other assets, net of
refranchises.......................... (10,600) (164,560) (186,790)
Proceeds from the sale of assets......... 16,674 70,865 92,443
----------- ----------- ------------
Net cash used in investing
activities.................... (3,994,557) (4,382,471) (6,009,781)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............. 2,750,000 3,850,000 5,550,000
Proceeds from interpartnership debt...... -- -- 31,222,436
Payments of long-term debt............... (2,604,913) (4,562,500) (34,987,500)
Deferred loan costs...................... -- (132,727) (5,575)
----------- ----------- ------------
Net cash provided by (used in)
financing activities.......... 145,087 (845,227) 1,779,361
----------- ----------- ------------
Net increase in cash and cash
equivalents.............................. 124,261 31,463 316,120
Cash and cash equivalents at beginning of
the year................................. 206,895 331,156 362,619
----------- ----------- ------------
Cash and cash equivalents at end of year... $ 331,156 $ 362,619 $ 678,739
=========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................ $ 2,412,038 $ 2,441,662 $ 2,780,893
=========== =========== ============
</TABLE>
See accompanying notes
F-286
<PAGE> 498
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND ORGANIZATION:
The accompanying consolidated financial statements include the accounts of
R/N South Florida Cable Management Limited Partnership (the "Partnership") and
its substantially wholly-owned subsidiary Rifkin/Narragansett South Florida CATV
Limited Partnership (the "Operating Partnership"). Each partnership is a Florida
Limited Partnership. The Partnership was organized in 1988 for the purpose of
being the general partner to the Operating Partnership which is engaged in the
installation, ownership, operation and management of cable television systems in
Florida.
In 1992, the Partnership adopted an amendment to the Partnership agreement
(the "Amendment") and entered into a Partnership Interest Purchase Agreement
whereby certain Special Limited Partnership interests were issued in the
aggregate amount of $1,250,000. These new Special Limited Partners are
affiliated with the current General and Limited Partners of the Partnership. The
Amendment provides for the methods under which the gains, losses, adjustments
and distributions are allocated to the accounts of the Special Limited Partners.
For financial reporting purposes, partnership profits or losses are
allocated to the limited partners, special limited partners and general partners
in the following ratios: 92.22%, 6.849% and .931%, respectively. Limited
partners and special limited partners are not required to fund any losses in
excess of their capital contributions.
ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP:
InterLink Communications Partners, LLLP ("ICP") agreed to purchase all of
the interests of the Partnerships. ICP acquired all of the limited partner
interests of the Operating Partnership, effective December 31, 1998, and is
currently in the process of obtaining the necessary consents to transfer all of
the Operating Partnership's franchises to ICP. Once obtained, ICP will then
purchase the general partner interest, and the Partnership, by operation of law,
will consolidate into ICP.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment additions are recorded at cost, which in the
case of assets constructed includes amounts for material, labor, overhead and
capitalized interest, if applicable.
For financial reporting purposes, the Operating Partnership uses the
straight-line method of depreciation over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Transmission and distribution systems and related
equipment............................................... 15 years
Office furniture and equipment............................ 3-15 years
Leasehold improvements.................................... 5-8 years
</TABLE>
OTHER ASSETS:
Other assets are carried at cost and are amortized on a straight-line basis
over the following lives:
<TABLE>
<S> <C>
Franchises................... -- the terms of the franchises (3-13
years)
Goodwill..................... -- 40 years
Organization costs........... -- 5 years
Deferred loan costs.......... -- the term of the debt (8 years)
</TABLE>
F-287
<PAGE> 499
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES:
No provision for the payment or refund of income taxes has been provided
since the partners are responsible for reporting their distributive share of
partnerships net income or loss in their personal capacities.
CASH AND CASH EQUIVALENTS:
The Partnerships consider all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION:
Customer fees are recorded as revenue in the period the service is
provided.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying values of cash and cash equivalents, customer accounts
receivable, accounts payable and interpartnership debt approximate fair value.
USE OF ESTIMATES:
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
IMPACT OF YEAR 2000 (UNAUDITED):
The Partnerships recognize that certain of its time-sensitive computer
programs and product distribution equipment may be affected by conversion to the
year 2000. During 1998, management began their evaluation of the information
systems, product distribution facilities, and vendor and supplier readiness. To
date, considerable progress has been made to complete the evaluation process, to
integrate and test compliance installations, and to prepare contingency plans.
In addition, third party suppliers are either fully compliant or are expected to
be compliant by December 31, 1999. Management expects to have all systems
compliant, or have a contingency plan in effect that will result in minimal
impact on the operations.
NEW ACCOUNTING PRONOUNCEMENT:
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-5 "Reporting on the costs of Start-Up
Activities," which requires the Partnerships to expense all start-up costs
related to organizing a new business. This new standard also includes one-time
activities related to opening a new facility, introduction of a new product or
service, or conducting business with a new class of customer or in a new
territory. This standard is effective for the Partnerships' 1999 fiscal year.
The organization costs are fully amortized, resulting in SOP 98-5 having no
material effect on its financial position or the results of operations.
RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION:
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform with the 1998 financial statement presentation. Such
reclassifications had no effect on the net income as previously stated.
F-288
<PAGE> 500
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. OTHER ASSETS
At December 31, 1997 and 1998, other assets consisted of the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Franchises and other....................... $14,348,984 $14,535,774
Goodwill................................... 3,429,845 3,429,845
Deferred loan costs........................ 694,819 --
Organization costs......................... 23,218 23,218
----------- -----------
18,496,866 17,988,837
Less accumulated amortization.............. 11,690,288 12,807,825
----------- -----------
$ 6,806,578 $ 5,181,012
=========== ===========
</TABLE>
On December 30, 1998, the Partnerships' loan with a financial institution
was paid in full (Note 3). The related deferred loan costs and associated
accumulated amortization were written off and an extraordinary loss of $434,469
was recorded.
3. DEBT
The Partnerships had senior term note payable and a revolving credit loan
agreement with a financial institution. The senior term note payable was a
$29,500,000 loan which required varying quarterly payments which commenced on
September 30, 1996. On June 30, 1997, the loan agreement was amended to defer
the June 30, 1997 and September 30, 1997 principal payments and restructured the
required principal payment amounts due through December 31, 2003. The revolving
credit loan provided for borrowing up to $3,000,000 at the discretion of the
Partnerships. On June 30, 1997, the loan agreement was amended to increase the
amount provided for borrowing under the revolving credit loan to $3,750,000. At
December 31, 1997, the term notes and the revolving credit loan had a balance of
$28,387,500 and $1,050,000, respectively, with a total balance of $29,437,500.
At December 30, 1998, the term notes and the revolving credit loan had a balance
of $27,637,500 and $3,300,000, respectively; at that date, the total balance of
$30,937,500 and accrued interest were paid in full.
Also on December 30, 1998, the Partnerships obtained a new interpartnership
loan agreement with ICP (Note 1). Borrowing under the interpartnership loan, as
well as interest and principal payments are due at the discretion of the
management of ICP, resulting in no minimum required annual principal payments.
The balance of the interpartnership loan at December 31, 1998 was $31,222,436.
The effective interest rate at December 31, 1998 was 8.5%.
4. MANAGEMENT AGREEMENT
The Partnerships have entered into a management agreement with Rifkin &
Associates, Inc. (Rifkin). The management agreement provides that Rifkin shall
manage the Operating Partnership and shall be entitled to annual compensation of
4% of gross revenues. Effective September 1, 1998, Rifkin conveyed its CATV
management business to R & A Management, LLC (RML). The result of this
transaction was the conveyance of the Rifkin management agreement (Rifkin
Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin
Agreement and the RML Agreement are disclosed on the Consolidated Statement of
Operations.
F-289
<PAGE> 501
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASE COMMITMENTS
At December 31, 1998, the Operating Partnership had lease commitments under
long-term operating leases as follows:
<TABLE>
<S> <C>
1999........................................................ $195,437
2000........................................................ 189,643
2001........................................................ 116,837
--------
Total............................................. $501,917
========
</TABLE>
Rent expense, including pole rent, was as follows for the periods
indicated:
<TABLE>
<CAPTION>
TOTAL
RENTAL
PERIOD EXPENSE
- - - ------ --------
<S> <C>
Year Ended December 31, 1996............................... $262,231
Year Ended December 31, 1997............................... 279,655
Year Ended December 31, 1998............................... 295,107
</TABLE>
6. RETIREMENT BENEFITS
The Operating Partnership has a 401(k) plan for its employees that have
been employed by the Operating Partnership for at least one year. Employees of
the Operating Partnership can contribute up to 15% of their salary, on a
before-tax basis, with a maximum 1998 contribution of $10,000 (as set by the
Internal Revenue Service). The Operating Partnership matches participant
contributions up to a maximum of 50% of the first 3% of a participant's salary
contributed. All participant contributions and earnings are fully vested upon
contribution and Operating Partnership contributions and earnings vest 20% per
year of employment with the Operating Partnership, becoming fully vested after
five years. The Operating Partnership's matching contributions for the years
ended December 31, 1996, 1997 and 1998 were $15,549, $23,292 and $20,652,
respectively.
F-290
<PAGE> 502
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of InterMedia Partners
and InterMedia Capital Partners IV, L.P.
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of changes in equity and of cash flows
present fairly, in all material respects, the financial position of InterMedia
Cable Systems (comprised of components of InterMedia Partners and InterMedia
Capital Partners IV, L.P.) at September 30, 1999 and December 31, 1998, and the
results of their operations and their cash flows for the nine-months ended
September 30, 1999 and for the years ended December 31, 1998 and 1997 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the management of
InterMedia Partners and InterMedia Capital Partners IV, L.P.; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
January 6, 2000
F-291
<PAGE> 503
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Accounts receivable, net of allowance for doubtful accounts
of $903 and $899, respectively............................ $ 14,971 $ 14,425
Receivables from affiliates................................. 7,966 5,623
Prepaid expenses............................................ 1,100 423
Other current assets........................................ 186 350
-------- --------
Total current assets...................................... 24,223 20,821
Intangible assets, net...................................... 214,182 255,356
Property and equipment, net................................. 228,676 218,465
Deferred income taxes....................................... 15,279 12,598
Investments and other non-current assets.................... 544 2,804
-------- --------
Total assets.............................................. $482,904 $510,044
-------- --------
LIABILITIES AND EQUITY
Accounts payable and accrued liabilities.................... $ 15,504 $ 19,230
Deferred revenue............................................ 11,151 11,104
Payables to affiliates...................................... 2,265 3,158
-------- --------
Total current liabilities................................. 28,920 33,492
Note payable to InterMedia Partners IV, L.P................. 406,975 396,579
Deferred channel launch revenue............................. 3,583 4,045
-------- --------
Total liabilities......................................... 439,478 434,116
-------- --------
Commitments and contingencies
Mandatorily redeemable preferred shares..................... 14,934 14,184
Equity...................................................... 28,492 61,744
-------- --------
Total liabilities and equity.............................. $482,904 $510,044
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-292
<PAGE> 504
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------------
1999 1998 1997
------------- -------- --------
<S> <C> <C> <C>
REVENUES
Basic and cable services............................ $105,275 $125,920 $112,592
Pay services........................................ 20,699 23,975 24,467
Other services...................................... 26,815 26,167 25,519
-------- -------- --------
152,789 176,062 162,578
COSTS AND EXPENSES
Program fees........................................ 35,579 39,386 33,936
Other direct expenses............................... 15,280 16,580 16,500
Selling, general and administrative expenses........ 33,315 30,787 29,181
Management and consulting fees...................... 2,356 3,147 2,870
Depreciation and amortization....................... 79,325 85,982 81,303
-------- -------- --------
165,855 175,882 163,790
-------- -------- --------
Profit/(loss) from operations....................... (13,066) 180 (1,212)
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense.................................... (17,636) (25,449) (28,458)
Interest and other income........................... 187 341 429
Gain on sale of investment.......................... 1,678 -- --
Gain on sale/exchange of cable systems.............. -- 26,218 10,006
Other expense....................................... (4,397) (3,188) (1,431)
-------- -------- --------
(20,168) (2,078) (19,454)
-------- -------- --------
Loss before income tax benefit (expense)............ (33,234) (1,898) (20,666)
Income tax benefit (expense)........................ 2,681 (1,623) 4,026
-------- -------- --------
NET LOSS............................................ $(30,553) $ (3,521) $(16,640)
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-293
<PAGE> 505
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
COMBINED STATEMENT OF CHANGES IN EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at January 1, 1997.................................. $ 69,746
Net loss.................................................... (16,640)
Accretion for mandatorily redeemable preferred shares....... (882)
Net contributions from parent............................... 6,489
--------
Balance at December 31, 1997................................ 58,713
Net loss.................................................... (3,521)
Accretion for mandatorily redeemable preferred shares....... (945)
Net cash contributions from parent.......................... 6,350
In-kind contribution from parent............................ 1,147
--------
Balance at December 31, 1998................................ 61,744
Net loss.................................................... (30,553)
Accretion for mandatorily redeemable preferred shares....... (750)
Net distributions to parent................................. (1,949)
--------
Balance at September 30, 1999............................... $ 28,492
========
</TABLE>
See accompanying notes to combined financial statements.
F-294
<PAGE> 506
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, --------------------
1999 1998 1997
------------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................ $(30,553) $ (3,521) $(16,640)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation and amortization..................... 79,325 85,982 81,303
Loss on disposal of fixed assets.................. 1,497 3,177 504
Gain on sale of investment........................ (1,678) -- --
Gain on sale/exchange of cable systems............ -- (26,218) (10,006)
Changes in assets and liabilities:
Accounts receivable............................ (546) (1,395) (2,846)
Receivables from affiliates.................... (2,343) (3,904) (639)
Prepaid expenses............................... (677) 203 (251)
Other current assets........................... 164 (106) (10)
Deferred income taxes.......................... (2,681) 1,623 (4,311)
Other non-current assets....................... 1,088 (517) (58)
Accounts payable and accrued liabilities....... 134 (2,073) 4,436
Deferred revenue............................... 740 1,208 1,399
Payables to affiliates......................... (893) 373 469
Accrued interest............................... 17,636 25,449 28,458
Deferred channel launch revenue................ (1,155) 2,895 2,817
-------- -------- --------
Cash flows from operating activities.............. 60,058 83,176 84,625
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............... (52,848) (72,673) (87,253)
Sale/exchange of cable systems.................... -- (398) 11,157
Proceeds from sale of investment.................. 2,850 -- --
Intangible assets................................. (871) (372) (506)
-------- -------- --------
Cash flows from investing activities.............. (50,869) (73,443) (76,602)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (distributions) contributions to/from
parent......................................... (1,949) 6,350 6,489
Net repayment of borrowings....................... (7,240) (16,083) (14,512)
-------- -------- --------
Cash flows from financing activities.............. (9,189) (9,733) (8,023)
-------- -------- --------
Net change in cash.................................. -- -- --
-------- -------- --------
Cash at beginning of period......................... -- -- --
-------- -------- --------
Cash at end of period............................... $ -- $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-295
<PAGE> 507
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
THE CHARTER TRANSACTIONS
InterMedia Partners, a California limited partnership ("IP-I"), and
InterMedia Capital Partners IV, L.P., a California limited partnership,
("ICP-IV", together with IP-I, "InterMedia") are affiliated through common
control and management. Robin Media Group, Inc. , a Nevada corporation, ("RMG")
is a majority owned subsidiary of ICP-IV. On April 20, 1999 InterMedia and
certain of its affiliates entered into agreements (the "Agreements") with
affiliates of Charter Communications, Inc. ("Charter") to sell and exchange
certain of their cable television systems ("the Charter Transactions"). The
Charter Transactions closed on October 1, 1999.
Specifically, ICP-IV and its affiliates sold certain of their cable
television systems in Tennessee and Gainesville, Georgia through a combination
of asset sales and the sale of their equity interests in RMG, and exchanged
their systems in and around Greenville and Spartanburg, South Carolina for
Charter systems located in Indiana, Kentucky, Utah and Montana. Immediately upon
Charter's acquisition of RMG, IP-I exchanged its cable television systems in
Athens, Georgia, Asheville and Marion, North Carolina and Cleveland, Tennessee
for RMG's cable television systems located in middle Tennessee.
The cable systems retained by Charter upon consummation of the Charter
Transactions, together with RMG, are referred to as the "InterMedia Cable
Systems," or the "Systems."
PRESENTATION
The accompanying combined financial statements represent the financial
position of the InterMedia Cable Systems as of September 30, 1999 and December
31, 1998 and 1997 and the results of their operations and their cash flows for
the nine months ended September 30, 1999 and the years ended December 31, 1998
and 1997. The Systems being sold or exchanged do not individually or
collectively comprise a separate legal entity. Accordingly, the combined
financial statements have been carved-out from the historical accounting records
of InterMedia.
CARVE-OUT METHODOLOGY
Throughout the periods covered by the combined financial statements, the
individual cable systems were operated and accounted for separately. However,
the Charter Transactions exclude certain systems (the "Excluded Systems") which
were operated as part of the Marion, North Carolina and western Tennessee
systems throughout the periods presented in the combined financial statements.
For purposes of carving out and excluding the results of operations and
financial position of the Excluded Systems from the combined financial
statements, management has estimated the revenues, expenses, assets and
liabilities associated with each Excluded System based on the ratio of each
Excluded System's basic subscribers to the total basic subscribers served by the
Marion, North Carolina and western Tennessee systems, respectively. Management
believes the basis used for these allocations is reasonable. The Systems'
results of operations are not necessarily indicative of future operating results
or the results that would have occurred if the Systems were a separate legal
entity.
Management and consulting fees represent an allocation of management fees
charged to IP-I and ICP-IV by InterMedia Capital Management, a California
limited partnership ("ICM") and InterMedia Management, Inc. ("IMI"),
respectively. ICM is a limited partner of IP-I. IMI is the managing member of
each of the general partners of IP-I and ICP-IV. These fees are charged at a
fixed amount per annum and have been allocated to the Systems based upon the
allocated
F-296
<PAGE> 508
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
contributed capital of the individual systems as compared to the total
contributed capital of InterMedia's subsidiaries.
As more fully described in Note 9 -- "Related Party Transactions," certain
administrative services are also provided by IMI and are charged to all
affiliates based on relative basic subscriber percentages.
CASH AND INTERCOMPANY ACCOUNTS
Under InterMedia's centralized cash management system, cash requirements of
its individual operating units were generally provided directly by InterMedia
and the cash generated or used by the Systems was transferred to/from
InterMedia, as appropriate, through intercompany accounts. The intercompany
account balances between InterMedia and the individual operating units, except
RMG's intercompany note payable to InterMedia Partners IV, L.P. ("IP-IV"), as
described in Note 7 -- "Note Payable to InterMedia Partners IV, L.P.," are not
intended to be settled. Accordingly, the balances, other than RMG's note payable
to IP-IV, are included in equity and all net cash flows from operations,
investing activities and financing activities have been included in the Systems'
net (distributions) contributions to/from parent in the combined statements of
cash flows.
IP-I and ICP-IV or its subsidiaries maintain all external debt to fund and
manage InterMedia's operations on a centralized basis. The combined financial
statements present only the debt and related interest expense of RMG, which was
assumed and repaid by Charter pursuant to the Charter Transactions. See Note
7 -- "Note Payable to InterMedia Partners IV, L.P." Debt, unamortized debt issue
costs and interest expense related to the financing of the cable systems not
owned by RMG have not been allocated to the InterMedia Cable Systems. As such,
the level of debt, unamortized debt issue costs and related interest expense
presented in the combined financial statements are not representative of the
debt that would be required or interest expense incurred if InterMedia Cable
Systems were a separate legal entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Cable television service revenue is recognized in the period in which
services are provided to customers. Deferred revenue generally represents
revenue billed in advance and deferred until cable service is provided.
Installation fees are recognized immediately into revenue to the extent of
direct selling costs incurred. Any fees in excess of such costs are deferred and
amortized into income over the period that customers are expected to remain
connected to the cable television system.
PROPERTY AND EQUIPMENT
Additions to property and equipment, including new customer installations,
are recorded at cost. Self-constructed fixed assets include materials, labor and
overhead. Costs of disconnecting and reconnecting cable service are expensed.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and improvements are capitalized. Capitalized
fixed assets are written down to recoverable values whenever recoverability
through operations or sale of the systems becomes doubtful. Gains and losses on
disposal of property and equipment are included in the Systems' statements of
operations when the assets are sold or retired from service.
F-297
<PAGE> 509
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Depreciation is computed using the double-declining balance method over the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Cable television plant...................................... 5 -- 10
Buildings and improvements.................................. 10
Furniture and fixtures...................................... 3 -- 7
Equipment and other......................................... 3 -- 10
</TABLE>
INTANGIBLE ASSETS
The Systems have franchise rights to operate cable television systems in
various towns and political subdivisions. Franchise rights are being amortized
over the lesser of the remaining franchise lives or the base ten and twelve-year
terms of IP-I and ICP-IV, respectively. The remaining lives of the franchises
range from one to seventeen years.
Goodwill represents the excess of acquisition costs over the fair value of
net tangible and franchise assets acquired and liabilities assumed and is being
amortized on a straight-line basis over the base ten or twelve-year term of IP-I
and ICP-IV, respectively.
Capitalized intangibles are written down to recoverable values whenever
recoverability through operations or sale of the systems becomes doubtful. Each
year, the Systems evaluate the recoverability of the carrying value of their
intangible assets by assessing whether the projected cash flows, including
projected cash flows from sale of the systems, is sufficient to recover the
unamortized costs of these assets.
INCOME TAXES
Income taxes reported in InterMedia Cable Systems' combined financial
statements represent the tax effects of RMG's results of operations. RMG as a
corporation is the only entity within InterMedia Cable Systems which reports a
provision/benefit for income taxes. No provision or benefit for income taxes is
reported by any of the other cable systems within the InterMedia Cable Systems
structure because these systems are currently owned by various partnerships,
and, as such, the tax effects of these cable systems' results of operations
accrue to the partners.
RMG accounts for income taxes using the asset and liability approach which
requires the recognition of deferred tax assets and liabilities for the tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
F-298
<PAGE> 510
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables, payables, deferred revenue and accrued
liabilities approximates fair value due to their short maturity.
3. SALE AND EXCHANGE OF CABLE PROPERTIES
SALE
On December 5, 1997, RMG sold its cable television assets serving
approximately 7,400 (unaudited) basic subscribers in and around Royston and
Toccoa, Georgia. The sale resulted in a gain, calculated as follows:
<TABLE>
<S> <C>
Proceeds from sale.......................................... $ 11,212
Net book value of assets sold............................... (1,206)
--------
Gain on sale................................................ $ 10,006
========
</TABLE>
EXCHANGE
On December 31, 1998, certain of the Systems' cable television assets
located in and around western and eastern Tennessee ("Exchanged Assets"),
serving approximately 10,600 (unaudited) basic subscribers, plus cash of $398
were exchanged for other cable television assets located in and around western
and eastern Tennessee, serving approximately 10,000 (unaudited) basic
subscribers.
The cable television assets received have been recorded at fair market
value, allocated as follows:
<TABLE>
<S> <C>
Property and equipment...................................... $ 5,141
Franchise rights............................................ 24,004
--------
Total....................................................... $ 29,145
========
</TABLE>
The exchange resulted in a gain of $26,218 calculated as the difference
between the fair value of the assets received and the net book value of the
Exchanged Assets less cash paid of $398.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Franchise rights...................................... $ 332,800 $ 332,157
Goodwill.............................................. 58,505 58,505
Other................................................. 573 345
--------- ---------
391,878 391,007
Accumulated amortization.............................. (177,696) (135,651)
--------- ---------
$ 214,182 $ 255,356
========= =========
</TABLE>
F-299
<PAGE> 511
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Land.................................................. $ 1,080 $ 1,068
Cable television plant................................ 266,848 231,937
Building and improvements............................. 5,546 5,063
Furniture and fixtures................................ 3,509 3,170
Equipment and other................................... 29,953 25,396
Construction-in-progress.............................. 22,999 18,065
--------- ---------
329,935 284,699
Accumulated depreciation.............................. (101,259) (66,234)
--------- ---------
$ 228,676 $ 218,465
========= =========
</TABLE>
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Accounts payable...................................... $ 4,793 $ 1,780
Accrued program costs................................. 1,504 1,897
Accrued franchise fees................................ 2,659 4,676
Accrued copyright fees................................ 145 406
Accrued capital expenditures.......................... 1,355 5,215
Accrued payroll costs................................. 2,746 1,784
Accrued property and other taxes...................... 1,524 862
Other accrued liabilities............................. 778 2,610
-------- --------
$ 15,504 $ 19,230
======== ========
</TABLE>
7. NOTE PAYABLE TO INTERMEDIA PARTNERS IV, L.P.
RMG's note payable to IP-IV consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Intercompany revolving credit facility, $1,200,000
commitment as of September 30, 1999, interest
currently at 6.60% payable on maturity, matures
December 31, 2006................................... $406,975 $396,579
======== ========
</TABLE>
RMG's debt is outstanding under an intercompany revolving credit facility
executed with IP-IV. The revolving credit facility currently provides for
$1,200,000 of available credit.
RMG's intercompany revolving credit facility requires repayment of the
outstanding principal and accrued interest on the earlier of (i) December 31,
2006, or (ii) acceleration of any of IP-IV's obligations to repay under its bank
debt outstanding under its revolving credit facility ("IP-IV
F-300
<PAGE> 512
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Revolving Credit Facility") and term loan agreement ("IP-IV Term Loan", together
with the IP-IV Revolving Credit Facility, the "IP-IV Bank Facility") dated July
30, 1996.
On October 1, 1999, Charter assumed and repaid RMG's intercompany revolving
credit facility pursuant to the Charter Transactions.
Interest rates under RMG's intercompany revolving credit facility are
calculated monthly and are referenced to those made available under the IP-IV
Bank Facility. Interest rates ranged from 6.21% to 6.96% during the nine months
ended September 30, 1999.
Advances under the IP-IV Bank Facility are available under interest rate
options related to the base rate of the administrative agent for the IP-IV Bank
Facility ("ABR") or LIBOR. Interest rates on borrowings under the IP-IV Term
Loan vary from LIBOR plus 1.75% to LIBOR plus 2.00% or ABR plus 0.50% to ABR
plus 0.75% based on IP-IV's ratio of debt outstanding to annualized quarterly
operating cash flow ("Senior Debt Ratio"). Interest rates on borrowings under
the IP-IV Revolving Credit Facility also vary from LIBOR plus 0.625% to LIBOR
plus 1.50% or ABR to ABR plus 0.25% based on IP-IV's Senior Debt Ratio. The
IP-IV Bank Facility requires quarterly payment of fees on the unused portion of
the IP-IV Revolving Credit Facility of 0.375% per annum when the Senior Debt
Ratio is greater than 4.0:1.0 and at 0.25% when the Senior Debt Ratio is less
than or equal to 4.0:1.0.
The terms and conditions of RMG's intercompany debt agreement are not
necessarily indicative of the terms and conditions which would be available if
the Systems were a separate legal entity.
8. MANDATORILY REDEEMABLE PREFERRED SHARES
RMG has Redeemable Preferred Stock outstanding at September 30, 1999 and
December 31, 1998, which has an annual dividend of 10.0% and participates in any
dividends paid on the common stock at 10.0% of the dividend per share paid on
the common stock. The Redeemable Preferred Stock bears a liquidation preference
of $12,000 plus any accrued but unpaid dividends at the time of liquidation and
is mandatorily redeemable on September 30, 2006 at the liquidation preference
amount. Pursuant to the terms of the Agreements, upon consummation of the
Charter Transactions, Charter redeemed RMG's Redeemable Preferred Stock at the
liquidation preference amount.
9. RELATED PARTY TRANSACTIONS
ICM and IMI provide certain management services to IP-I and ICP-IV,
respectively, for per annum fixed fees, of which 20% per annum is deferred and
payable in each following year in order to support InterMedia's debt. Management
fees charged to InterMedia for the nine months ended September 30, 1999 and the
years ended December 31, 1998 and 1997 amounted to $4,059, $5,410 and $6,395,
respectively, of which $2,356, $3,147 and $2,870, respectively, has been charged
to the Systems.
IMI has entered into agreements with both IP-I and ICP-IV to provide
accounting and administrative services at cost. Under the terms of the
agreements, the expenses associated with rendering these services are charged to
the Systems and other affiliates based upon relative basic subscriber
percentages. Management believes this method to be reflective of the actual
cost. IMI also pays on behalf of the Systems and other affiliates "pass through
costs" that are specifically identifiable to the Systems and other affiliates.
These include, but are not limited to programming fees and copyright fees.
During the nine months ended September 30, 1999 and
F-301
<PAGE> 513
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
the years ended December 31, 1998 and 1997, IMI administrative fees charged to
the Systems totaled $3,093, $3,657 and $4,153, respectively. Receivables from
affiliates at September 30, 1999 and December 31, 1998 include $5,873 and $52,
respectively, of advances to IMI, net of administrative fees charged by IMI and
operating expenses paid by IMI on behalf of the Systems.
IP-I is majority-owned, and ICP-IV is owned in part, by AT&T Broadband &
Internet Services ("AT&TBIS"), formerly Tele-Communications, Inc. As affiliates
of AT&TBIS, IP-I and ICP-IV are able to purchase programming services from a
subsidiary of AT&TBIS. Management believes that the overall programming rates
made available through this relationship are lower than the Systems could obtain
separately. Such volume rates may not continue to be available in the future
should AT&TBIS's ownership interest in InterMedia significantly decrease.
Program fees charged by the AT&TBIS subsidiary to the Systems for the nine
months ended September 30, 1999 and the years ended December 31, 1998 and 1997
amounted to $26,352, $30,884 and $26,815, respectively. Payables to affiliates
include programming fees payable to the AT&TBIS subsidiary of $2,918 at December
31, 1998. There were no programming fees payable to the AT&TBIS subsidiary at
September 30, 1999.
On January 1, 1998 an affiliate of AT&TBIS entered into agreements with
InterMedia to manage the Systems' advertising business and related services for
an annual fixed fees per advertising sales subscriber as defined by the
agreements. In addition to the annual fixed fee, AT&TBIS is entitled to varying
percentage shares of the incremental growth in annual cash flows from
advertising sales above specified targets. Management fees charged by the
AT&TBIS subsidiary for the nine months ended September 30, 1999 and the year
ended December 31, 1998 amounted to $227 and $292, respectively. Receivables
from affiliates at September 30, 1999 and December 31, 1998 include $2,034 and
$3,437, respectively, of receivable from AT&TBIS for advertising sales.
As part of its normal course of business the Systems are involved in
transactions with affiliates of InterMedia which own and operate cable
television systems. Such transactions include purchases and sales, at cost, of
inventories used in construction of cable plant. Receivables from affiliates at
September 30, 1999 and December 31, 1998 include $59 and $2,134, respectively,
of receivables from affiliated systems. Payables to affiliates at September 30,
1999 and December 31, 1998 include $2,265 and $208, respectively, of payables to
affiliated systems.
10. CABLE TELEVISION REGULATION
Cable television legislation and regulatory proposals under consideration
from time to time by Congress and various federal agencies have in the past, and
may in the future, materially affect the Systems and the cable television
industry.
The cable industry is currently regulated at the federal and local levels
under the Cable Act of 1984, the Cable Act of 1992 ("the 1992 Act"), the
Telecommunications Act of 1996 (the "1996 Act") and regulations issued by the
Federal Communications Commission ("FCC") in response to the 1992 Act. FCC
regulations govern the determination of rates charged for basic, expanded basic
and certain ancillary services, and cover a number of other areas including
customer services and technical performance standards, the required transmission
of certain local broadcast stations and the requirement to negotiate
retransmission consent from major network and certain local television stations.
Among other provisions, the 1996 Act eliminated rate regulation on the expanded
basic tier effective March 31, 1999.
F-302
<PAGE> 514
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Current regulations issued in conjunction with the 1992 Act empower the FCC
and/or local franchise authorities to order reductions of existing rates which
exceed the maximum permitted levels and to require refunds measured from the
date a complaint is filed in some circumstances or retroactively for up to one
year in other circumstances. Management believes it has made a fair
interpretation of the 1992 Act and related FCC regulations in determining
regulated cable television rates and other fees based on the information
currently available. However, complaints have been filed with the FCC on rates
for certain franchises and certain local franchise authorities have challenged
existing and prior rates. Further complaints and challenges could be
forthcoming, some of which could apply to revenue recorded in 1999 and prior
years. Management believes that the effect, if any, of these complaints and
challenges will not be material to the Systems' financial position or results of
operations.
Many aspects of regulation at the federal and local levels are currently
the subject of judicial review and administrative proceedings. In addition, the
FCC is required to conduct rulemaking proceedings to implement various
provisions of the 1996 Act. It is not possible at this time to predict the
ultimate outcome of these reviews or proceedings or their effect on the Systems.
11. COMMITMENTS AND CONTINGENCIES
The Systems are committed to provide cable television services under
franchise agreements with remaining terms of up to seventeen years. Franchise
fees of up to 5% of gross revenues are payable under these agreements.
Current FCC regulations require that cable television operators obtain
permission to retransmit major network and certain local television station
signals. The Systems have entered into long-term retransmission agreements with
all applicable stations in exchange for in-kind and/or other consideration.
InterMedia has been named in purported and certified class actions in
various jurisdictions concerning late fee charges and practices. Certain cable
systems owned by InterMedia charge late fees to customers who do not pay their
cable bills on time. These late fee cases challenge the amount of the late fees
and the practices under which they are imposed. The plaintiffs raise claims
under state consumer protection statutes, other state statutes and common law.
The plaintiffs generally allege that the late fees charged by InterMedia's cable
systems, including the Systems in the States of Tennessee, South Carolina and
Georgia are not reasonably related to the costs incurred by the cable systems as
a result of the late payment. The plaintiffs seek to require cable systems to
reduce their late fees on a prospective basis and to provide compensation for
alleged excessive late fee charges for past periods. These cases are either at
the early stages of the litigation process or are subject to a case management
order that sets forth a process leading to mediation. Based upon the facts
available management believes that, although no assurances can be given as to
the outcome of these actions, the ultimate disposition of these matters should
not have a material adverse effect upon the financial condition of the Systems.
In the Spring of 1999 the Tennessee Department of Revenue ("TDOR") proposed
legislation that was passed by the Tennessee State Legislature which replaced
the former Amusement Tax with a new sales tax on all cable service revenues in
excess of fifteen dollars per month effective September 1, 1999. The new tax is
computed at a rate approximately equal to the former effective tax rate.
F-303
<PAGE> 515
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Prior to the passage of this legislation, the TDOR suggested that under its
interpretation of the former legislation it could assess, for prior periods up
to three years, additional taxes on expanded basic service revenue. Management
believes that based on subsequent correspondence with the TDOR that the TDOR
will not pursue additional taxes under the former amusement tax legislation.
The Systems are subject to other claims and litigation in the ordinary
course of business. In the opinion of management, the ultimate outcome of any
existing litigation or other claims will not have a material effect on the
Systems' financial position or results of operations.
The Systems have entered into pole rental agreements and lease certain of
its facilities and equipment under non-cancelable operating leases. Minimum
rental commitments at September 30, 1999 for the next five years and thereafter
under non-cancelable operating leases related to the Systems are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 169
2000........................................................ 623
2001........................................................ 580
2002........................................................ 366
2003........................................................ 252
2004 and thereafter......................................... 1,080
------
$3,070
======
</TABLE>
Rent expense, including pole rental agreements, for the nine months ended
September 30, 1999 and for the years ended December 31, 1998 and 1997 was
$2,243, $2,817 and $2,828, respectively.
12. INCOME TAXES
Income tax benefit (expense) consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ------------------
1999 1998 1997
------------- ------- -------
<S> <C> <C> <C>
Current federal................................. $ -- $ -- $ (285)
Deferred federal................................ 2,415 (1,454) 3,813
Deferred state.................................. 266 (169) 498
-------- ------- -------
$ 2,681 $(1,623) $ 4,026
======== ======= =======
</TABLE>
F-304
<PAGE> 516
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
Deferred income taxes relate to temporary differences as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Property and equipment................................ $ (7,425) $ (7,258)
Intangible assets..................................... (10,514) (12,930)
--------- ---------
(17,939) (20,188)
Loss carryforward -- federal.......................... 31,924 31,547
Loss carryforward -- state............................ 341 297
Other................................................. 953 942
--------- ---------
$ 15,279 $ 12,598
========= =========
</TABLE>
At December 31, 1998, RMG had net operating loss carryforwards for federal
income tax purposes aggregating $92,785, which expire through 2018. RMG is a
loss corporation as defined in Section 382 of the Internal Revenue Code.
Therefore, if certain substantial changes in RMG's ownership should occur, there
could be a significant annual limitation on the amount of loss carryforwards
which can be utilized.
InterMedia's management has not established a valuation allowance to reduce
the deferred tax assets related to RMG's unexpired net operating loss
carryforwards. Due to an excess of appreciated asset value over the tax basis of
RMG's net assets, management believes it is more likely than not that the
deferred tax assets related to unexpired net operating losses will be realized.
A reconciliation of the tax benefit (expense) computed at the statutory
federal rate and the benefit (expense) reported in the accompanying combined
statements of operations is as follows:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30, ----------------------
1999 1998 1997
------------- --------- ---------
<S> <C> <C> <C>
Tax benefit at federal statutory rate...... $ 4,476 $ 626 $ 4,454
State taxes, net of federal benefit........ 522 73 498
Goodwill amortization...................... (1,675) (2,309) (2,056)
Realization of acquired tax benefit........ -- -- 346
Other...................................... (642) (13) 784
--------- --------- ---------
$ 2,681 $ (1,623) $ 4,026
========= ========= =========
</TABLE>
13. CHANNEL LAUNCH REVENUE
During 1997 and 1998, the Systems were credited with amounts representing
their share of payments received or to be received by InterMedia from certain
programmers to launch and promote their new channels. Of the total amount
credited, the Systems recognized advertising revenue of $434, $586 and $1,182
during the nine months ended September 30, 1999 and the years ended December 31,
1998 and 1997, respectively, for advertisements provided by the Systems to
promote the new channels. The remaining amounts credited to the Systems are
being amortized over the respective terms of the program agreements which range
between five to ten years. For the nine months ended September 30, 1999 and the
years ended December 31,
F-305
<PAGE> 517
INTERMEDIA CABLE SYSTEMS
(COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS
IV, L.P.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1998 and 1997, the Systems amortized and recorded as other service revenues
$721, $956 and $894, respectively. Also, during 1998 the Systems recorded a
receivable from a programmer, of which $853 and $1,791 remained outstanding at
September 30, 1999 and December 31, 1998, respectively, for the launch and
promotion of its new channel.
14. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
In connection with RMG's sale of its cable television assets located in
Royston and Toccoa, Georgia in December 1997, as described in Note 3 -- "Sale
and Exchange of Cable Properties," net cash proceeds received were as follows:
<TABLE>
<S> <C>
Proceeds from sale.......................................... $ 11,212
Receivable from buyer....................................... (55)
--------
Net proceeds received from buyer.......................... $ 11,157
========
</TABLE>
In connection with the exchange of certain cable assets in and around
western and eastern Tennessee on December 31, 1998, as described in Note 3, the
Systems paid cash of $398.
In December 1998, IP-IV contributed its 4.99% partner interest in a limited
partnership to RMG. The book value of the investment at the time of the
contribution was $1,147.
Total accretion on RMG's Redeemable Preferred Stock for the nine months
ended September 30, 1999 and for the years ended December 31, 1998 and 1997
amounted to $750, $945 and $882, respectively.
15. EMPLOYEE BENEFIT PLANS
The Systems participate in the InterMedia Partners Tax Deferred Savings
Plan which covers all full-time employees who have completed at least six months
of employment. The plan provides for a base employee contribution of 1% and a
maximum of 15% of compensation. The Systems' matching contributions under the
plan are at the rate of 50% of the employee's contribution, up to a maximum of
5% of compensation.
F-306
<PAGE> 518
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying statements of operations and changes in
net assets and cash flows of Sonic Communications Cable Television Systems for
the period from April 1, 1998, through May 20, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Sonic
Communications Cable Television Systems for the period from April 1, 1998,
through May 20, 1998, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
F-307
<PAGE> 519
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1,
1998, THROUGH
MAY 20,
1998
-------------
<S> <C>
REVENUES.................................................... $ 6,343,226
-----------
OPERATING EXPENSES:
Operating costs........................................... 1,768,393
General and administrative................................ 1,731,471
Depreciation and amortization............................. 1,112,057
-----------
4,611,921
-----------
Income from operations................................. 1,731,305
INTEREST EXPENSE............................................ 289,687
-----------
Income before provision for income taxes............... 1,441,618
PROVISION IN LIEU OF INCOME TAXES........................... 602,090
-----------
Net income............................................. 839,528
NET ASSETS, April 1, 1998................................... 55,089,511
-----------
NET ASSETS, May 20, 1998.................................... $55,929,039
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-308
<PAGE> 520
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1,
1998, THROUGH
MAY 20,
1998
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 839,528
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 1,112,057
Changes in assets and liabilities --
Accounts receivable, net............................. 49,980
Prepaid expenses and other........................... 171,474
Accounts payable and accrued expenses................ (1,479,682)
-----------
Net cash provided by operating activities......... 693,357
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (470,530)
Payments of franchise costs............................... (166,183)
-----------
Net cash used in investing activities............. (636,713)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................ (41,144)
-----------
Net cash used in financing activities............. (41,144)
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 15,500
-----------
CASH AND CASH EQUIVALENTS, beginning of period.............. 532,238
-----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 547,738
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-309
<PAGE> 521
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Sonic Communications Cable Television Systems (the Company) operates cable
television systems in California and Utah.
Effective May 21, 1998, the Company's net assets were acquired by Charter
Communications Holdings, LLC.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
The Company depreciates its cable distribution systems using the
straight-line method over estimated useful lives of 5 to 15 years for systems
acquired on or after April 1, 1981. Systems acquired before April 1, 1981, are
depreciated using the declining balance method over estimated useful lives of 8
to 20 years.
Vehicles, machinery, office, and data processing equipment and buildings
are depreciated using the straight-line or declining balance method over
estimated useful lives of 3 to 25 years. Capital leases and leasehold
improvements are amortized using the straight-line or declining balance method
over the shorter of the lease term or the estimated useful life of the asset.
INTANGIBLES
The excess of amounts paid over the fair values of tangible and
identifiable intangible assets acquired in business combinations are amortized
using the straight-line method over the life of the franchise. Identifiable
intangible assets such as franchise rights, noncompete agreements and subscriber
lists are amortized using the straight-line method over their useful lives,
generally 3 to 15 years.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of May 20, 1998, no installation revenue has been
deferred, as direct selling costs exceeded installation revenue.
INTEREST EXPENSE
Interest expense relates to a note payable to a stockholder of the Company,
which accrues interest at 7.8% per annum.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported
F-310
<PAGE> 522
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
2. COMMITMENTS AND CONTINGENCIES:
FRANCHISES
The Company has committed to provide cable television services under
franchise agreements with various governmental bodies for remaining terms up to
13 years. Franchise fees of up to 5% of gross revenues are payable under these
agreements.
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense for the period from
April 1, 1998, through May 20, 1998, were $59,199.
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
period from April 1, 1998, through May 20, 1998, was $64,159.
3. INCOME TAXES:
The results of the Company are included in the consolidated federal income
tax return of its parent, Sonic Enterprises, Inc., which is responsible for tax
payments applicable to the Company. The financial statements reflect a provision
in lieu of income taxes as if the Company was filing on a separate company
basis. Accordingly, the Company has included the provision in lieu of income
taxes in the accompanying statement of operations.
The provision in lieu of income taxes approximates the amount of tax
computed using U.S. statutory rates, after reflecting state income tax expense
of $132,510 for the period from April 1, 1998, through May 20, 1998.
4. REGULATION IN THE CABLE TELEVISION INDUSTRY:
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject to
judicial proceeding and administrative or legislative proposals. Legislation and
regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
F-311
<PAGE> 523
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. For the period from
April 1, 1998, through May 20, 1998, the amount refunded by the Company has been
insignificant. The Company may be required to refund additional amounts in the
future.
The Company believes that it has complied in all material respects with the
ownership of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company are unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Systems.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
F-312
<PAGE> 524
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Long Beach Acquisition Corp.:
We have audited the accompanying statements of operations, stockholder's
equity and cash flows of Long Beach Acquisition Corp. (a Delaware corporation)
for the period from April 1, 1997, through May 23, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Long Beach
Acquisition Corp. for the period from April 1, 1997, through May 23, 1997, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
July 31, 1998
F-313
<PAGE> 525
LONG BEACH ACQUISITION CORP.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997
<TABLE>
<S> <C>
SERVICE REVENUES............................................ $ 5,313,282
-----------
EXPENSES:
Operating costs........................................... 1,743,493
General and administrative................................ 1,064,841
Depreciation and amortization............................. 3,576,166
Management fees -- related parties........................ 230,271
-----------
6,614,771
-----------
Loss from operations................................... (1,301,489)
INTEREST EXPENSE............................................ 753,491
-----------
Net loss............................................... $(2,054,980)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-314
<PAGE> 526
LONG BEACH ACQUISITION CORP.
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997
<TABLE>
<CAPTION>
CLASS A, SENIOR
VOTING REDEEMABLE ADDITIONAL TOTAL
COMMON PREFERRED PAID-IN ACCUMULATED STOCKHOLDER'S
STOCK STOCK CAPITAL DEFICIT EQUITY
-------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE,
April 1, 1997........... $100 $11,000,000 $33,258,723 $(51,789,655) $(7,530,832)
Net loss................ -- -- -- (2,054,980) (2,054,980)
---- ----------- ----------- ------------ -----------
BALANCE,
May 23, 1997............ $100 $11,000,000 $33,258,723 $(53,844,635) $(9,585,812)
==== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-315
<PAGE> 527
LONG BEACH ACQUISITION CORP.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,054,980)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization.......................... 3,576,166
Changes in assets and liabilities, net of effects from
acquisition-
Accounts receivable, net............................. (830,725)
Prepaid expenses and other........................... (19,583)
Accounts payable and accrued expenses................ (528,534)
Other current liabilities............................ 203,282
-----------
Net cash provided by operating activities......... 345,626
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (596,603)
-----------
Net cash used in investing activities............. (596,603)
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (250,977)
CASH AND CASH EQUIVALENTS, beginning of period.............. 3,544,462
-----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 3,293,485
===========
CASH PAID FOR INTEREST...................................... $ 1,316,462
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-316
<PAGE> 528
LONG BEACH ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS
MAY 23, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Long Beach Acquisition Corp. (LBAC or the "Company") was a wholly owned
corporation of KC Cable Associates, L.P., a partnership formed through a joint
venture agreement between Kohlberg, Kravis, Roberts & Co. (KKR) and Cablevision
Industries Corporation (CVI). The Company was formed to acquire cable television
systems serving Long Beach, California, and surrounding areas.
On May 23, 1997, the Company executed a stock purchase agreement with
Charter Communications Long Beach, Inc. (CC-LB) whereby CC-LB purchased all of
the outstanding stock of the Company for an aggregate purchase price, net of
cash acquired, of $150.9 million. Concurrent with this stock purchase, CC-LB was
acquired by Charter Communications, Inc. (Charter) and Kelso Investment
Associates V, L.P., an investment fund (Kelso).
As of May 23, 1997, LBAC provided cable television service to subscribers
in southern California.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installation. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred, and
equipment replacement costs and betterments are capitalized.
Depreciation is provided on a straight-line basis over the estimated useful
life of the related asset as follows:
<TABLE>
<S> <C>
Leasehold improvements.................................. Life of respective lease
Cable systems and equipment............................. 5-10 years
Subscriber devices...................................... 5 years
Vehicles................................................ 5 years
Furniture, fixtures and office equipment................ 5-10 years
</TABLE>
FRANCHISES
Franchises include the assigned fair value of the franchise from purchased
cable television systems. These franchises are amortized on a straight-line
basis over six years, the remaining life of the franchise at acquisition.
INTANGIBLE ASSETS
Intangible assets include goodwill, which is amortized over fifteen years;
subscriber lists, which are amortized over seven years; a covenant not to
compete which is amortized over five
F-317
<PAGE> 529
LONG BEACH ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
years; organization costs which are amortized over five years and debt issuance
costs which are amortized over ten years, the life of the loan.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
average estimated period that customers are expected to remain connected to the
cable television system. As of May 23, 1997, no installation revenue has been
deferred, as direct selling costs have exceeded installation service revenues.
INCOME TAXES
LBAC's income taxes are recorded in accordance with SFAS No. 109,
"Accounting for Income Taxes."
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. STOCKHOLDER'S EQUITY:
For the period from April 1, 1997, through May 23, 1997, stockholder's
equity consisted of the following:
<TABLE>
<S> <C>
Stockholder's (deficit) equity:
Common stock -- Class A, voting $1 par value, 100 shares
authorized, issued and outstanding..................... $ 100
Common stock -- Class B, nonvoting, $1 par value, 1,000
shares authorized, no shares issued.................... --
Senior redeemable preferred stock, no par value, 110,000
shares authorized, issued and outstanding, stated at
redemption value....................................... 11,000,000
Additional paid-in capital................................ 33,258,723
Accumulated deficit....................................... (53,844,635)
------------
Total stockholder's (deficit) equity................... $ (9,585,812)
============
</TABLE>
F-318
<PAGE> 530
LONG BEACH ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INTEREST EXPENSE:
The Company has the option of paying interest at either the Base Rate of
the Eurodollar rate, as defined, plus a margin which is based on the attainment
of certain financial ratios. The weighted average interest rate for the period
from April 1, 1997, through May 23, 1997, was 7.3%.
4. REGULATION IN THE CABLE TELEVISION INDUSTRY:
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act") and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject to
judicial proceeding and administrative or legislative proposals. Legislation and
regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of May 23, 1997,
the amount refunded by the Company has been insignificant. The Company may be
required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
ownership of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company are unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
F-319
<PAGE> 531
LONG BEACH ACQUISITION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
5. RELATED-PARTY TRANSACTIONS:
The Company has entered into a management agreement (the "Management
Agreement") with CVI under which CVI manages the operations of the Company for
an annual management fee equal to 4% of gross operating revenues, as defined.
Management fees under this agreement amounted to $210,100 for the period from
April 1, 1997, through May 23, 1997. In addition, the Company has agreed to pay
a monitoring fee of two dollars per basic subscriber, as defined, per year for
services provided by KKR. Monitoring fees amounted to $20,171 for the period
from April 1, 1997, through May 23, 1997.
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Rent expense incurred under these leases for the period from
April 1, 1997, through May 23, 1997, was $67,600.
The Company rents utility poles in its operations. Generally, pole rental
agreements are short term, but LBAC anticipates that such rentals will recur.
Rent expense for pole attachments for the period from April 1, 1997, through May
23, 1997, was $12,700.
LITIGATION
The Company is a party to lawsuits which are generally incidental to its
business. In the opinion of management, after consulting with legal counsel, the
outcome of these lawsuits will not have a material adverse effect on the
Company's financial position or results of operations.
7. INCOME TAXES:
The Company has not recognized the tax benefit associated with its taxable
loss for the period from April 1, 1997, through May 23, 1997, as the Company
believes the benefit will likely not be realized.
8. EMPLOYEE BENEFIT PLANS:
Substantially all employees of the Company are eligible to participate in a
defined contribution plan containing a qualified cash or deferred arrangement
pursuant to IRC Section 401(k). The plan provides that eligible employees may
contribute up to 10% of their compensation to the plan. The Company made no
contributions to the plan for the period from April 1, 1997, through May 23,
1997.
F-320
<PAGE> 532
REPORT OF INDEPENDENT AUDITORS
The Audit Committee
CHARTER COMMUNICATIONS, INC.
We have audited the accompanying combined balance sheets of Fanch Cable
Systems Sold to Charter Communications, Inc. (comprised of components of
TWFanch-one Co., components of TWFanch-two Co., Mark Twain Cablevision, North
Texas Cablevision LTD., Post Cablevision of Texas L.P., Spring Green
Communications L.P., Fanch Narragansett CSI L.P., Cable Systems Inc., ARH, and
Tioga), as of November 11, 1999 and December 31, 1998, and the related combined
statements of operations, net assets and cash flows for the period from January
1, 1999 through November 11, 1999 and for the years ended December 31, 1998 and
1997. These financial statements are the responsibility of Fanch Communications,
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of North Texas Cablevision, LTD., Spring Green Communications L.P.,
Cable Systems Inc. and Fanch Narragansett CSI Limited Partnership, which
statements reflect total assets of $18,289,788 as of December 31, 1998 and total
revenues of $14,562,704 and $11,906,101 for the years ended December 31, 1998
and 1997. Those statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to data included
for North Texas Cablevision LTD., Spring Green Communications L.P., Cable
Systems Inc. and Fanch Narragansett CSI Limited Partnership, is based solely on
the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the combined financial position of Fanch Cable Systems Sold to Charter
Communications, Inc. at November 11, 1999 and December 31, 1998, and the
combined results of its operations and its cash flows for the period from
January 1, 1999 through November 11, 1999 and the years ended December 31, 1998
and 1997 in conformity with accounting principles generally accepted in the
United States.
/s/ ERNST & YOUNG LLP
Denver, Colorado
January 28, 2000
F-321
<PAGE> 533
REPORT OF INDEPENDENT AUDITORS
The Shareholders
CABLE SYSTEMS, INC.
The Partners
FANCH NARRAGANSETT CSI LIMITED PARTNERSHIP
We have audited the accompanying balance sheets of Cable Systems, Inc. and
Fanch Narragansett CSI Limited Partnership as of December 31, 1998 and 1997, and
the related statements of operations and cash flows for the years then ended.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying combined financial statements have been prepared pursuant
to Section 5.04(a) of the Loan Agreement between Cable Systems, Inc., Fanch
Narragansett CSI Limited Partnership and Fleet National Bank. Generally accepted
accounting principles do not recognize consolidated financial statements when a
less than 50% ownership ratio exists between two companies. As a result, our
opinion is restricted to the individual company statements shown.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cable Systems, Inc. and
Fanch Narragansett CSI Limited Partnership at December 31, 1998 and 1997, and
the results of its operations and cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ SHIELDS & CO.
March 9, 1999
Englewood, Colorado
F-322
<PAGE> 534
REPORT OF INDEPENDENT AUDITORS
The Partners
NORTH TEXAS CABLEVISION, LTD.
We have audited the accompanying consolidated balance sheets of North Texas
Cablevision, Ltd. as of December 31, 1998 and 1997, and the related consolidated
statements of operations and partners' deficit and cash flows for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of North Texas Cablevision,
Ltd. at December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ SHIELDS & CO.
March 9, 1999
Englewood, Colorado
F-323
<PAGE> 535
REPORT OF INDEPENDENT AUDITORS
The Partners
SPRING GREEN COMMUNICATIONS, L.P.
We have audited the accompanying balance sheet of Spring Green
Communications, L.P. as of December 31, 1998 and 1997, and the related
statements of operations and partners' capital and cash flows from inception
November 3, 1997, through December 31, 1998. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Spring Green Communications,
L.P. at December 31, 1998 and 1997, and the results of its operations and its
cash flows for the periods ended December 31, 1997, and 1998 in conformity with
generally accepted accounting principles.
/s/ SHIELDS & CO.
March 10, 1999
Englewood, Colorado
F-324
<PAGE> 536
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 11, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 568,583 $ 809,720
Accounts receivable, less allowance for doubtful accounts
of approximately $229,000 and $443,000 in 1999 and
1998, respectively.................................... 7,424,375 3,236,751
Prepaid expenses and other current assets................ 1,529,577 1,645,785
------------ ------------
Total current assets....................................... 9,522,535 5,692,256
Property, plant and equipment:
Transmission and distribution systems and related
equipment............................................. 325,687,737 200,526,755
Furniture and equipment.................................. 13,704,415 8,389,207
------------ ------------
339,392,152 208,915,962
Less accumulated depreciation............................ (73,807,164) (52,484,281)
------------ ------------
Net property, plant and equipment.......................... 265,584,988 156,431,681
Goodwill, net of accumulated amortization of approximately
$85,370,000 and $63,030,000 in 1999 and 1998,
respectively............................................. 515,312,398 266,776,690
Subscriber lists, net of accumulated amortization of
approximately $28,168,000 and $15,024,000 in 1999 and
1998, respectively....................................... 67,444,869 17,615,056
Other intangible assets, net of accumulated amortization of
approximately $17,157,000 and $14,411,000 in 1999 and
1998, respectively....................................... 12,032,316 11,482,409
------------ ------------
Total intangible assets.................................... 594,789,583 295,874,155
Other assets............................................... -- 1,050,815
============ ============
Total assets............................................... $869,897,106 $459,048,907
============ ============
LIABILITIES AND NET ASSETS
Current liabilities:
Accounts payable and other accrued liabilities........... $ 7,065,436 $ 13,630,205
Subscriber advances and deposits......................... 5,492,869 2,033,992
------------ ------------
Total current liabilities.................................. 12,558,305 15,664,197
Net assets................................................. 857,338,801 443,384,710
------------ ------------
Total liabilities and net assets........................... $869,897,106 $459,048,907
============ ============
</TABLE>
See accompanying notes.
F-325
<PAGE> 537
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED DECEMBER 31,
NOVEMBER 11, ---------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Service..................................... $165,967,333 $123,183,391 $113,954,539
Installation and other...................... 19,948,268 17,920,743 16,587,074
------------ ------------ ------------
185,915,601 141,104,134 130,541,613
Operating expenses, excluding depreciation and
amortization................................ 58,504,674 42,616,007 40,346,214
Selling, general and administrative
expenses.................................... 27,071,932 20,361,890 21,363,377
------------ ------------ ------------
85,576,606 62,977,897 61,709,591
Income before other expenses.................. 100,338,995 78,126,237 68,832,022
Other expenses:
Depreciation and amortization............... 62,097,138 45,885,038 61,502,426
Management fees............................. 6,161,558 3,998,259 3,663,561
Loss (gain) on disposal of assets........... 8,135,954 6,420,250 (1,229,272)
Other (income) expense, net................. (340,049) 313,693 232,102
------------ ------------ ------------
Net income before tax expense............... 24,284,394 21,508,997 4,663,205
Income tax expense.......................... 197,334 286,451 2,260,369
------------ ------------ ------------
Net income.................................... $ 24,087,060 $ 21,222,546 $ 2,402,836
============ ============ ============
</TABLE>
See accompanying notes.
F-326
<PAGE> 538
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.
COMBINED STATEMENTS OF NET ASSETS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED DECEMBER 31,
NOVEMBER 11, ---------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net assets at beginning of period............. $443,384,710 $455,085,231 $481,540,621
Net income.................................... 24,087,060 21,222,546 2,402,836
Contributions from (payments to) owners....... 389,867,031 (32,923,067) (28,858,226)
------------ ------------ ------------
Net assets at end of period................... $857,338,801 $443,384,710 $455,085,231
============ ============ ============
</TABLE>
See accompanying notes.
F-327
<PAGE> 539
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED DECEMBER 31,
NOVEMBER 11, ---------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................... $ 24,087,060 $ 21,222,546 $ 2,402,836
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 62,097,138 45,885,038 61,502,426
Loss (gain) on disposal of assets....... 8,135,954 6,420,250 (1,229,272)
(Increase) decrease in accounts
receivable, prepaid expenses and other
current assets........................ (3,020,601) (2,053,483) 2,067,370
(Decrease) increase in accounts payable
and other accrued liabilities and
subscriber advances and deposits...... (3,105,892) 1,434,091 (4,676,441)
------------- ------------ ------------
Net cash provided by operating activities.... 88,193,659 72,908,442 60,066,919
INVESTING ACTIVITIES
Acquisition of systems....................... (413,345,351) -- (18,243,593)
Purchases of property, plant and equipment... (64,956,476) (39,343,681) (17,213,637)
Additions to intangibles, net................ -- (909,674) (1,116,251)
Proceeds from sale of equipment.............. -- 103,028 5,337,321
------------- ------------ ------------
Net cash used in investing activities........ (478,301,827) (40,150,327) (31,236,160)
FINANCING ACTIVITIES
Contributions from (payments to) owners...... 389,867,031 (32,923,067) (28,858,226)
------------- ------------ ------------
Net cash provided by (used in) financing
activities................................. 389,867,031 (32,923,067) (28,858,226)
Net change in cash and cash equivalents...... (241,137) (164,952) (27,467)
Cash and cash equivalents at beginning of
year....................................... 809,720 974,672 1,002,139
------------- ------------ ------------
Cash and cash equivalents at end of year..... $ 568,583 $ 809,720 $ 974,672
============= ============ ============
</TABLE>
See accompanying notes.
F-328
<PAGE> 540
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 11, 1999
1. BASIS OF PRESENTATION
ACQUISITION BY CHARTER COMMUNICATIONS, INC. AND BASIS OF PRESENTATION
The Fanch Cable Systems Sold to Charter Communications, Inc. are comprised
of the following entities: components of TWFanch-one Co., components of
TWFanch-two Co., Mark Twain Cablevision, North Texas Cablevision LTD., Post
Cablevision of Texas L.P., Spring Green Communications L.P., Fanch Narragansett
CSI L.P., Cable Systems Inc., ARH, and Tioga (the "Combined Systems"). The
Combined Systems were managed by Fanch Communications, Inc. (the "Management
Company").
Pursuant to a purchase agreement, dated May 12, 1999 between certain
partners ("Partners") of the Combined Systems and Charter Communications, Inc.
("Charter"), the Partners of the Combined Systems entered into a distribution
agreement whereby the Partners will distribute and/or sell certain of their
cable systems to certain of their respective Partners. These Partners will then
sell the Combined Systems through a combination of asset sales and the sale of
equity and partnership interests to Charter.
Accordingly, these combined financial statements of the Combined Systems
reflect the "carved out" financial position, results of operations, cash flows
and changes in net assets of the operations of the Combined Systems as if they
had been operating as a separate company. For purposes of determining the
financial statement amounts of the Combined Systems, management excluded certain
systems (the "Excluded Systems"). In order to exclude the results of operations
and financial position of the Excluded Systems from the combined financial
statements, management has estimated certain revenues, expenses, assets and
liabilities that are not specifically identified to systems based on the ratio
of each Excluded System's basic subscribers to the total basic subscribers
served by the respective partnerships. Management believes the basis used for
these allocations is reasonable. The Combined Systems' results of operations are
not necessarily indicative of future operating results or the results that would
have occurred if the Combined Systems were a separate legal entity.
DESCRIPTION OF BUSINESS
The Combined Systems, operating in various states throughout the United
States, are principally engaged in operating cable television systems and
related activities under non-exclusive franchise agreements.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include the accounts of the
Combined Systems, as if the Combined Systems were a single company. All material
intercompany balances and transactions have been eliminated.
CASH, INTERCOMPANY ACCOUNTS AND DEBT
Under the Combined Systems' centralized cash management system, the cash
requirements of its individual operating units were generally subsidized by the
Management Company and the cash generated or used by the individual operating
units was transferred to/from the Management Company, as appropriate, through
the use of intercompany accounts. The resulting intercompany account balances
are included in net assets and all the net cash generated from (used in)
operations, investing activities and financing activities has been included in
the
F-329
<PAGE> 541
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
Combined Systems' net contributions by (payments to) the Management Company in
the combined statements of cash flows. The Management Company maintains external
debt to fund and manage operations on a centralized basis. Debt, unamortized
loan costs and interest expense of the Management Company have not been
allocated to the Combined Systems. As such, the debt, unamortized loan costs,
and related interest are not representative of the debt that would be required
or interest expense incurred if the Combined Systems were a separate legal
entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY, PLANT AND EQUIPMENT
The Combined Systems record additions to property, plant and equipment at
cost, which in the case of assets constructed includes amounts for material,
labor and overhead. Maintenance and repairs are charged to expense as incurred.
For financial reporting purposes, the Combined Systems use the
straight-line method of depreciation over the estimated useful lives of the
assets as follows:
<TABLE>
<CAPTION>
LIVES
-----
<S> <C>
Transmission and distribution systems and related
equipment 3 to 20 years
Furniture and equipment 4 to 8 1/2 years
</TABLE>
INCOME TAXES
The Combined Systems pay an immaterial amount of income taxes. Taxes are
paid for Cable Systems, Inc., Hornell, ARH, Tioga, and systems operating in the
State of Michigan. The majority of the Combined Systems are various partnerships
and, as such, the tax effects of the Combined Systems' results of operations
accrue to the partners.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. Actual
results could differ from those estimates.
REVENUE RECOGNITION
The Combined Systems recognize revenue when services have been delivered.
Revenues on long-term contracts are recognized over the term of the contract
using the straight-line method.
F-330
<PAGE> 542
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLES
Intangibles are recorded at cost and are amortized on a straight-line basis
over their estimated useful lives. The estimated useful lives are as follows:
<TABLE>
<CAPTION>
LIVES
-----
<S> <C>
Goodwill 7 to 20 years (7 to 10 in 1997)
Subscriber list 3 to 7 years
Other, including franchise costs 2 to 13 years
</TABLE>
Amortization expense was $38,229,923, $25,955,253, and $44,595,992 for the
period from January 1, 1999 to November 11, 1999 and for the years ended
December 31, 1998 and 1997, respectively. Certain of the Combined Systems
changed the estimated useful life of goodwill from 7 and 10 years in 1997 to 20
years effective January 1, 1998 to better match the amortization period to
anticipated economic lives of the franchises and to better reflect industry
practice. This change in estimate resulted in an increase in net income of
approximately $20 million for the year ended December 31, 1998.
3. DISPOSAL OF ASSETS
During the periods presented, various upgrades were performed on certain
plant locations. The cost and accumulated depreciation applicable to the plant
replaced has been estimated and recorded as a loss on disposal, which is
summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED DECEMBER 31
NOVEMBER 11 -------------------------
1999 1998 1997
------------ ---- ----
<S> <C> <C> <C>
Cost................................................ $12,238,388 $8,606,851 $ 5,529,505
Accumulated depreciation.......................... (4,102,434) (2,083,573) (2,003,191)
Proceeds.......................................... -- (103,028) (5,337,321)
Disposal of intangible assets..................... -- -- 2,978,143
Accumulated amortization.......................... -- -- (2,396,408)
----------- ---------- -----------
Loss (gain) on disposal........................... $ 8,135,954 $6,420,250 $(1,229,272)
=========== ========== ===========
</TABLE>
4. PURCHASE AND SALE OF SYSTEMS
On March 30, 1997, the Combined Systems acquired cable television systems,
including plant and franchise and business licenses, serving communities in the
states of Pennsylvania and Virginia. The purchase price was $1.4 million, of
which $765,000 was allocated to property, plant and equipment and $635,000 was
allocated to intangible assets.
Concurrent with the purchase of the systems in Pennsylvania on March 30,
1997, the Combined Systems sold certain of these assets, including plant and
franchise and business licenses, for $340,000. No gain or loss on this
transaction was recorded.
On June 30, 1997, the Combined Systems acquired cable television systems,
including plant and franchise and business licenses, serving communities in the
State of Indiana. The purchase price was $6,345,408, of which $2,822,260 was
allocated to property, plant and equipment and $3,523,148 was allocated to
intangible assets.
F-331
<PAGE> 543
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASE AND SALE OF SYSTEMS (CONTINUED)
On November 3, 1997, the Combined Systems acquired substantially all of the
assets, including franchise and business licenses, for cable systems serving
various communities in Wisconsin. The purchase price was $8.7 million, of which
$3.9 million was allocated to property, plant and equipment and $4.8 million was
allocated to intangible assets.
On June 12, 1998, the Combined Systems entered into an agreement to acquire
cable television systems, including plant and franchise and business licenses,
serving communities in the State of Michigan. The purchase price was $42
million, subject to purchase price adjustments. In connection with the
agreement, the Combined Systems received an additional $8.76 million in capital
contributions. The agreement was completed and the assets were transferred to
the Combined Systems on February 1, 1999. The Combined Systems recorded
approximately $11.7 million in property, plant and equipment and approximately
$30.3 million in intangible assets.
On July 8, 1998, the Combined Systems entered into an Asset Purchase
Agreement to acquire cable television systems, including plant and franchise and
business licenses, serving communities in the states of Maryland, Ohio and West
Virginia. The purchase price was $248 million, subject to purchase price
adjustments. The transaction was completed and the assets were transferred to
the Combined Systems on February 24, 1999. The Combined Systems recorded
approximately $39 million to property, plant and equipment and approximately
$209 million to intangible assets.
On January 15, 1999, the Combined Systems entered into an agreement to
acquire cable television systems, including plant and franchise and business
licenses, serving communities in the State of Michigan from a related party. The
purchase price was $70 million, subject to purchase price adjustments. The
agreement was completed and the assets were transferred to the Combined Systems
on March 31, 1999. In connection with the agreement, the Combined Systems
received an additional $25 million in capital contributions. The Combined
Systems recorded approximately $14.4 million to property, plant and equipment
and approximately $55.6 million to intangible assets.
On May 12, 1999, the Combined Systems entered into an agreement to acquire
the stock of ARH, Ltd. ARH, Ltd. is engaged in the business of owning and
operating cable television systems in Texas and West Virginia. The purchase
price was $50 million subject to purchase price adjustments. The transaction was
completed and the assets were transferred to the Combined Systems on June 22,
1999. The Combined Systems recorded approximately $3.9 million to property,
plant and equipment and approximately $46.1 million to intangible assets.
Unaudited pro forma operating results as though the acquisitions discussed
above had occurred at the beginning of the periods, with adjustments to give
effect to amortization of franchises and certain other adjustments for the
period, are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1 TO YEAR ENDED
NOVEMBER 11 DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
Revenues........................................ $202,259,532 $197,803,975
Income from operations.......................... 92,986,581 107,053,905
Net income...................................... 27,704,095 32,130,293
</TABLE>
F-332
<PAGE> 544
FANCH CABLE SYSTEMS SOLD TO CHARTER COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASE AND SALE OF SYSTEMS (CONTINUED)
The unaudited pro forma information has been presented for comparative
purposes and does not purport to be indicative of the results of operations had
these transactions been complete as of the assumed date or which may be obtained
in the future.
5. RELATED PARTIES
The Combined Systems have entered into management agreements with the
Management Company whose sole stockholder is affiliated with several of the
Combined Systems. The Combined Systems have also entered into a management
agreement with an entity (the "Affiliated Company") that has ownership interest
in certain of the Combined Systems. The agreements provide that the Management
Company and the Affiliated Company will manage their respective systems and
receive annual compensation equal to 2.5% to 5% of the gross revenues from
operations from their respective systems. Management fees were $6,161,558,
$4,072,179, and $3,663,560 for the period from January 1, 1999 to November 11,
1999 and the years ended December 31, 1998 and 1997, respectively.
A company affiliated with the Management Company provides subscriber
billing services for a portion of the Combined Systems' subscribers. The
Combined Systems incurred fees for monthly billing and related services in the
approximate amounts of $362,000, $507,000, and $535,000 for the period from
January 1, 1999 to November 11, 1999 and the years ended December 31, 1998 and
1997, respectively.
The Combined Systems purchase the majority of their programming through the
Affiliated Company. Fees incurred for programming were approximately
$38,356,000, $24,600,000, and $22,200,000 for the period from January 1, 1999 to
November 11, 1999 and the years ended December 31, 1998 and 1997, respectively.
The Management Company pays amounts on behalf of and receives amounts from
the Combined Systems in the ordinary course of business. Accounts receivable and
payable of the Combined Systems include amounts due from and due to the
Management Company.
6. COMMITMENTS
The Combined Systems, as an integral part of their cable operations, have
entered into lease contracts for certain items including tower rental, microwave
service and office space. Rent expense, including office, tower and pole rent,
for the period from January 1, 1999 to November 11, 1999 and the years ended
December 31, 1998 and 1997 was approximately $3,110,000, $2,462,866, and
$2,238,394, respectively. The majority of these agreements are on month-to-month
arrangements and, accordingly, the Combined Systems have no material future
minimum commitments related to these leases.
7. EMPLOYEE BENEFIT PLAN
The Combined Systems each have a defined contribution plan (the "Plan")
which qualifies under section 401(k) of the Internal Revenue Code. Therefore,
each system of the Combined Systems participates in the respective plan.
Combined Systems contributions were approximately $497,000, $354,000, and
$297,000 for the period from January 1, 1999 to November 11, 1999 and the years
ended December 31, 1998 and 1997, respectively.
F-333
<PAGE> 545
REPORT OF INDEPENDENT AUDITORS
Partners
Falcon Communications, L.P.
We have audited the accompanying consolidated balance sheets of Falcon
Communications, L.P. as of December 31, 1998 and November 12, 1999, and the
related consolidated statements of operations, partners' equity (deficit) and
cash flows for each of the two years in the period ended December 31, 1998 and
for the period from January 1, 1999 to November 12, 1999 (date of disposition).
These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Falcon Communications, L.P. at December 31, 1998 and November 12, 1999 and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1998 and for the period from January 1,
1999 to November 12, 1999 (date of disposition), in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 2, 2000
F-334
<PAGE> 546
FALCON COMMUNICATIONS, L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 12,
1999
DECEMBER 31, (DATE OF
1998 DISPOSITION)
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................. $ 14,284 $ 9,995
Receivables:
Trade, less allowance of $670,000 and $1,074,000 for
possible losses...................................... 15,760 18,946
Affiliates............................................. 2,322 3,511
Other assets.............................................. 16,779 33,456
Property, plant and equipment, less accumulated
depreciation and amortization.......................... 505,894 553,851
Franchise cost, less accumulated amortization of
$226,526,000 and $269,752,000.......................... 397,727 370,461
Goodwill, less accumulated amortization of $25,646,000 and
$31,636,000............................................ 135,308 130,581
Customer lists and other intangible costs, less
accumulated amortization of $59,422,000 and
$127,314,000........................................... 333,017 273,851
Deferred loan costs, less accumulated amortization of
$2,014,000 and $3,137,000.............................. 24,331 22,623
---------- ----------
$1,445,422 $1,417,275
========== ==========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Notes payable............................................. $1,611,353 $1,711,835
Accounts payable.......................................... 10,341 16,790
Due to affiliate.......................................... -- 15,202
Accrued expenses.......................................... 83,077 56,160
Customer deposits and prepayments......................... 2,257 8,070
Deferred income taxes..................................... 8,664 8,393
Minority interest......................................... 403 541
---------- ----------
TOTAL LIABILITIES........................................... 1,716,095 1,816,991
---------- ----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PARTNERS' EQUITY................................. 133,023 424,280
---------- ----------
PARTNERS' EQUITY (DEFICIT):
General partners.......................................... (408,369) (826,681)
Limited partners.......................................... 4,673 2,685
---------- ----------
TOTAL PARTNERS' DEFICIT..................................... (403,696) (823,996)
---------- ----------
$1,445,422 $1,417,275
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-335
<PAGE> 547
FALCON COMMUNICATIONS, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1999 TO
------------------------ NOVEMBER 12, 1999
1997 1998 (DATE OF DISPOSITION)
---------- ----------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES........................................ $255,886 $ 307,558 $ 371,617
-------- --------- ---------
EXPENSES:
Service costs................................... 75,643 97,832 125,246
General and administrative expenses............. 46,437 63,401 139,462
Depreciation and amortization................... 118,856 152,585 196,260
-------- --------- ---------
Total expenses.................................. 240,936 313,818 460,968
-------- --------- ---------
Operating income (loss)......................... 14,950 (6,260) (89,351)
-------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense, net........................... (79,137) (102,591) (114,993)
Equity in net income (loss) of investee
partnerships.................................. 443 (176) (41)
Other income (expense), net..................... 885 (2,917) 8,062
Income tax benefit (expense).................... 2,021 (1,897) (2,509)
-------- --------- ---------
Net loss before extraordinary item.............. (60,838) (113,841) (198,832)
Extraordinary item, retirement of debt.......... -- (30,642) --
-------- --------- ---------
NET LOSS........................................ $(60,838) $(144,483) $(198,832)
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-336
<PAGE> 548
FALCON COMMUNICATIONS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
PARTNERS' DEFICIT,
January 1, 1997.................................. $ (12,591) $ (443,908) $ (456,499)
Reclassification from redeemable partners'
equity...................................... -- 100,529 100,529
Capital contribution.......................... -- 53 53
Net loss for year............................. (609) (60,229) (60,838)
---------- ---------- ----------
PARTNERS' DEFICIT,
December 31, 1997................................ (13,200) (403,555) (416,755)
Reclassification of partners' deficit......... (408,603) 408,603 --
Redemption of partners' interests............. (155,908) -- (155,908)
Net assets retained by the managing general
partner..................................... (5,392) -- (5,392)
Reclassification from redeemable partners'
equity...................................... 38,350 -- 38,350
Acquisition of Falcon Video and TCI net
assets...................................... 280,409 -- 280,409
Capital contributions......................... 83 -- 83
Net loss for year............................. (144,108) (375) (144,483)
---------- ---------- ----------
PARTNERS' EQUITY (DEFICIT)
December 31, 1998................................ (408,369) 4,673 (403,696)
Reclassification to redeemable partners'
equity...................................... (291,257) -- (291,257)
Capital contributions......................... 70,723 -- 70,723
Acquisition of TCI net assets adjustment...... (934) -- (934)
Net loss for period........................... (196,844) (1,988) (198,832)
---------- ---------- ----------
PARTNERS' EQUITY (DEFICIT)
November 12, 1999................................ $ (826,681) $ 2,685 $ (823,996)
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-337
<PAGE> 549
FALCON COMMUNICATIONS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1999 TO
------------------------ NOVEMBER 12, 1999
1997 1998 (DATE OF DISPOSITION)
--------- ------------ ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(60,838) $ (144,483) $ (198,832)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Payment-in-kind interest expense.......... 20,444 -- --
Amortization of debt discount............. -- 19,342 24,103
Depreciation and amortization............. 118,856 152,585 196,260
Amortization of deferred loan costs....... 2,192 2,526 1,782
Compensation funded by Managing General
Partner................................. -- -- 70,723
Write-off deferred loan costs............. -- 10,961 (4)
Gain on sale of cable system.............. -- -- (11,069)
Casualty (gain) loss...................... (3,476) (314) 69
Equity in net (income) loss of investee
partnerships............................ (443) 176 41
Provision for losses on receivables, net
of recoveries........................... 5,714 4,775 4,510
Deferred income taxes..................... (2,748) 1,111 (271)
Other..................................... 1,319 278 348
Increase (decrease) from changes in:
Receivables............................... (9,703) (1,524) (6,114)
Other assets.............................. (4,021) 906 (7,194)
Accounts payable.......................... (1,357) 337 6,450
Accrued expenses and due to affiliate..... 13,773 24,302 (11,634)
Customer deposits and prepayments......... (175) 633 5,813
-------- ----------- -----------
Net cash provided by operating
activities.............................. 79,537 71,611 74,981
-------- ----------- -----------
Cash flows from investing activities:
Capital expenditures......................... (76,323) (96,367) (126,548)
Increase in intangible assets................ (1,770) (7,124) (3,344)
Acquisitions of cable television systems..... -- (83,391) (27,161)
Cash acquired in connection with the
acquisition of TCI and Falcon Video
Communications, L.P....................... -- 317 --
Proceeds from sale of cable system........... -- -- 3,178
Assets retained by the Managing General
Partner................................... -- (3,656) --
Other........................................ 1,806 1,893 (1,871)
-------- ----------- -----------
Net cash used in investing activities..... (76,287) (188,328) (155,746)
-------- ----------- -----------
Cash flows from financing activities:
Borrowings from notes payable................ 37,500 2,388,607 1,153,250
Repayment of debt............................ (40,722) (2,244,752) (1,076,871)
Deferred loan costs.......................... (29) (25,684) (70)
Capital contributions........................ 93 -- --
Redemption of partners' interests............ -- (1,170) --
Minority interest capital contributions...... 192 83 167
-------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. (2,966) 117,084 76,476
-------- ----------- -----------
</TABLE>
F-338
<PAGE> 550
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1999 TO
------------------------ NOVEMBER 12, 1999
1997 1998 (DATE OF DISPOSITION)
--------- ------------ ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents.................................. 284 367 (4,289)
Cash and cash equivalents, at beginning of
period....................................... 13,633 13,917 14,284
-------- ----------- -----------
Cash and cash equivalents, at end of period.... $ 13,917 $ 14,284 $ 9,995
======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-339
<PAGE> 551
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Falcon Communications, L.P. ("FCLP"), a California limited partnership (the
"Partnership") and successor to Falcon Holding Group, L.P. ("FHGLP"), owned and
operated cable television systems serving small to medium-sized communities and
the suburbs of certain cities in 23 states through November 12, 1999. On
September 30, 1998, pursuant to a Contribution and Purchase Agreement dated as
of December 30, 1997, as amended (the "Contribution Agreement"), FHGLP acquired
the assets and liabilities of Falcon Video Communications, L.P. ("Falcon
Video"), in exchange for ownership interests in FHGLP. Simultaneously with the
closing of that transaction, in accordance with the Contribution Agreement,
FHGLP contributed substantially all of the existing cable television system
operations owned by FHGLP and its subsidiaries (including the Falcon Video
Systems) to the Partnership and TCI Falcon Holdings, LLC ("TCI") contributed
certain cable television systems owned and operated by affiliates of TCI (the
"TCI Systems") to the Partnership (the "TCI Transaction"). As a result, Tele-
Communications, Inc. held approximately 46% of the equity interest of the
Partnership and FHGLP owned the remaining 54% and served as the managing general
partner of the Partnership. The TCI Transaction has been accounted for as a
recapitalization of FHGLP into the Partnership and the concurrent acquisition by
the Partnership of the TCI systems. In March 1999, AT&T and Tele-Communications,
Inc. completed a merger under which Tele-Communications, Inc. became a unit of
AT&T called AT&T Broadband & Internet Services, which became a general partner
of FCLP as a result of a merger.
On November 12, 1999, Charter Communications Holding Company, LLC
("Charter") acquired the Partnership in a cash and stock transaction valued at
approximately $3.6 billion, including assumption of liabilities. Upon closing of
the transaction, the Partnership was merged with CC VII Holdings, LLC, a
Delaware limited liability company and successor to FCLP.
The consolidated financial statements include the accounts of the
Partnership and its subsidiary holding companies and cable television operating
partnerships and corporations, which include Falcon Cable Communications LLC
("Falcon LLC"), a Delaware limited liability company that serves as the general
manager of the cable television subsidiaries. Such statements reflect balances
immediately prior to the acquisition transaction. The assets contributed by
FHGLP in 1998 to the Partnership excluded certain immaterial investments,
principally FHGLP's ownership of 100% of the outstanding stock of Enstar
Communications Corporation ("ECC"), which is the general partner and manager of
fifteen limited partnerships operating under the name "Enstar." ECC's ownership
interest in the Enstar partnerships ranges from 0.5% to 5%. Upon the
consummation of the TCI Transaction, the management of the Enstar partnerships
was assigned to the Partnership by FHGLP. The consolidated statements of
operations and statements of cash flows for the year ended December 31, 1998
include FHGLP's interest in ECC for the nine months ended September 30, 1998.
The effects of ECC's operations on all previous periods presented are
immaterial. On November 12, 1999, Charter acquired ECC.
FHGLP also controlled, held varying equity interests in and managed certain
other cable television partnerships (the "Affiliated Partnerships") for a fee.
FHGLP is a limited partnership, the sole general partner of which is Falcon
Holding Group, Inc., a California corporation ("FHGI"). FHGI also holds a 1%
interest in certain of the subsidiaries of the Partnership. At the beginning of
1998, the Affiliated Partnerships were comprised of Falcon Classic Cable Income
Properties, L.P. ("Falcon Classic") whose cable television systems are referred
to as the "Falcon Classic Systems," Falcon Video and the Enstar partnerships. As
discussed in Note 3,
F-340
<PAGE> 552
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
the Falcon Classic Systems were acquired by FHGLP during 1998. The Falcon Video
Systems were acquired on September 30, 1998 in connection with the TCI
Transaction. As a result of these transactions, the Affiliated Partnerships
consist solely of the Enstar partnerships from October 1, 1998 forward.
All significant intercompany accounts and transactions have been eliminated
in consolidation. The consolidated financial statements do not give effect to
any assets that the partners may have outside their interests in the
Partnership, nor to any obligations, including income taxes, of the partners.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Partnership
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents. Cash equivalents at December 31,
1997 and 1998 included $4.5 million and $345,000 of investments in commercial
paper and short-term investment funds of major financial institutions. There
were no such cash equivalents at November 12, 1999.
INVESTMENTS IN AFFILIATED PARTNERSHIPS
Prior to closing the TCI Transaction, the Partnership was the general
partner of certain entities, which in turn acted as general partner of the
Affiliated Partnerships. The Partnership's effective ownership interests in the
Affiliated Partnerships were less than one percent. The Affiliated Partnerships
were accounted for using the equity method of accounting. Equity in net losses
were recorded to the extent of the investments in and advances to the
partnerships plus obligations for which the Partnership, as general partner, was
responsible. The liabilities of the Affiliated Partnerships, other than amounts
due the Partnership, principally consisted of debt for borrowed money and
related accrued interest. The Partnership's ownership interests in the
Affiliated Partnerships were eliminated in 1998 with the acquisition of Falcon
Video and Falcon Classic and the retention by FHGLP of its interests in the
Enstar partnerships.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs associated
with installations in homes not previously served by cable are capitalized as
part of the distribution system, and reconnects are expensed as incurred. For
financial reporting, depreciation and amortization is computed using the
straight-line method over the following estimated useful lives.
<TABLE>
<S> <C>
CABLE TELEVISION SYSTEMS:
Headend buildings and equipment........................... 10-16 years
Trunk and distribution.................................... 5-15 years
Microwave equipment....................................... 10-15 years
OTHER:
Furniture and equipment................................... 3-7 years
Vehicles.................................................. 3-10 years
Leasehold improvements.................................... Life of lease
</TABLE>
F-341
<PAGE> 553
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
FRANCHISE COST AND GOODWILL
The excess of cost over the fair values of tangible assets and customer
lists of cable television systems acquired represents the cost of franchises and
goodwill. In addition, franchise cost includes capitalized costs incurred in
obtaining new franchises and in the renewal of existing franchises. These costs
are amortized using the straight-line method over the lives of the franchises,
ranging up to 28 years (composite 15 year average). Goodwill is amortized over
20 years. Costs relating to unsuccessful franchise applications are charged to
expense when it is determined that the efforts to obtain the franchise will not
be successful.
CUSTOMER LISTS AND OTHER INTANGIBLE COSTS
Customer lists and other intangible costs include customer lists, covenants
not to compete and organization costs which are amortized using the
straight-line method over two to five years.
DEFERRED LOAN COSTS
Costs related to borrowings are capitalized and amortized to interest
expense over the life of the related loan.
RECOVERABILITY OF ASSETS
The Partnership assesses on an ongoing basis the recoverability of
intangible assets (including goodwill) and capitalized plant assets based on
estimates of future undiscounted cash flows compared to net book value. If the
future undiscounted cash flow estimates were less than net book value, net book
value would then be reduced to estimated fair value, which generally
approximates discounted cash flows. The Partnership also evaluates the
amortization periods of assets, including goodwill and other intangible assets,
to determine whether events or circumstances warrant revised estimates of useful
lives.
REVENUE RECOGNITION
Revenues from customer fees, equipment rental and advertising are
recognized in the period that services are delivered. Installation revenue is
recognized in the period the installation services are provided to the extent of
direct selling costs. Any remaining amount is deferred and recognized over the
estimated average period that customers are expected to remain connected to the
cable television system. Management fees are recognized on the accrual basis
based on a percentage of gross revenues of the respective cable television
systems managed. Effective October 1, 1998, 20% of the management fees from the
Enstar partnerships was retained by FHGLP.
DERIVATIVE FINANCIAL INSTRUMENTS
As part of the Partnership's management of financial market risk and as
required by certain covenants in its New Credit Agreement, the Partnership
enters into various transactions that involve contracts and financial
instruments with off-balance-sheet risk, principally interest rate swap and
interest rate cap agreements. The Partnership enters into these agreements in
order to manage the interest-rate sensitivity associated with its variable-rate
indebtedness. The differential to be paid or received in connection with
interest rate swap and interest rate cap agreements is recognized as interest
rates change and is charged or credited to interest expense over the life
F-342
<PAGE> 554
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED)
of the agreements. Gains or losses for early termination of those contracts are
recognized as an adjustment to interest expense over the remaining portion of
the original life of the terminated contract.
INCOME TAXES
The Partnership and its subsidiaries, except for Falcon First, Inc., are
limited partnerships or limited liability companies and pay no income taxes as
entities except for nominal taxes assessed by certain state jurisdictions. All
of the income, gains, losses, deductions and credits of the Partnership are
passed through to its partners. The basis in the Partnership's assets and
liabilities differs for financial and tax reporting purposes. At November 12,
1999, the book basis of the Partnership's net assets exceeded its tax basis by
$623 million.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 -- PARTNERSHIP MATTERS
The Amended and Restated Agreement of Limited Partnership of FCLP ("FCLP
Partnership Agreement") provided that profits and losses will be allocated, and
distributions will be made, in proportion to the partners' percentage interests.
Prior to November 13, 1999, FHGLP was the managing general partner and a limited
partner and owned a 54% interest in FCLP, and Tele-Communications, Inc. was a
general partner and owned a 46% interest. The partners' percentage interests
were based on the relative net fair market values of the assets contributed to
FCLP under the Contribution Agreement, as estimated at the closing. The
percentage interests were subsequently adjusted to reflect the December 1998
redemption of a small part of FHGLP's partnership interest.
Through the closing of the sale to Charter, FCLP was required, under
certain circumstances, on or after April 1, 2006, to purchase the interests of
the non-management limited partners of FHGLP at their then fair value. The
estimated redemption value at December 31, 1998 was $133 million and was
reflected in the consolidated financial statements as redeemable partners'
equity. Such amount was determined based on management's estimate of the
relative fair value of such interests under then current market conditions.
These limited partners were redeemed from their portion of the Charter sale
proceeds as of November 12, 1999 for $424 million, which amount is shown as
redeemable partners' equity at that date.
The Partnership assumed the obligations of FHGLP under the 1993 Incentive
Performance Plan (the "Incentive Performance Plan"), but FHGLP funded this
obligation from its portion of the Charter sale proceeds. See Note 8.
F-343
<PAGE> 555
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- ACQUISITIONS AND SALES
In March and July 1998, FHGLP acquired the Falcon Classic Systems for an
aggregate purchase price of $83.4 million. Falcon Classic had revenue of
approximately $20.3 million for the year ended December 31, 1997.
As discussed in Note 1, on September 30, 1998 the Partnership acquired the
TCI Systems and the Falcon Video Systems in accordance with the Contribution
Agreement.
Sources and uses of funds for each of the transactions were as follows:
<TABLE>
<CAPTION>
FALCON
CLASSIC FALCON VIDEO
TCI SYSTEMS SYSTEMS SYSTEMS
----------- ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sources of Funds:
Cash on hand................................ $ 11,429 $ 59,038 $ 6,591
Advance under bank credit facilities........ 429,739 56,467 76,800
-------- -------- -------
Total sources of funds.................... $441,168 $115,505 $83,391
======== ======== =======
Uses of Funds:
Repay debt assumed from TCI and existing
debt of Falcon Video, including accrued
interest.................................. $429,739 $115,505 $ --
Purchase price of assets.................... -- -- 83,391
Payment of assumed obligations at closing... 6,495 -- --
Transaction fees and expenses............... 2,879 -- --
Available funds............................. 2,055 -- --
-------- -------- -------
Total uses of funds....................... $441,168 $115,505 $83,391
======== ======== =======
</TABLE>
The following unaudited condensed consolidated statements of operations
present the consolidated results of operations of the Partnership as if the
acquisitions referred to above had occurred at the beginning of the periods
presented and are not necessarily indicative of what would have occurred had the
acquisitions been made as of such dates or of results which may occur in the
future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenues................................................... $ 424,994 $ 426,827
Expenses................................................... (438,623) (444,886)
--------- ---------
Operating loss........................................... (13,629) (18,059)
Interest and other expenses................................ (115,507) (130,632)
--------- ---------
Loss before extraordinary item............................. $(129,136) $(148,691)
========= =========
</TABLE>
F-344
<PAGE> 556
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- ACQUISITIONS AND SALES -- (CONTINUED)
The acquisitions of the TCI Systems, the Falcon Video Systems and the
Falcon Classic Systems were accounted for by the purchase method of accounting,
whereby the purchase prices were allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the dates of
acquisition, as follows:
<TABLE>
<CAPTION>
TCI FALCON FALCON
SYSTEMS VIDEO SYSTEMS CLASSIC SYSTEMS
-------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Purchase Price:
General partnership interests issued.............. $234,457 $ 43,073 $ --
Debt assumed...................................... 275,000 112,196 --
Debt incurred..................................... -- -- 83,391
Other liabilities assumed......................... 955 3,315 2,804
Transaction costs................................. 2,879 -- --
-------- -------- -------
513,291 158,584 86,195
-------- -------- -------
Fair Market Value of Net Assets Acquired:
Property, plant and equipment..................... 77,992 41,889 33,539
Franchise costs................................... 170,799 36,374 7,847
Customer lists and other intangible assets........ 217,443 53,602 34,992
Other assets...................................... 4,165 2,381 3,164
-------- -------- -------
470,399 134,246 79,542
-------- -------- -------
Excess of purchase price over fair value of
assets acquired and liabilities assumed...... $ 42,892 $ 24,338 $ 6,653
======== ======== =======
</TABLE>
The excess of purchase price over the fair value of net assets acquired has
been recorded as goodwill and is being amortized using the straight-line method
over 20 years.
The general partnership interests issued in the TCI Transaction were valued
in proportion to the estimated fair value of the TCI Systems and the Falcon
Video Systems as compared to the estimated fair value of the Partnership's
assets, which was agreed upon in the Contribution Agreement by all holders of
Partnership interests.
In January 1999, the Partnership acquired the assets of certain cable
systems serving approximately 591 customers in Oregon for $801,000. On March 15,
1999, the Partnership acquired the assets of certain cable systems serving
approximately 7,928 customers in Utah for $6.8 million. On March 22, 1999, the
Partnership acquired the assets of the Franklin, Virginia system in exchange for
the assets of its Scottsburg, Indiana systems and $8 million in cash and
recognized a gain of $8.5 million. The Franklin system serves approximately
9,042 customers and the Scottsburg systems served approximately 4,507 customers.
On July 30, 1999, the Partnership acquired the assets of certain cable systems
serving approximately 6,500 customers in Oregon for $9.5 million.
On March 1, 1999, the Partnership contributed $2.4 million cash and certain
systems located in Oregon with a net book value of $5.6 million to a joint
venture with Bend Cable Communications, Inc., which manages the joint venture.
The Partnership owns 17% of the joint venture. These systems had been acquired
from Falcon Classic in March 1998, and served approximately 3,471 subscribers at
March 1, 1999. On March 26, 1999, the Partnership sold certain systems serving
approximately 2,550 subscribers in Kansas for $3.0 million and
F-345
<PAGE> 557
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- ACQUISITIONS AND SALES -- (CONTINUED)
recognized a gain of $2.4 million. The effects of these transactions on results
of operations are not material.
NOTE 4 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short maturity of
those instruments.
Notes Payable
The fair value of the Partnership's 8.375% Senior Debentures and 9.285%
Senior Discount Debentures is based on quoted market prices for those issues of
debt as of December 31, 1998. The fair value at December 31, 1999 is based on
the redemption amounts paid by Charter to retire the obligations after the
acquisition by Charter. The fair value of the Partnership's other subordinated
notes is based on quoted market prices for similar issues of debt with similar
maturities. The carrying amount of the Partnership's remaining debt outstanding
approximates fair value due to its variable rate nature.
Interest Rate Hedging Agreements
The fair value of interest rate hedging agreements is estimated by
obtaining quotes from brokers as to the amount either party would be required to
pay or receive in order to terminate the agreements.
The following table depicts the fair value of each class of financial
instruments for which it is practicable to estimate that value as of December
31:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 NOVEMBER 12, 1999
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 14,284 $ 14,284 $ 9,995 $ 9,995
Notes payable (Note 6):
8.375% Senior Debentures............. 375,000 382,500 375,000 378,750
9.285% Senior Discount Debentures.... 294,982 289,275 319,085 321,459
Bank credit facilities............... 926,000 926,000 1,017,750 1,017,750
Other Subordinated Notes............. 15,000 16,426 -- --
Other................................ 371 371 -- --
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest Rate Hedging Agreements (Note
6):
Interest rate swaps.................... $1,534,713 $ (22,013) $1,279,713 $ 22,518
</TABLE>
F-346
<PAGE> 558
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
The carrying value of interest rate swaps was a net obligation of $9.3
million at December 31, 1998 and $9 million at November 12, 1999. See Note 6(e).
The amount of debt on which current interest expense has been affected is $960
million and $745 million for swaps at December 31, 1998 and November 12, 1999,
respectively. The balance of the contract totals presented above reflects
contracts entered into as of November 12, 1999 which do not become effective
until existing contracts expire.
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 12,
1998 1999
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cable television systems.................................... $765,641 $862,889
Furniture and equipment..................................... 25,576 29,514
Vehicles.................................................... 18,381 19,835
Land, buildings and improvements............................ 16,505 16,568
-------- --------
826,103 928,806
Less accumulated depreciation and amortization.............. (320,209) (374,955)
-------- --------
$505,894 $553,851
======== ========
</TABLE>
NOTE 6 -- NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 12,
1998 1999
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FCLP Only:
8.375% Senior Debentures(a)............................... $ 375,000 $ 375,000
9.285% Senior Discount Debentures, less unamortized
discount(a)............................................ 294,982 319,085
Owned Subsidiaries:
Credit Facility(b)........................................ 926,000 --
Amended and Restated Credit Agreement(c).................. -- 1,017,750
Other subordinated notes(d)............................... 15,000 --
Other..................................................... 371 --
---------- ----------
$1,611,353 $1,711,835
========== ==========
</TABLE>
(a) 8.375% SENIOR DEBENTURES AND 9.285% SENIOR DISCOUNT DEBENTURES
On April 3, 1998, FHGLP and its wholly-owned subsidiary, Falcon Funding
Corporation ("FFC" and, collectively with FHGLP, the "Issuers"), sold
$375,000,000 aggregate principal amount of 8.375% Senior Debentures due 2010
(the "Senior Debentures") and $435,250,000 aggregate principal amount at
maturity of 9.285% Senior Discount Debentures due 2010 (the "Senior Discount
Debentures" and, collectively with the Senior Debentures, the "Debentures") in a
private placement. The Debentures were exchanged for debentures with the same
form and terms, but registered under the Securities Act of 1933, as amended, in
August 1998.
F-347
<PAGE> 559
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- NOTES PAYABLE -- (CONTINUED)
In connection with consummation of the TCI Transaction, the Partnership was
substituted for FHGLP as an obligor under the Debentures and thereupon FHGLP was
released and discharged from any further obligation with respect to the
Debentures and the related Indenture. FFC remains as an obligor under the
Debentures and is now a wholly owned subsidiary of the Partnership. FFC was
incorporated solely for the purpose of serving as a co-issuer of the Debentures
and does not have any material operations or assets and will not have any
revenues.
The Senior Discount Debentures were issued at a price of 63.329% per $1,000
aggregate principal amount at maturity, for total gross proceeds of
approximately $275.6 million, and will accrete to stated value at an annual rate
of 9.285% until April 15, 2003. The unamortized discount amounted to $140.3
million at December 31, 1998 and $116.2 at November 12, 1999, respectively.
After giving effect to offering discounts, commissions and estimated expenses of
the offering, the sale of the Debentures (representing aggregate indebtedness of
approximately $650.6 million as of the date of issuance) generated net proceeds
of approximately $631 million. The Partnership used substantially all the net
proceeds from the sale of the Debentures to repay outstanding bank indebtedness.
(b) CREDIT FACILITY
On June 30, 1998, the Partnership entered into a $1.5 billion senior credit
facility (the "Credit Facility") which replaced its earlier credit facility and
provided funds for the closing of the TCI Transaction. See Note 1. The borrowers
under the Credit Facility were the operating subsidiaries prior to consummation
of the TCI Transaction and, following the TCI Transaction, the borrower is
Falcon LLC. The restricted companies, as defined under the Credit Facility, are
Falcon LLC and each of its subsidiaries (excluding certain subsidiaries
designated as excluded companies from time to time) and each restricted company
(other than Falcon LLC) is also a guarantor of the Credit Facility.
The Credit Facility consisted of three committed facilities (one revolver
and two term loans) and one uncommitted $350 million supplemental credit
facility (the terms of which will be negotiated at the time the Partnership
makes a request to draw on such facility). Facility A is a $650 million
revolving credit facility maturing December 29, 2006; Facility B is a $200
million term loan maturing June 29, 2007; and Facility C is a $300 million term
loan maturing December 31, 2007. All of Facility C and approximately $126
million of Facility B were funded on June 30, 1998, and the debt outstanding
under the Partnership's earlier credit facility of approximately $329 million
was repaid. As a result, from June 30, 1998 until September 29, 1998, FHGLP had
an excess cash balance of approximately $90 million. Immediately prior to
closing the TCI Transaction, approximately $39 million was borrowed under
Facility A to discharge certain indebtedness of Falcon Video. In connection with
consummation of the TCI Transaction, Falcon LLC assumed the approximately $433
million of indebtedness outstanding under the Credit Facility. In addition to
utilizing cash on hand of approximately $63 million, Falcon LLC borrowed the
approximately $74 million remaining under Facility B and approximately $366
million under Facility A to discharge approximately $73 million of Falcon Video
indebtedness and to retire approximately $430 million of TCI indebtedness
assumed as part of the contribution of the TCI Systems. As a result of these
borrowings, the amount outstanding under the Credit Facility at December 31,
1998 was $926 million. Subject to covenant limitations, the Partnership had
available to it additional borrowing capacity thereunder of $224 million at
December 31, 1998. However, limitations imposed by the Partnership's partnership
agreement, as amended, would limit available borrowings at December 31, 1998 to
$23.1 million.
F-348
<PAGE> 560
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- NOTES PAYABLE -- (CONTINUED)
(c) AMENDED AND RESTATED CREDIT AGREEMENT
On November 12, 1999, the Partnership amended the Credit Facility with the
Amended and Restated Credit Agreement (the "Amended Agreement") providing for a
$1.85 billion senior credit facility. The Amended Agreement consists of four
committed facilities (two revolvers and two term loans) and one uncommitted $590
million supplemental credit facility (the terms of which will be negotiated at
the time the Partnership makes a request to draw on such facility). Facility A
is a $646 million revolving credit facility maturing December 29, 2006; Facility
B is a $200 million term loan maturing June 29, 2007; Facility C is a $300
million term loan maturing December 31, 2007; and Facility D is a $110 million
supplemental revolving credit facility maturing on December 31, 2007. As a
result of borrowings, the amount outstanding under the Amended Agreement at
November 12, 1999 was $1.018 billion. The Partnership had available to it
additional borrowing capacity thereunder of $235 million. However debt covenants
limit the amount that can be borrowed to $205 million at November 12, 1999,
which was subject to limitations imposed by the Partnership's partnership
agreement. Charter paid the lenders a fee of $2 million to obtain the Amended
Agreement.
(d) OTHER SUBORDINATED NOTES
Other subordinated notes consisted of 11.56% Subordinated Notes due March
2001. The subordinated notes were repaid by Charter on November 12, 1999 with
accrued interest of $202,000 and a prepayment premium of $1,143,000.
(e) INTEREST RATE HEDGING AGREEMENTS
The Partnership utilizes interest rate hedging agreements to establish
long-term fixed interest rates on a portion of its variable-rate debt. The
Amended Agreement requires that interest be tied to the ratio of consolidated
total debt to consolidated annualized cash flow (in each case, as defined
therein), and further requires that the Partnership maintain hedging
arrangements with respect to at least 50% of the outstanding borrowings
thereunder plus any additional borrowings of the Partnership, including the
Debentures, for a two year period. As of November 12, 1999, borrowings under the
Amended Agreement bore interest at an average rate of 7.51% (including the
effect of interest rate hedging agreements). The Partnership has entered into
fixed interest rate hedging agreements with an aggregate notional amount at
November 12, 1999 of $1.28 billion. Agreements in effect at November 12, 1999
totaled $745 million, with the remaining $535 million to become effective as
certain of the existing contracts mature from 2000 through October 2004. These
agreements expire at various times through October 2006.
The hedging agreements resulted in additional interest expense of $350,000,
$1.2 million and $3.9 million for the years ended December 31, 1997 and 1998 and
for the period from January 1, 1999 to November 12, 1999, respectively. The
Partnership does not believe that it has any significant risk of exposure to
non-performance by any of its counterparties.
F-349
<PAGE> 561
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- NOTES PAYABLE -- (CONTINUED)
(f) DEBT MATURITIES
The Partnership's notes payable outstanding at November 12, 1999 mature as
follows:
<TABLE>
<CAPTION>
8.375% 9.285%
SENIOR SENIOR NOTES TO
YEAR DEBENTURES DEBENTURES BANKS TOTAL
- - - ---- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
2000................................ $ -- $ -- $ 5,000 $ 5,000
2001................................ -- -- 5,000 5,000
2002................................ -- -- 5,000 5,000
2003................................ -- -- 5,000 5,000
2004................................ -- -- 5,000 5,000
Thereafter.......................... $375,000 $435,250 $992,750 $1,803,000
</TABLE>
(G) EXTRAORDINARY ITEM
Fees and expenses incurred in connection with the repurchase of the
Partnership's 11% Notes (the "Notes") on May 19, 1998 and the retirement of the
remaining Notes on September 15, 1998 were $19.7 million in the aggregate. In
addition, the unamortized portion of deferred loan costs related to the Notes
and a previous credit facility, which amounted to $10.9 million in the
aggregate, were written off as an extraordinary charge upon the extinguishment
of the related debt in 1998.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
The Partnership leases land, office space and equipment under operating
leases expiring at various dates through the year 2039. See Note 9.
Future minimum rentals for operating leases at November 12, 1999 are as
follows:
<TABLE>
<CAPTION>
YEAR TOTAL
- - - ---- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
1999........................................................ $ 353
2000........................................................ 2,904
2001........................................................ 2,527
2002........................................................ 2,132
2003........................................................ 1,232
Thereafter.................................................. 4,612
-------
$13,760
=======
</TABLE>
In most cases, management expects that, in the normal course of business,
these leases will be renewed or replaced by other leases. Rent expense amounted
to $2.4 million in 1997, $3.1 million in 1998 and $3.6 million for the period
from January 1, 1999 to November 12, 1999.
In addition, the Partnership rents line space on utility poles in some of
the franchise areas it serves. These rentals amounted to $3.1 million for 1997,
$3.9 million for 1998 and $4.5 million for the period from January 1, 1999 to
November 12, 1999. Generally, such pole rental agreements are short-term;
however, the Partnership anticipates such rentals will continue in the future.
F-350
<PAGE> 562
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Beginning in August 1997, the Partnership elected to self-insure its cable
distribution plant and subscriber connections against property damage as well as
possible business interruptions caused by such damage. The decision to
self-insure was made due to significant increases in the cost of insurance
coverage and decreases in the amount of insurance coverage available. In October
1998, the Partnership reinstated third party insurance coverage against damage
to its cable distribution plant and subscriber connections and against business
interruptions resulting from such damage. This coverage is subject to a
significant annual deductible and is intended to limit the Partnership's
exposure to catastrophic losses, if any, in future periods. Management believes
that the relatively small size of the Partnership's markets in any one
geographic area, coupled with their geographic separation, will mitigate the
risk that the Partnership could sustain losses due to seasonal weather
conditions or other events that, in the aggregate, could have a material adverse
effect on the Partnership's liquidity and cash flows. The Partnership continues
to purchase insurance coverage in amounts management views as appropriate for
all other property, liability, automobile, workers' compensation and other types
of insurable risks.
The Partnership is required under various franchise agreements at November
12, 1999 to rebuild certain existing cable systems at a cost of approximately
$125.4 million.
The Partnership is regulated by various federal, state and local government
entities. The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), provides for among other things, federal and local
regulation of rates charged for basic cable service, cable programming service
tiers ("CPSTs") and equipment and installation services. Regulations issued in
1993 and significantly amended in 1994 by the Federal Communications Commission
(the "FCC") have resulted in changes in the rates charged for the Partnership's
cable services. The Partnership believes that compliance with the 1992 Cable Act
has had a negative impact on its operations and cash flow. It also presently
believes that any potential future liabilities for refund claims or other
related actions would not be material. The Telecommunications Act of 1996 (the
"1996 Telecom Act") was signed into law on February 8, 1996. As it pertains to
cable television, the 1996 Telecom Act, among other things, (i) ends the
regulation of certain CPSTs in 1999; (ii) expands the definition of effective
competition, the existence of which displaces rate regulation; (iii) eliminates
the restriction against the ownership and operation of cable systems by
telephone companies within their local exchange service areas; and (iv)
liberalizes certain of the FCC's cross-ownership restrictions.
The Partnership has various contracts to obtain basic and premium
programming from program suppliers whose compensation is generally based on a
fixed fee per customer or a percentage of the gross receipts for the particular
service. Some program suppliers provide volume discount pricing structures or
offer marketing support to the Partnership. The Partnership's programming
contracts are generally for a fixed period of time and are subject to negotiated
renewal. The Partnership does not have long-term programming contracts for the
supply of a substantial amount of its programming. Accordingly, no assurances
can be given that the Partnership's programming costs will not continue to
increase substantially or that other materially adverse terms will not be added
to the Partnership's programming contracts. Management believes, however, that
the Partnership's relations with its programming suppliers generally are good.
Effective December 1, 1998, the Partnership elected to obtain certain of
its programming services through an affiliate of TCI. This election resulted in
a reduction in the Partnership's programming costs, the majority of which will
be passed on to its customers in the form of
F-351
<PAGE> 563
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
reduced rates in compliance with FCC rules. The Partnership has elected to
continue to acquire its remaining programming services under its existing
programming contracts. The Partnership, in the normal course of business,
purchases cable programming services from certain program suppliers owned in
whole or in part by an affiliate of TCI.
The Partnership is periodically a party to various legal proceedings. Such
legal proceedings are ordinary and routine litigation proceedings that are
incidental to the Partnership's business, and management presently believes that
the outcome of all pending legal proceedings will not, individually or in the
aggregate, have a material adverse effect on the financial condition of the
Partnership.
The Partnership, certain of its affiliates, and certain third parties were
named as defendants in an action entitled Frank O'Shea I.R.A. et al. v. Falcon
Cable Systems Company, et al., Case No. BC 147386, in the Superior Court of the
State of California, County of Los Angeles (the "Action"). Plaintiffs in the
Action were certain former unitholders of Falcon Cable Systems Company ("FCSC")
purporting to represent a class consisting of former unitholders of FCSC other
than those affiliated with FCSC and/or its controlling persons. The complaint in
the Action alleged, among other things, that defendants breached their fiduciary
and contractual duties to unitholders, and acted negligently, with respect to
the purchase from former unitholders of their interests in FCSC in 1996. A
settlement of the action was approved by the court in May 1999 and has become
effective. The terms of the settlement did not have a material adverse effect on
the financial condition of the Partnership. Net of insurance proceeds, the
settlement's cost to the Partnership amounted to approximately $2.9 million. The
Partnership recognized expenses related to the settlement of $145,000, $2.5
million and $166,000 in 1997, 1998, and for the period from January 1, 1999 to
November 12, 1999, respectively.
In various states, customers have filed punitive class action lawsuits on
behalf of all persons residing in those states who are or were customers of the
Partnership's cable television service, and who have been charged a fee for
delinquent payment of their cable bill. The actions challenge the legality of
the processing fee and seek declaratory judgment, injunctive relief and
unspecified damages. At this stage, the Partnership is not able to project the
outcome of the actions.
NOTE 8 -- EMPLOYEE BENEFIT PLANS
The subsidiaries of the Partnership have a cash or deferred profit sharing
plan (the "Profit Sharing Plan") covering substantially all of their employees.
FHGLP joined in the adoption of the FHGI cash or deferred profit sharing plan as
of March 31, 1993. The provisions of this plan were amended to be substantially
identical to the provisions of the Profit Sharing Plan.
The Profit Sharing Plan provides that each participant may elect to make a
contribution in an amount up to 20% of the participant's annual compensation
which otherwise would have been payable to the participant as salary. The
Partnership's contribution to the Profit Sharing Plan, as determined by
management, is discretionary but may not exceed 15% of the annual aggregate
compensation (as defined) paid to all participating employees. Effective January
1, 1999 the Profit Sharing Plan was amended, whereby the Partnership would make
an employer contribution equal to 100% of the first 3% and 50% of the next 2% of
the participant's contributions, respectively. There were no contributions for
the Profit Sharing Plan in 1997 or 1998. The partnership contributed $1.0
million during the period from January 1, 1999 to November 12, 1999.
F-352
<PAGE> 564
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- EMPLOYEE BENEFIT PLANS -- (CONTINUED)
On September 30 1998, the Partnership assumed the obligations of FHGLP for
its 1993 Incentive Performance Plan (the "Incentive Plan"). The value of the
interests in the Incentive Plan was tied to the equity value of certain
partnership units in FHGLP held by FHGI. In connection with the assumption by
the Partnership, FHGLP agreed to fund any benefits payable under the Incentive
Plan through additional capital contributions to the Partnership, the waiver of
its rights to receive all or part of certain distributions from the Partnership
and/or a contribution of a portion of its partnership units to the Partnership.
The benefits which were payable under the Incentive Plan are equal to the amount
of distributions which FHGI would have otherwise received with respect to
1,932.67 of the units of FHGLP held by FHGI and a portion of FHGI's interest in
certain of the partnerships that are the general partners of the Partnership's
operating subsidiaries. Benefits were payable under the Incentive Plan only when
distributions would otherwise be paid to FHGI with respect to the
above-described units and interests.
In 1999, the Partnership adopted a Restricted Unit Plan (the "New FCLP
Incentive Plan" or "Plan") for the benefit of certain employees. Grants of
restricted units are provided at the discretion of the Advisory Committee. The
value of the units in the New FCLP Incentive Plan is tied to the equity value of
FCLP above a base equity as determined initially in 1999 by the partners, and
for grants in subsequent years by an appraisal. Benefits are payable under the
New FCLP Incentive Plan only when distributions would otherwise be payable to
equity holders of FCLP. An initial grant of 100,000 units representing 2.75% of
the equity of FCLP in excess of the equity base was approved and will be
allocated to the participants in the Plan. There is a five-year vesting
requirement for all participants.
In connection with the sale of the Partnership to Charter discussed in Note
1, the Partnership recorded compensation expense in the amount of approximately
$46.4 million related to both the Incentive Plan ($21 million) and the New FCLP
Incentive Plan ($25.4 million). The amount was determined based on the value of
the underlying ownership units, as established by the sale of the Partnership to
Charter, and on estimated closing working capital and debt balances of the
Partnership. The Partnership paid $33 million on November 12, 1999 to certain
employees. The payments were funded by net proceeds of the sale. The Partnership
transferred its remaining liability approximating $13.4 million to FHGLP who
will make the final payments under the plans. The participants in the Incentive
Plan were present and former employees of the Partnership, FHGLP and its
operating affiliates, all of whom were 100% vested. Prior to the closing of the
TCI Transaction, FHGLP amended the Incentive Plan to provide for payments by
FHGLP at the closing of the TCI Transaction to participants in an aggregate
amount of approximately $6.5 million and to reduce by such amount FHGLP's
obligations to make future payments to participants under the Incentive Plan.
In addition to the amounts expensed pursuant to the equity plans, the
Partnership recorded bonuses to certain employees in the aggregate amount of $20
million upon the closing of the sale to Charter. The Partnership also recorded
employee severance and other compensation aggregating $4.2 million. The
Partnership paid $11.8 million on November 12, 1999 to certain employees. The
payments were funded by net proceeds of the sale. The Partnership transferred
its remaining liability approximating $12.4 million to FHGLP who will make the
final payment. The aggregate amount of expenses recorded under benefit plans and
severance and other compensation of $70.7 million was recorded as a capital
contribution, as FHGLP's share of the proceeds from the sale have been, or will
be, used to fund such obligations.
F-353
<PAGE> 565
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Partnership is a separate, stand-alone holding company which employs
all of the management personnel. The Partnership is financially dependent on the
receipt of permitted payments from its operating subsidiaries, management and
consulting fees from domestic cable ventures, and the reimbursement of specified
expenses by certain of the Affiliated Partnerships to fund its operations.
Expected increases in the funding requirements of the Partnership combined with
limitations on its sources of cash may create liquidity issues for the
Partnership in the future. Specifically, the Credit Facility permitted the
subsidiaries of the Partnership to remit to the Partnership no more than 4.25%
of their net cable revenues, as defined, in any year. Beginning on January 1,
1999, this limitation was increased to 4.5% of net cable revenues in any year.
As a result of the 1998 acquisition by the Partnership of the Falcon Classic and
Falcon Video Systems, the Partnership will no longer receive management fees and
reimbursed expenses from Falcon Classic or receive management fees from Falcon
Video. Commencing on October 1, 1998, FHGLP retains 20% of the management fees
paid by the Enstar partnerships. The management fees earned from the Enstar
partnerships were $2 million, $1.9 million and $1.4 million for the years ended
December 31, 1997 and 1998 and for the period from January 1, 1999 to November
12, 1999, respectively.
The management and consulting fees and expense reimbursements earned from
the Affiliated Partnerships amounted to approximately $5.2 million and $2.1
million, $3.7 million and $1.5 million and $1.4 million and $1.4 million for the
years ended December 31, 1997 and 1998 and for the period ended November 12,
1999, respectively. The fees and expense reimbursements of $3.7 million and $1.5
million earned in 1998 included $191,000 and $128,000 earned from Falcon Classic
from January 1, 1998 through July 16, 1998, and $1.2 million in management fees
from Falcon Video from January 1, 1998 through September 30, 1998. Subsequent to
these acquisitions, the amounts payable to the Partnership in respect of its
management of the former Falcon Classic and Falcon Video systems became subject
to the limitations contained in the Credit Facility.
Included in Commitments and Contingencies (Note 7) is a facility lease
agreement with the Partnership's Chief Executive Officer and his wife, or
entities owned by them, requiring annual future minimum rental payments
aggregating $2.5 million through 2005. During the years ended December 31, 1997
and 1998 and for the period ended November 12, 1999, rent expense on the
facility amounted to $383,000, $416,000 and $369,000, respectively. FCLP
purchased a facility owned by the Partnership's Chief Executive Officer and his
wife in February 1999 for $283,000 which was previously leased by FCLP.
In addition, the Partnership provides certain accounting, bookkeeping and
clerical services to the Partnership's Chief Executive Officer. The costs of
services provided were determined based on allocations of time plus overhead
costs (rent, parking, supplies, telephone, etc.). Such services amounted to
$163,000, $212,000 and $256,000 for the years ended December 31, 1997 and 1998
and for the period from January 1, 1999 to November 12, 1999, respectively.
These costs were net of amounts reimbursed to the Partnership by the Chief
Executive Officer amounting to $55,000, $72,000 and $77,000 for the years ended
December 31, 1997 and 1998 and for the period from January 1, 1999 to November
12, 1999, respectively.
F-354
<PAGE> 566
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- OTHER INCOME (EXPENSE)
Other income (expense) is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1999
----------------- TO NOVEMBER 12,
1997 1998 1999
------- ------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Gain (loss) on insured casualty losses.................. $ 3,476 $ 314 $ (69)
Gain on sale of system.................................. -- -- 10,671
Sale of system -- Falcon................................ -- -- (2,427)
Gain (loss) on sale of investment....................... (1,360) 174 --
Net lawsuit settlement costs............................ (1,030) (2,614) (166)
Other, net.............................................. (201) (791) 53
------- ------- -------
$ 885 $(2,917) $ 8,062
======= ======= =======
</TABLE>
NOTE 11 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Operating activities
During the years ended December 31, 1997 and 1998 and the period from
January 1, 1999 to November 12, 1999, FCLP paid cash interest amounting to
approximately $48.1 million, $84.9 million and $93.9 million, respectively.
Investing activities
See Note 3 regarding the non-cash investing activities related to the
acquisitions of the cable systems of the TCI Systems, the Falcon Video Systems
and the Falcon Classic Systems. Also included in Note 3 are the non-cash
investing activities related to the exchange of the Partnership's Scottsburg,
Indiana system for a system in Franklin, Virginia.
Financing activities
See Note 3 regarding the non-cash financing activities relating to the
acquisitions of the cable systems of the TCI Systems, the Falcon Video Systems
and the Falcon Classic Systems. See Note 2 regarding the reclassification to
redeemable partners' equity.
NOTE 12 -- FCLP (PARENT COMPANY ONLY)
The following parent-only condensed financial information presents Falcon
Communications, L.P.'s balance sheets and related statements of operations and
cash flows by accounting for the investments in its subsidiaries on the equity
method of accounting. The accompanying condensed financial information should be
read in conjunction with the consolidated financial statements and notes
thereto.
F-355
<PAGE> 567
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- FCLP (PARENT COMPANY ONLY) -- (CONTINUED)
CONDENSED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
NOVEMBER 12,
DECEMBER 31, 1999
1998 (DATE OF DISPOSITION)
------------ ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................ $ 1,605 $ 3,363
Receivables:
Intercompany notes and accrued interest receivable.... 655,128 674,409
Due from affiliates and other entities................ 2,129 108
Prepaid expenses and other............................... 236 305
Property, plant and equipment, less accumulated
depreciation and amortization......................... 3,599 4,572
Deferred loan costs, less accumulated amortization....... 20,044 18,718
---------- ----------
$ 682,741 $ 701,475
========== ==========
LIABILITIES:
Senior notes payable..................................... $ 669,982 $ 694,085
Notes payable to affiliates.............................. 70,805 71,801
Accounts payable......................................... 135 340
Accrued expenses......................................... 14,000 10,432
Equity in net losses of subsidiaries in excess of
investment............................................ 198,492 324,533
---------- ----------
TOTAL LIABILITIES..................................... 953,414 1,101,191
REDEEMABLE PARTNERS' EQUITY................................ 133,023 424,280
PARTNERS' DEFICIT.......................................... (403,696) (823,996)
---------- ----------
$ 682,741 $ 701,475
========== ==========
</TABLE>
F-356
<PAGE> 568
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- FCLP (PARENT COMPANY ONLY) -- (CONTINUED)
CONDENSED STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1, 1999 TO
------------------------ NOVEMBER 12, 1999
1997 1998 (DATE OF DISPOSITION)
---------- ----------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Management fees:
Affiliated Partnerships.................... $ 2,873 $ 2,120 $ 1,372
Subsidiaries............................... 13,979 14,010 16,530
International and other.................... 281 33 29
-------- --------- ---------
Total revenues........................... 17,133 16,163 17,931
-------- --------- ---------
EXPENSES:
General and administrative expenses........... 11,328 21,134 83,180
Depreciation and amortization................. 274 559 1,242
-------- --------- ---------
Total expenses........................... 11,602 21,693 84,422
-------- --------- ---------
Operating income (loss).................. 5,531 (5,530) (66,491)
OTHER INCOME (EXPENSE):
Interest income............................... 22,997 50,562 49,731
Interest expense.............................. (30,485) (59,629) (56,861)
Equity in net losses of subsidiaries.......... (56,422) (105,659) (126,041)
Equity in net losses of investee
partnerships............................... (4) (31) --
Other, net.................................... (2,455) -- 830
-------- --------- ---------
Net loss before extraordinary item.............. (60,838) (120,287) (198,832)
Extraordinary item, retirement of debt.......... -- (24,196) --
-------- --------- ---------
NET LOSS........................................ $(60,838) $(144,483) $(198,832)
======== ========= =========
</TABLE>
F-357
<PAGE> 569
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- FCLP (PARENT COMPANY ONLY) -- (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1999 TO
------------------ NOVEMBER 12, 1999
1997 1998 (DATE OF DISPOSITION)
------ --------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in) Operating
activities...................................... $1,478 $(418,226) $2,982
------ --------- ------
Cash flows from investing activities:
Distributions from affiliated partnerships...... -- 1,820 --
Capital expenditures............................ (417) (2,836) (2,218)
Investments in affiliated partnerships and other
investments.................................. (254) (2,998) --
Proceeds from sale of investments and other
assets....................................... 702 1,694 4
Assets retained by Falcon Holding Group, L.P.... -- (2,893) --
------ --------- ------
Net cash provided by (used in) investing
activities...................................... 31 (5,213) (2,214)
------ --------- ------
Cash flows from financing activities:
Repayment of debt............................... (131) (282,203) --
Borrowings from notes payable................... -- 650,639 --
Borrowings from subsidiaries.................... -- 70,805 996
Capital contributions........................... 93 -- --
Redemption of partners' equity.................. -- (1,170) --
Deferred loan costs............................. -- (21,204) (7)
------ --------- ------
Net cash provided by (used in) financing
activities...................................... (38) 416,867 989
------ --------- ------
Net increase (decrease) in cash and cash
equivalents..................................... 1,471 (6,572) 1,757
Cash and cash equivalents, at beginning of
period.......................................... 6,706 8,177 1,605
------ --------- ------
Cash and cash equivalents, at end of period....... $8,177 $ 1,605 $3,362
====== ========= ======
</TABLE>
NOTE 13 -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COST AND END OF
OF PERIOD EXPENSES(A) DEDUCTIONS(B) OTHER(C) PERIOD
---------- ----------- ------------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for possible losses on
receivables
Year ended December 31,
1997.......................... $907 $5,714 $(5,796) -- $ 825
1998.......................... $825 $4,775 $(5,299) $369 $ 670
Period from January 1, 1999 to
November 12, 1999............. $670 $4,510 $(4,106) -- $1,074
</TABLE>
- - - ---------------
(a) Provision for losses, net of recoveries.
(b) Write-off uncollectible accounts.
F-358
<PAGE> 570
FALCON COMMUNICATIONS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Allowance for losses on receivables acquired in connection with the
acquisition of Falcon Classic, Falcon Video and the TCI Systems.
NOTE 14 -- YEAR 2000 (UNAUDITED)
In the prior years, the Partnership discussed the nature and progress of
its plans to become Year 2000 ready. In late 1999, the Partnership completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Partnership experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000 date
change. The Partnership expensed approximately $4.7 million during the period
from January 1, 1999 to November 12, 1999 in connection with remediating its
systems. The Partnership is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems, or the
products and services of third parties.
F-359
<PAGE> 571
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tele-Communications, Inc.:
We have audited the accompanying combined balance sheets of the TCI Falcon
Systems (as defined in Note 1 to the combined financial statements) as of
September 30, 1998 and December 31, 1997, and the related combined statements of
operations and parent's investment, and cash flows for the nine-month period
ended September 30, 1998 and for each of the years in the two-year period ended
December 31, 1997. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the TCI Falcon
Systems as of September 30, 1998 and December 31, 1997, and the results of their
operations and their cash flows for the nine-month period ended September 30,
1998 and for each of the years in the two-year period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Denver, Colorado
June 21, 1999
F-360
<PAGE> 572
TCI FALCON SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Trade and other receivables, net............................ $ 2,452 $ 4,665
Property and equipment, at cost:
Land...................................................... 1,289 1,232
Distribution systems...................................... 151,017 137,767
Support equipment and buildings........................... 20,687 18,354
-------- --------
172,993 157,353
Less accumulated depreciation............................. 80,404 69,857
-------- --------
92,589 87,496
-------- --------
Franchise costs............................................. 399,258 393,540
Less accumulated amortization............................. 70,045 62,849
-------- --------
329,213 330,691
-------- --------
Other assets, net of accumulated amortization............... 630 714
-------- --------
$424,884 $423,566
======== ========
LIABILITIES AND PARENT'S INVESTMENT
Accounts payable............................................ $ 729 $ 350
Accrued expenses............................................ 5,267 3,487
Deferred income taxes (note 4).............................. 124,586 121,183
-------- --------
Total liabilities................................. 130,582 125,020
Parent's investment (note 5)................................ 294,302 298,546
-------- --------
Commitments and contingencies (note 6)...................... $424,884 $423,566
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-361
<PAGE> 573
TCI FALCON SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEARS ENDED
THROUGH DECEMBER 31,
SEPTEMBER 30, --------------------
1998 1997 1996
--------------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenue.............................................. $ 86,476 $113,897 $102,155
Operating costs and expenses:
Operating (note 5)................................. 31,154 39,392 33,521
Selling, general and administrative................ 17,234 19,687 21,695
Administrative fees (note 5)....................... 2,853 5,034 5,768
Depreciation....................................... 10,317 12,724 12,077
Amortization....................................... 7,440 9,785 8,184
-------- -------- --------
68,998 86,622 81,245
-------- -------- --------
Operating income................................ 17,478 27,275 20,910
Other income (expense):
Intercompany interest expense (note 5)............. (4,343) (5,832) (4,701)
Other, net......................................... 28 (84) (44)
-------- -------- --------
(4,315) (5,916) (4,745)
-------- -------- --------
Earnings before income taxes.................... 13,163 21,359 16,165
Income tax expense................................... (5,228) (8,808) (6,239)
-------- -------- --------
Net earnings.................................... 7,935 12,551 9,926
Parent's investment:
Beginning of period................................ 298,546 319,520 262,752
Change in due to Tele-Communications, Inc. ("TCI")
(note 5)........................................ (12,179) (33,525) 46,842
-------- -------- --------
End of period...................................... $294,302 $298,546 $319,520
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-362
<PAGE> 574
TCI FALCON SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEARS ENDED
THROUGH DECEMBER 31,
SEPTEMBER 30, --------------------
1998 1997 1996
--------------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings....................................... $ 7,935 $ 12,551 $ 9,926
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization................... 17,757 22,509 20,261
Deferred income tax expense..................... 3,403 7,181 4,533
Changes in operating assets and liabilities, net
of effects of acquisitions:
Change in receivables......................... 2,213 (1,644) (55)
Change in other assets........................ 84 (125) (248)
Change in accounts payable and accrued
expenses................................... 2,159 418 (473)
-------- -------- --------
Net cash provided by operating
activities............................... 33,551 40,890 33,944
-------- -------- --------
Cash flows from investing activities:
Capital expended for property and equipment........ (13,540) (7,586) (13,278)
Cash paid for acquisitions......................... -- -- (68,240)
Other investing activities......................... (809) 221 732
-------- -------- --------
Net cash used in investing activities...... (14,349) (7,365) (80,786)
-------- -------- --------
Cash flows from financing activities:
Change in due to TCI............................... (19,202) (33,525) 46,842
-------- -------- --------
Net cash provided by (used in) financing
activities............................... (19,202) (33,525) 46,842
-------- -------- --------
Net change in cash......................... -- -- --
Cash:
Beginning of period...................... -- -- --
-------- -------- --------
End of period............................ $ -- $ -- $ --
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest........... $ 4,343 $ 5,832 $ 4,701
======== ======== ========
Cash paid during the period for income taxes....... $ -- $ 140 $ 86
======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-363
<PAGE> 575
TCI FALCON SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO SEPTEMBER 30, 1998,
AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(1) BASIS OF PRESENTATION
The combined financial statements include the accounts of thirteen of TCI's
cable television systems serving certain subscribers within Oregon, Washington,
Alabama, Missouri and California (collectively, the "TCI Falcon Systems"). This
combination was created in connection with the Partnership formation discussed
below. The TCI Falcon Systems were indirectly wholly-owned by TCI in all periods
presented herein up to the date of the Contribution, as defined below. All
significant inter-entity accounts and transactions have been eliminated in
combination. The combined net assets of the TCI Falcon Systems including amounts
due to TCI are referred to as "Parent's Investment".
TCI's ownership interests in the TCI Falcon Systems, as described above,
were acquired through transactions wherein TCI acquired various larger cable
entities (the "Original Systems"). The TCI Falcon System's combined financial
statements include an allocation of the purchase price and certain purchase
accounting adjustments, including the related deferred tax effects, from TCI's
acquisition of the Original Systems. Such allocation and the related franchise
cost amortization was based on the relative fair market value of the systems
acquired. In addition, certain costs of TCI are charged to the TCI Falcon
Systems based on their number of customers (see note 5). Although such
allocations are not necessarily indicative of the costs that would have been
incurred by the TCI Falcon Systems on a stand alone basis, management believes
that the resulting allocated amounts are reasonable.
Partnership Formation
On September 30, 1998, TCI and Falcon Holding Group, LP ("Falcon") closed a
transaction under a Contribution and Purchase Agreement (the "Contribution"),
whereby TCI contributed the TCI Falcon Systems to a newly formed partnership
(the "Partnership") between TCI and Falcon in exchange for an approximate 46%
ownership interest in the Partnership. The accompanying combined financial
statements reflect the position, results of operations and cash flows of the TCI
Falcon Systems immediately prior to the Contribution, and, therefore, do not
include the effects of such Contribution.
(2) ACQUISITION
On January 1, 1998, a subsidiary of TCI acquired certain cable television
assets in and around Ellensburg, WA from King Videocable Company. On the same
date, these assets were transferred to the TCI Falcon Systems. As a result of
these transactions, the TCI Falcon Systems recorded non-cash increases in
property and equipment of $2,100,000, in franchise costs of $4,923,000, and in
parent's investment of $7,023,000. Assuming the acquisition had occurred on
January 1, 1997, the TCI Falcon Systems' pro forma results of operations would
not have been materially different from the results of operations for the year
ended December 31, 1997.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Receivables
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at September 30, 1998 and December 31, 1997 was not significant.
F-364
<PAGE> 576
TCI FALCON SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, labor and applicable
overhead related to installations, and interest during construction are
capitalized. During the nine-month period ended September 30, 1998 and for the
years ended December 31, 1997 and 1996, interest capitalized was not
significant.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for support
equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such property
are charged to accumulated depreciation, and salvage, if any, is credited
thereto. Gains or losses are only recognized in connection with the sales of
properties in their entirety.
Franchise Costs
Franchise costs include the difference between the cost of acquiring cable
television systems and amounts assigned to their tangible assets. Such amounts
are generally amortized on a straight-line basis over 40 years. Costs incurred
by the TCI Falcon Systems in negotiating and renewing franchise agreements are
amortized on a straight-line basis over the life of the franchise, generally 10
to 20 years.
Impairment of Long-Lived Assets
Management periodically reviews the carrying amounts of property, plant and
equipment and its intangible assets to determine whether current events or
circumstances warrant adjustments to such carrying amounts. If an impairment
adjustment is deemed necessary based on an analysis of undiscounted cash flows,
such loss is measured by the amount that the carrying value of such assets
exceeds their fair value. Considerable management judgment is necessary to
estimate the fair value of assets, accordingly, actual results could vary
significantly from such estimates. Assets to be disposed of are carried at the
lower of their financial statement carrying amount or fair value less costs to
sell.
Revenue Recognition
Cable revenue for customer fees, equipment rental, advertising, and
pay-per-view programming is recognized in the period that services are
delivered. Installation revenue is recognized in the period the installation
services are provided to the extent of direct selling costs. Any remaining
amount is deferred and recognized over the estimated average period that
customers are expected to remain connected to the cable television system.
Combined Statements of Cash Flows
Transactions effected through the intercompany account with TCI (except for
the acquisition and dividend discussed in notes 2 and 5, respectively) have been
considered constructive cash receipts and payments for purposes of the combined
statements of cash flows.
F-365
<PAGE> 577
TCI FALCON SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the combined financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications
Certain prior year amounts have been reclassified for comparability with
the 1998 presentation.
(4) INCOME TAXES
The TCI Falcon Systems were included in the consolidated federal income tax
return of TCI. Income tax expense for the TCI Falcon Systems is based on those
items in the consolidated calculation applicable to the TCI Falcon Systems.
Intercompany tax allocation represents an apportionment of tax expense or
benefit (other than deferred taxes) among subsidiaries of TCI in relation to
their respective amounts of taxable earnings or losses. The payable or
receivable arising from the intercompany tax allocation is recorded as an
increase or decrease in amounts due to TCI. Deferred income taxes are based on
the book and tax basis differences of the assets and liabilities within the TCI
Falcon Systems. The income tax amounts included in the accompanying combined
financial statements approximate the amounts that would have been reported if
the TCI Falcon Systems had filed a separate income tax return.
Income tax expense for the nine-month period ended September 30, 1998 and
for the years ended December 31, 1997 and 1996 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Nine-month period ended September 30, 1998:
Intercompany allocation........................... $(1,825) $ -- $(1,825)
Federal........................................... -- (2,778) (2,778)
State and local................................... -- (625) (625)
------- ------- -------
$(1,825) $(3,403) $(5,228)
======= ======= =======
Year ended December 31, 1997:
Intercompany allocation........................... $(1,487) $ -- $(1,487)
Federal........................................... -- (5,862) (5,862)
State and local................................... (140) (1,319) (1,459)
------- ------- -------
$(1,627) $(7,181) $(8,808)
======= ======= =======
Year ended December 31, 1996:
Intercompany allocation........................... $(1,620) $ -- $(1,620)
Federal........................................... -- (4,032) (4,032)
State and local................................... (86) (501) (587)
------- ------- -------
$(1,706) $(4,533) $(6,239)
======= ======= =======
</TABLE>
F-366
<PAGE> 578
TCI FALCON SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense differs from the amounts computed by applying the
federal income tax rate of 35% as a result of the following:
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEARS ENDED
THROUGH DECEMBER 31,
SEPTEMBER 30, ------------------
1998 1997 1996
--------------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense................ $(4,607) $(7,476) $(5,658)
Amortization not deductible for tax purposes... (198) (265) (178)
State and local income taxes, net of federal
income tax benefit........................... (406) (948) (382)
Other.......................................... (17) (119) (21)
------- ------- -------
$(5,228) $(8,808) $(6,239)
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and deferred tax liabilities at September 30,
1998 and December 31, 1997 are presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Deferred tax asset -- principally due to non-
deductible accruals........................... $ 146 $ 128
-------- --------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation................ 24,246 20,985
Franchise costs, principally due to
differences in amortization and initial
basis...................................... 100,486 100,326
-------- --------
Total gross deferred tax
liabilities......................... 124,732 121,311
-------- --------
Net deferred tax liability............ $124,586 $121,183
======== ========
</TABLE>
(5) PARENT'S INVESTMENT
Parent's investment in the TCI Falcon Systems at September 30, 1998 and
December 31, 1997 is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Due to TCI...................................... $ 642,228 $224,668
Retained earnings (deficit)..................... (347,926) 73,878
--------- --------
$ 294,302 $298,546
========= ========
</TABLE>
The amount due to TCI represents advances for operations, acquisitions and
construction costs, as well as, the amounts owed as a result of the allocation
of certain costs from TCI. TCI charges intercompany interest expense at variable
rates to cable systems within the TCI Falcon Systems based upon amounts due to
TCI from the cable systems. Such amounts are due on demand.
F-367
<PAGE> 579
TCI FALCON SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On August 15, 1998, TCI caused the TCI Falcon Systems to effect
distributions from the TCI Falcon Systems to TCI aggregating $429,739,000 (the
"Dividend"). The Dividend resulted in a non-cash increase to the intercompany
amounts owed to TCI and a corresponding non-cash decrease to retained earnings.
As a result of TCI's ownership of 100% of the TCI Falcon Systems prior to
the Contribution, the amounts due to TCI have been classified as a component of
parent's investment in the accompanying combined financial statements.
The TCI Falcon Systems purchase, at TCI's cost, substantially all of their
pay television and other programming from affiliates of TCI. Charges for such
programming were $21,479,000, $25,500,000 and $20,248,000 for the nine months
ended September 30, 1998 and the years ended December 31, 1997 and 1996,
respectively, and are included in operating expenses in the accompanying
combined financial statements.
Certain subsidiaries of TCI provide administrative services to the TCI
Falcon Systems and have assumed managerial responsibility of the TCI Falcon
Systems' cable television system operations and construction. As compensation
for these services, the TCI Falcon Systems pay a monthly fee calculated on a
per-customer basis.
The intercompany advances and expense allocation activity in amounts due to
TCI consists of the following:
<TABLE>
<CAPTION>
JANUARY 1, 1998 YEARS ENDED
THROUGH DECEMBER 31,
SEPTEMBER 30, --------------------
1998 1997 1996
--------------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Beginning of period.......................... $224,668 $258,193 $211,351
Transfer of cable system acquisition
purchase price.......................... 7,023 -- 68,240
Programming charges........................ 21,479 25,500 20,248
Administrative fees........................ 2,853 5,034 5,768
Intercompany interest expense.............. 4,343 5,832 4,701
Tax allocations............................ 1,825 1,487 1,620
Distribution to TCI........................ 429,739 -- --
Cash transfer.............................. (49,702) (71,378) (53,735)
-------- -------- --------
End of period................................ $642,228 $224,668 $258,193
======== ======== ========
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") imposed certain rate regulations on the cable television
industry. Under the 1992 Cable Act, all cable systems are subject to rate
regulation, unless they face "effective competition," as defined by the 1992
Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"),
in their local franchise area.
Although the Federal Communications Commission (the "FCC") has established
regulations required by the 1992 Cable Act, local government units (commonly
referred to as local franchising authorities) are primarily responsible for
administering the regulation of a cable system's basic service tier ("BST"). The
FCC itself directly administered rate regulation of any
F-368
<PAGE> 580
TCI FALCON SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
cable programming service tier ("CPST"). The FCC's authority to regulate CPST
rates expired on March 31, 1999. The FCC has taken the position that it will
still adjudicate CPST complaints filed after this sunset date (but no later than
180 days after the last CPST rate increase imposed prior to March 31, 1999), and
will strictly limit its review (and possible refund orders) to the time period
predating the sunset date.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price structure that allows for the recovery
of inflation and certain increased costs, as well as providing some incentive
for expanding channel carriage. Operators also have the opportunity to bypass
this "benchmark" regulatory structure in favor of the traditional "cost-of-
service" regulation in cases where the latter methodology appears favorable.
Premium cable services offered on a per-channel or per-program basis remain
unregulated, as do affirmatively marketed packages consisting entirely of new
programming product.
The management of the TCI Falcon Systems believes that it has complied in
all material respects with the provisions of the 1992 Cable Act and the 1996
Act, including its rate setting provisions. If, as a result of the review
process, a system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of CPST
rates would be retroactive to the date of complaint. Any refunds of the excess
portion of BST or equipment rates would be retroactive to one year prior to the
implementation of the rate reductions.
Certain plaintiffs have filed or threatened separate class action
complaints against certain of the systems of TCI Falcon Systems, alleging that
the systems' practice of assessing an administrative fee to customers whose
payments are delinquent constitutes an invalid liquidated damage provision, a
breach of contract, and violates local consumer protection statutes. Plaintiffs
seek recovery of all late fees paid to the subject systems as a class purporting
to consist of all customers who were assessed such fees during the applicable
limitation period, plus attorney fees and costs.
The TCI Falcon Systems have contingent liabilities related to legal
proceedings and other matters arising in the ordinary course of business.
Although it is possible the TCI Falcon Systems may incur losses upon conclusion
of the matters referred to above, an estimate of any loss or range of loss
cannot presently be made. Based upon the facts available, management believes
that, although no assurance can be given as to the outcome of these actions, the
ultimate disposition should not have a material adverse effect upon the combined
financial condition of the TCI Falcon Systems.
The TCI Falcon Systems lease business offices, have entered into pole
rental agreements and use certain equipment under lease arrangements. Rental
expense under such arrangements amounted to $1,268,000, $1,868,000 and
$1,370,000 for the nine-month period ended September 30, 1998, and the years
ended December 31, 1997 and 1996, respectively.
F-369
<PAGE> 581
TCI FALCON SYSTEMS
(A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
SEPTEMBER 30,
- - - -------------
<S> <C>
1999........................................................ $ 762
2000........................................................ 667
2001........................................................ 533
2002........................................................ 469
2003........................................................ 414
Thereafter.................................................. 2,768
------
$5,613
======
</TABLE>
TCI formed a year 2000 Program Management Office (the "PMO") to organize
and manage its year 2000 remediation efforts. The PMO is responsible for
overseeing, coordinating and reporting on TCI's year 2000 remediation efforts,
including the year 2000 remediation efforts of the TCI Falcon Systems prior to
the Contribution. Subsequent to the date of the Contribution, the year 2000
remediation efforts of the TCI Falcon Systems are no longer the responsibility
of TCI or the PMO.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. There can be
no assurance that the TCI Falcon Systems or the systems of other companies on
which the TCI Falcon Systems relies will be converted in time or that any such
failure to convert by the TCI Falcon Systems or other companies will not have a
material adverse effect on its financial position, results of operations or cash
flows.
F-370
<PAGE> 582
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO CC V HOLDINGS, LLC:
We have audited the accompanying consolidated balance sheet of CC V
Holdings, LLC and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations and cash flows for the period from
November 15, 1999, through December 31, 1999, and the consolidated statements of
operations, changes in shareholders' equity and cash flows for the period from
January 1, 1999, through November 14, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CC V
Holdings, LLC and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the period from November 15, 1999, through
December 31, 1999, and for the period from January 1, 1999, through November 14,
1999, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 1 to the consolidated financial statements,
substantially all of CC V Holdings, LLC was acquired by Charter Communications
Holding Company, LLC as of November 15, 1999, in a business combination
accounted for as a purchase. As a result of the application of purchase
accounting, the consolidated financial statements of CC V Holdings, LLC and
subsidiaries as of December 31, 1999, and for the Successor Period (November 15,
1999, through December 31, 1999), are presented on a different cost basis than
financial statements presented for the Predecessor Period (January 1, 1999,
through November 14, 1999), and accordingly, are not directly comparable.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 16, 2000
F-371
<PAGE> 583
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR
------------
DECEMBER 31,
1999
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 6,806
Accounts receivable, net of allowance for doubtful
accounts of $1,143..................................... 1,920
Prepaid expenses and other................................ 663
--------
Total current assets................................. 9,389
--------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment............................. 121,285
Franchises................................................ 721,744
--------
Total investment in cable properties................. 843,029
--------
DEFERRED FINANCING COSTS.................................... 1,983
--------
$854,401
========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 25,132
Payables to manager of cable systems--related parties..... 4,971
--------
Total current liabilities............................ 30,103
--------
LONG-TERM DEBT.............................................. 451,212
DEFERRED MANAGEMENT FEES--RELATED PARTIES................... 262
MEMBER'S EQUITY--100 units issued and outstanding........... 372,824
--------
$854,401
========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-372
<PAGE> 584
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------- -------------
PERIOD FROM PERIOD FROM
NOVEMBER 15, JANUARY 1,
1999, THROUGH 1999, THROUGH
DECEMBER 31, NOVEMBER 14,
1999 1999
------------- -------------
<S> <C> <C>
REVENUES:
Basic services............................................ $ 11,281 $ 76,721
Premium services.......................................... 1,008 7,088
Other..................................................... 1,641 10,574
-------- --------
13,930 94,383
-------- --------
OPERATING EXPENSES:
Programming............................................... 3,597 24,927
General and administrative................................ 1,991 10,968
Service................................................... 2,377 16,311
Marketing................................................. 316 883
Depreciation and amortization............................. 7,822 39,943
Corporate expense charges--related parties................ 501 --
-------- --------
16,604 93,032
-------- --------
(Loss) income from operations.......................... (2,674) 1,351
-------- --------
OTHER INCOME (EXPENSE):
Interest income........................................... -- 764
Interest expense.......................................... (7,537) (40,162)
-------- --------
(7,537) (39,398)
-------- --------
Loss before income taxes............................... (10,211) (38,047)
BENEFIT FROM INCOME TAXES................................... -- (13,936)
-------- --------
Loss before minority interest.......................... (10,211) (24,111)
MINORITY INTEREST IN LOSS OF SUBSIDIARY..................... -- 4,499
-------- --------
Net loss............................................... $(10,211) $(19,612)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-373
<PAGE> 585
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1999........................ $ -- $35,000 $ (8,918) $ 26,082
Net loss...................................... -- -- (19,612) (19,612)
------- ------- -------- --------
BALANCE, November 14, 1999...................... $ -- $35,000 $(28,530) $ 6,470
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-374
<PAGE> 586
CC V HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
------------- -------------
PERIOD FROM PERIOD FROM
NOVEMBER 15, JANUARY 1,
1999, THROUGH 1999, THROUGH
DECEMBER 31, NOVEMBER 14,
1999 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(10,211) $(19,612)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization.......................... 7,822 39,943
Deferred income taxes.................................. -- (16,969)
Minority interest in loss of subsidiary................ -- 4,499
Noncash interest expense............................... 1,855 11,764
Net change in certain assets and liabilities, net of
effects from acquisitions--
Accounts receivable.................................. 782 (1,182)
Prepaid expenses and other........................... 76 (409)
Receivable from affiliate............................ -- 124
Accounts payable and accrued expenses................ (3,399) 15,285
Payables to manager of cable systems--related
parties............................................. 4,971 --
Payable to affiliate................................. -- (2,206)
Other operating activities........................... (469) (2,905)
-------- --------
Net cash provided by operating activities.............. 1,427 28,332
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (2,042) (13,683)
Payments for acquisitions, net of cash acquired........... -- (47,237)
Other investing activities................................ -- (11,414)
-------- --------
Net cash used in investing activities.................. (2,042) (72,334)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 5,000 39,428
Repayments of long-term debt.............................. -- (20)
Payment of deferred financing costs....................... (2,000) --
Distributions............................................. (273) --
-------- --------
Net cash provided by financing activities.............. 2,727 39,408
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 2,112 (4,594)
-------- --------
CASH AND CASH EQUIVALENTS, beginning of period.............. 4,694 9,288
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 6,806 $ 4,694
======== ========
CASH PAID FOR INTEREST...................................... $ 2,551 $ 30,429
======== ========
CASH PAID FOR TAXES......................................... $ -- $ 283
======== ========
NONCASH TRANSACTION--Increase in franchises and member's
equity resulting from the application of purchase
accounting................................................ $383,308 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-375
<PAGE> 587
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
CC V Holdings, LLC (CC V Holdings), (formerly known as Avalon Cable LLC (Avalon
Cable)), and its wholly owned subsidiaries (collectively, the "Company"). CC V
Holdings is a Delaware limited liability company. The Company derives its
primary source of revenues by providing various levels of cable programming and
services to residential and business customers. The Company operates primarily
in the state of Michigan and in the New England area. The Company also owns and
operates various Internet service providers, which provide dial-up telephone
access to the Internet via a modem.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Acquisition
On November 15, 1999, Charter Communications Holding Company, LLC (Charter
Holdco) purchased directly and indirectly all of the equity interests of Avalon
Cable of Michigan Holdings, Inc. (Avalon Michigan Holdings) for an aggregate
purchase price of $832,000, including assumed debt of $273,400 (the "Charter
Acquisition"). In connection with a multistep restructuring following the
acquisition of Avalon Michigan Holdings, Avalon Michigan Holdings was merged
with and into CC V Holdings. Effective January 1, 2000, these interests acquired
were transferred to Charter Communications Holdings, LLC, a wholly owned
subsidiary of Charter Holdco.
As a result of the Charter Acquisition, the Company has applied purchase
accounting in the preparation of the accompanying consolidated financial
statements. Accordingly, CC V Holdings' increased its member's equity to
$383,308 to reflect the amount paid in the Charter Acquisition and has allocated
that amount to assets acquired and liabilities assumed based on their relative
fair values including amounts assigned to franchises of $727,720. The allocation
of the purchase price is based, in part, on preliminary information, which is
subject to adjustment upon completion of certain appraisal and valuation
information. 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.
As a result of the Charter Acquisition and the application of purchase
accounting, financial information in the accompanying consolidated financial
statements and notes thereto as of December 31, 1999, and for the period from
November 15, 1999, through December 31, 1999 (the "Successor Period") are
presented on a different cost basis than the financial information for the
period from January 1, 1999, through November 14, 1999, (the "Predecessor
Period") and therefore, such information is not comparable.
Prior to the Charter Acquisition, Avalon Michigan Holdings had a majority
interest in CC V Holdings.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. These investments are
carried at cost that approximates market value.
F-376
<PAGE> 588
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installations. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, while equipment replacement and betterments are
capitalized.
Depreciation for the Successor Period is provided on the straight-line
method over the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems.................................. 3-15 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3-5 years
</TABLE>
Depreciation for the Predecessor Period was provided on the straight-line
method over the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Buildings and improvement................................... 10-25 years
Cable plant and equipment................................... 5-12 years
Vehicles.................................................... 5 years
Office furniture and equipment.............................. 5-10 years
</TABLE>
Franchises
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable systems, including the Charter
Acquisition, represent the excess of the cost of properties acquired over the
amounts assigned to net tangible assets and identifiable intangible assets at
the date of acquisition and are amortized using the straight-line method over a
period of 15 years. The period of 15 years is management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Company. Accumulated
amortization was $5,976 at December 31, 1999. Amortization expense for the
period from January 1, 1999 through November 14, 1999 and for the period from
November 15, 1999, through December 31, 1999, was $29,679 and $5,976,
respectively.
Deferred Financing Costs
Costs related to the Senior Credit Facilities (as defined below) are
deferred and amortized to interest expense using the effective interest rate
method over the term of the related borrowing. As of December 31, 1999,
accumulated amortization of deferred financing costs is $17.
Impairment of Assets
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
F-377
<PAGE> 589
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable system. As of December 31, 1999, no installation revenue has been
deferred, as direct selling costs have exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Company ranging up to a federally
mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly
basis from the Company's customers and are periodically remitted to local
franchises. Franchise fees collected and paid are reported as revenues and
expenses.
Interest Rate Hedge Agreements
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain of its debt agreements. Interest rate
caps are accounted for as hedges of debt obligations, and accordingly, the net
settlement amounts are recorded as adjustments to interest expense in the period
incurred. Premiums paid for interest rate caps are deferred, included in other
assets, and are amortized over the original term of the interest rate agreement
as an adjustment to interest expense.
Interest rate caps are entered into by the Company to reduce the impact of
rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
Income Taxes
Prior to the Charter Acquisition, the Company filed a consolidated income
tax return. The tax benefit of $13,936 in the accompanying consolidated
statement of operations for the period from January 1, 1999, through November
14, 1999, is recorded at 37%. This approximates the statutory tax rate of the
Company.
Beginning November 15, 1999, the Company and all subsidiaries are limited
liability companies such that all income taxes are the responsibility of the
equity member of the Company and are not provided for in the accompanying
consolidated financial statements. In addition, certain subsidiaries or
corporations are subject to income taxes but have no operations and, therefore,
no material income tax liabilities or assets.
Segments
Segments have been identified based upon management responsibility. The
Company operates in one segment, cable services.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported
F-378
<PAGE> 590
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to a
concentration of credit risk include cash and subscriber and other receivables.
The Company had cash in excess of federally insured deposits at financial
institutions at December 31, 1999. The Company does not believe that such
deposits are subject to any unusual credit risk beyond the normal credit risk
associated with operating its business. The Company extends credit to customers
on an unsecured basis in the normal course of business. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
historically exceeded management's expectations. The Company's trade receivables
reflect a customer base centered in Michigan and New England. The Company
routinely assesses the financial strength of its customers; as a result,
concentrations of credit risk are limited.
2. MEMBER'S EQUITY:
For the period from November 15, 1999, through December 31, 1999, successor
member's equity consisted of the following:
<TABLE>
<S> <C>
BALANCE, November 15, 1999.................................. $383,308
Net loss.................................................. (10,211)
Distributions to Charter Communications, Inc. and
Charter Investment, Inc................................ (273)
--------
BALANCE, December 31, 1999.................................. $372,824
========
</TABLE>
3. ACQUISITIONS:
On March 26, 1999, Avalon Michigan Holdings acquired the minority interest
of Mercom Inc. (Mercom) for $21,875. In addition, the Company acquired eight
cable systems for an aggregate purchase price of $25,362 in 1999. These eight
acquisitions, which were completed during the Predecessor Period, were accounted
for using the purchase method of accounting and, accordingly, results of
operations of the acquired systems have been included in the accompanying
consolidated financial statements from the dates of acquisition. The purchase
prices were allocated to tangible and intangible assets based on estimated fair
market values at the dates of acquisition. The excess of the consideration paid
over the estimated fair market values of the net assets acquired was $12,940 and
was amortized using the straight-line method over 15 years during the
Predecessor Period. All goodwill was eliminated as a result of the Charter
Acquisition.
F-379
<PAGE> 591
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unaudited pro forma operating results as though the 1999 acquisitions
discussed above, including the Charter Acquisition, had occurred on January 1,
1999, with adjustments to give effect to amortization of franchises, interest
expense and certain other adjustments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
(UNAUDITED)
<S> <C>
Revenues.................................................... $110,308
Loss from operations........................................ (17,580)
Net loss.................................................... (59,668)
</TABLE>
The unaudited pro forma financial information has been presented for
comparative purposes and does not purport to be indicative of the results of
operations had these transactions been completed as of the assumed date or which
may be obtained in the future.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1999:
<TABLE>
<S> <C>
Cable distribution systems.................................. $101,675
Buildings and leasehold improvements........................ 16,636
Vehicles and equipment...................................... 4,776
--------
123,087
Less--Accumulated depreciation.............................. (1,802)
--------
$121,285
========
</TABLE>
Depreciation expense for assets owned by the Company for the period from
January 1, 1999, through November 14, 1999, and for the period from November 15,
1999, through December 31, 1999, was $10,264 and $1,802, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1999:
<TABLE>
<S> <C>
Accrued litigation costs--see Note 10....................... $ 9,435
Accrued interest............................................ 5,417
Accounts payable............................................ 3,427
Accrued programming......................................... 3,047
Accrued franchises.......................................... 1,578
Other....................................................... 2,228
-------
$25,132
=======
</TABLE>
F-380
<PAGE> 592
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT:
The Company has outstanding the following borrowings on long-term debt
arrangements at December 31, 1999:
<TABLE>
<S> <C>
Senior Credit Facility...................................... $170,000
Senior Subordinated Notes................................... 150,000
Senior Discount Notes....................................... 196,000
7.0% Note Payable, due May 2003............................. 500
--------
516,500
Less--Unamortized net discount.............................. (65,288)
--------
$451,212
========
</TABLE>
Credit Facilities
On November 6, 1998, Avalon Michigan became a co-borrower along with Avalon
Cable of New England LLC (Avalon New England) and Avalon Cable Finance, Inc.
(Avalon Finance), affiliated companies on the $320,888 senior credit facilities,
which included term loan facilities consisting of (i) tranche A term loans of
$120,888 and (ii) tranche B term loans of $170,000 and a revolving credit
facility of $30,000 (collectively, the "Old Credit Facilities").
In connection with the Senior Subordinated Notes (as defined below) and
Senior Discount Notes (as defined below) offerings, Avalon Michigan repaid
$125,013 of the Old Credit Facilities, and the availability under the Old Credit
Facilities was reduced to $195,875 prior to the Charter Acquisition.
The interest rate under the Old Credit Facilities was a rate based on
either (i) the base rate (a rate per annum equal to the greater of the Prime
Rate and the Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar
rate (a rate per annum equal to the Eurodollar Base Rate divided by 1.00 less
the Eurocurrency Reserve Requirements) plus, in either case, an applicable
margin.
In connection with the Charter Acquisition, the Old Credit Facilities were
terminated.
Effective November 15, 1999, the Company became a borrower on $300,000
senior credit facilities, which includes term loan facilities consisting of (i)
a Term B Loan of $125,000 that matures on November 15, 2008, and (ii) a
revolving credit facility of $175,000 that matures on May 15, 2008
(collectively, the "Senior Credit Facilities"). The Senior Credit Facilities
also provide for, at the option of the lenders, supplemental credit facilities
in the amounts of $75,000, available until December 31, 2003.
The interest rate under the Senior Credit Facilities is a rate based on
either (i) the base rate (a rate per annum equal to the greater of the Prime
Rate and the Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar
rate (a rate per annum equal to the Eurodollar Base Rate divided by 1.00 less
the Eurocurrency Reserve Requirements) plus, in either case, an applicable
margin. The variable interest rate as of December 31, 1999, ranged from 7.995%
to 8.870%. A quarterly commitment fee of between 0.250% to 0.375% per annum is
payable on the unborrowed balance of the revolving credit facility.
Commencing March 31, 2003, and at the end of each quarter thereafter
through September 30, 2008, the Term B Loan is payable in installments of 0.25%
of the outstanding balance, and the remaining 94.25% unpaid outstanding balance
is due on November 15, 2008.
F-381
<PAGE> 593
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commencing March 31, 2003, and at the end of each quarter thereafter, available
borrowings under the revolving credit facility shall be reduced on an annual
basis by 5.0% in 2003, 15.0% in 2004, 20.0% in 2005, 22.0% in 2006, 24.0% in
2007 and 14.0% in 2008.
The Senior Credit Facilities contain restrictive covenants which, among
other things, require the Company to maintain certain ratios including
consolidated leverage ratios and the interest coverage ratio, fixed charge ratio
and debt service coverage.
The obligations of the Company under the Senior Credit Facilities agreement
are secured by substantially all of the assets of the Company.
Senior Subordinated Notes
In December 1998, Avalon Michigan became a co-issuer of a $150,000
principal amount of 9.375% Senior Subordinated Notes (the "Senior Subordinated
Notes").
The indenture governing the Senior Subordinated Notes provides that upon
the occurrence of a change of control each holder of the Senior Subordinated
Notes has the right to require the Company to purchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Senior Subordinated
Notes at an offer price in cash equal to 101% of the aggregate principal amount
thereon plus accrued and unpaid interest and Liquidated Damages (as defined in
the indentures) thereof, if any, to the date of purchase. The Charter
Acquisition constituted a change of control.
Pursuant to a change of control offer dated December 3, 1999, 134,050 of
the Company's 9.375% Senior Subordinated Notes due December 1, 2008 were validly
tendered.
The aggregate repurchase price was $137,400, including accrued and unpaid
interest through January 28, 2000, and was funded with equity contributions from
Charter Communications Holdings, LLC (Charter Holdings), a wholly owned
subsidiary of Charter Holdco and parent of CC V Holdings, which made the cash
available from the proceeds of its sale of $1.5 billion of high yield notes in
January 2000 (the "January 2000 Charter Holdings Notes").
In addition to the above change of control repurchase, the Company
repurchased the remaining 15,950 notes (including accrued and unpaid interest)
in the open market for $16,300, also using cash received from equity
contributions ultimately from Charter Holdings, which made the cash available
from the sale proceeds of the January 2000 Charter Holdings Notes.
Senior Discount Notes
On December 10, 1998, Avalon Michigan Holdings and Avalon Cable Holdings
Finance, Inc. (collectively, the "Holdings Co-Issuers") issued $196,000
aggregate principal amount at maturity of 11.875% Senior Discount Notes (the
"Senior Discount Notes") due 2008.
The Senior Discount Notes were issued at a substantial discount from their
principal amount at maturity, for proceeds of approximately $110,400. Interest
on the Senior Discount Notes will accrue but not be payable before December 1,
2003. Thereafter, interest on the Senior Discount Notes will accrue on the
principal amount at maturity at a rate of 11.875% per annum commencing December
1, 2003, and will be payable semiannually in arrears on June 1 and December 1 of
each year. Prior to December 1, 2003, the accreted value of the Senior Discount
Notes will increase, representing amortization of original issue discount,
between the date of original issuance and December 1, 2003, on a semiannual
basis using a 360-day year comprised of twelve 30-day months, such that the
accreted value shall be equal to the full principal amount at maturity of the
Senior Discount Notes on December 1, 2003.
F-382
<PAGE> 594
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 1, 2003, the Holdings Co-Issuers will be required to redeem an
amount equal to $369.79 per $1,000 principal amount at maturity of each Senior
Discount Note then outstanding on a pro rata basis at a redemption price of 100%
of the principal amount at maturity.
On or after December 1, 2003, the Senior Discount Notes will be subject to
redemption at any time at the option of the Holdings Co-Issuers, in whole or in
part, at the redemption prices, which are expressed as percentages of principal
amount, shown below plus accrued and unpaid interest, if any, and liquidated
damages, if any, thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003........................................................ 105.938%
2004........................................................ 103.958%
2005........................................................ 101.979%
2006 and thereafter......................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time before December 1, 2001, the
holding companies may on any one or more occasions redeem up to 35% of the
aggregate principal amount at maturity of senior discount notes originally
issued under the Senior Discount Note indenture at a redemption price equal to
111.875% of the accreted value at the date of redemption, plus liquidated
damages, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment.
Upon the occurrence of a change of control, each holder of Senior Discount
Notes will have the right to require the Holdings Co-Issuers to repurchase all
or any part of such holder's Senior Discount Notes pursuant to a change of
control offer at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages thereon,
if any, to the date of purchase. The Charter Acquisition constituted a change of
control.
Upon expiration of the change of control offer (January 26, 2000), 16,250
of the Senior Discount Notes due were validly tendered.
The Senior Discount Notes were repurchased for $10,500 using cash received
from equity contributions from Charter Holdings. As of February 29, 2000,
179,750 Senior Discount Notes remain outstanding with an accreted value of
$116,400.
Based upon outstanding indebtedness at December 31, 1999, and the
amortization of term, and scheduled reductions in available borrowings of the
revolving credit facility, aggregate future principal payments on the total
borrowings under all debt agreements at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
2000........................................................ $ --
2001........................................................ --
2002........................................................ --
2003........................................................ 74,229
2004........................................................ 1,250
Thereafter.................................................. 441,021
--------
$516,500
========
</TABLE>
F-383
<PAGE> 595
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying and fair values of the Company's significant financial
instruments as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
-------- -------- -----
<S> <C> <C> <C>
Debt:
Senior Credit Facilities.................................. $170,000 $ -- $170,000
Senior Subordinated Notes................................. 151,500 -- 151,500
Senior Discount Notes..................................... 129,212 -- 129,212
7.0% Note payable, due May 2003........................... 500 -- 500
Interest Rate Hedge Agreement:
Cap....................................................... -- 15,000 16
</TABLE>
The carrying amount of the Senior Credit Facilities approximates fair value
as the outstanding borrowings bear interest at market rates. The fair values of
the Senior Subordinated Notes and Senior Discount Notes are based on quoted
market prices.
The interest pay rate for the interest rate cap agreement was 9.0% at
December 31, 1999.
The notional amount of the interest rate hedge agreement does not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of the interest rate hedge agreement. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contract.
The fair value of the interest rate hedge agreement generally reflects the
estimated amount that the Company would receive (excluding accrued interest) to
terminate the contract on the reporting date, thereby taking into account the
current unrealized gains or losses of the open contract. Dealer quotations are
available for the Company's interest rate hedge agreement.
Management believes that the seller of the interest rate hedge agreement
will be able to meet their obligations under the agreement. In addition, the
interest rate hedge agreement is with certain of the participating banks under
the Company's Senior Credit Facilities thereby reducing the exposure to credit
loss. The Company has policies regarding the financial stability and credit
standing of the major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the Company's
consolidated financial position or results of operations.
8. RELATED-PARTY TRANSACTIONS:
Charter Investment, Inc. (Charter Investment) provides management services
to the Company including centralized customer billing services, and data
processing and related support. Costs for these services are charged directly to
the Company's operating subsidiaries and are included in operating costs. These
billings are determined based on the number of basic customers. Charter
Investment utilizes a combination of excess insurance coverage and self-
insurance programs for its medical, dental and workers' compensation claims.
Charges are made to the Company as determined by independent actuaries at the
present value of the actuarially computed present and future liabilities for
such benefits. Depreciation and amortization incurred by Charter Investment and
Charter have been allocated to the Company based on the number of the basic
customers. Such costs totaled $44 for the period from November 15, 1999, through
December 31, 1999, are reflected as a capital contribution. Management believes
that costs incurred by Charter Investment on the Company's behalf and included
in the accompanying
F-384
<PAGE> 596
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements are not materially different than costs the Company would
have incurred as a stand-alone entity.
Charter, an entity controlled by Paul G. Allen, was named manager of CC V
Holdings pursuant to the terms of the limited liability company agreement for CC
V Holdings dated as of November 15, 1999. Furthermore, Charter now manages and
operates the Company's cable systems pursuant to a Management Agreement entered
into with certain subsidiaries of CC V Holdings. The term of the management
agreement is 10 years, commencing on November 15, 1999. Charter is entitled to
reimbursement for all expenses, costs, losses and liabilities or damages
incurred by Charter in connection with the performance of its services. Payment
of the management fee is permitted under the Company's credit agreement, but
ranks below the Company's senior debt and shall not be paid except to the extent
permitted under the Senior Credit Facilities. Such costs totaled $501 for the
period from November 15, 1999, through December 31, 1999, and are recorded in
corporate expense charges-related parties in the accompanying consolidated
financial statements. Deferred management fees at December 31, 1999, are $262.
9. EMPLOYEE BENEFIT PLAN:
Avalon Michigan had a qualified savings plan under Section 401(k) of the
Internal Revenue Code (the "Plan"). In connection with the Charter Acquisition,
the Plan's assets were frozen as of November 14, 1999, and employees became
fully vested. Effective January 1, 2000, the Company's employees with two months
of service are eligible to participate in the Charter Communications, Inc.
401(k) Plan (the "Charter Plan"). Employees that qualify for participation in
the Charter Plan can contribute up to 15% of their salary, on a before tax
basis, subject to a maximum contribution limit as determined by the Internal
Revenue Service.
10. COMMITMENTS AND CONTINGENCIES:
Leases
The Company rents poles from utility companies for use in its operations.
While rental agreements are generally short-term, the Company anticipates such
rentals will continue in the future. The Company also leases office facilities
and various equipment under month-to-month operating leases. Rent expense was
$1,506 and $212 for the periods from January 1, 1999, through November 14, 1999,
and from November 15, 1999, through December 31, 1999, respectively. Rental
commitments are expected to continue at approximately the same level for the
foreseeable future, including pole rental commitments which are cancelable.
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
F-385
<PAGE> 597
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1999, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. As of
December 31, 1999, approximately 26% of the Company's local franchising
authorities are certified to regulate basic tier rates. The Company is unable to
estimate at this time the amount of refunds, if any, that may be payable by the
Company in the event certain of its rates are successfully challenged by
franchising authorities or found to be unreasonable by the FCC. The Company does
not believe that the amount of any such refunds would have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulated rates on the cable
programming service tier (CPST). The FCC has taken the position that it will
still adjudicate pending CPST complaints but will strictly limit its review, and
possible refund orders, to the time period predating the sunset date, March 31,
1999. The Company does not believe any adjudications regarding their pre-sunset
complaints will have a material adverse effect on the Company's consolidated
financial position or results of operations.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
Litigation
In connection with the Company's acquisition of Mercom, former Mercom
shareholders holding approximately 731,894 Mercom common shares (approximately
15.3% of all outstanding Mercom common shares) gave notice of their election to
exercise appraisal rights as provided by Delaware law. On July 2, 1999, former
Mercom shareholders holding 535,501 shares of Mercom common stock filed a
petition for appraisal of stock in the Delaware Chancery Court. With respect to
209,893 of the total number of shares for which the Company received notice, the
notice provided to the Company was received from beneficial holders of Mercom
shares who were not holders of record. The Company believes that the notice with
respect to these shares did not comply with Delaware law and is ineffective.
The Company cannot predict at this time the effect of the elections to
exercise appraisal rights on the Company since the Company does not know the
extent to which these former Mercom shareholders will continue to pursue
appraisal rights under Delaware law or choose to abandon these efforts and seek
to accept the consideration payable in the Mercom merger. If
F-386
<PAGE> 598
CC V HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these former Mercom shareholders continue to pursue their appraisal rights and
if a Delaware court were to find that the fair value of the Mercom common
shares, exclusive of any element of value arising from our acquisition of
Mercom, exceeded $12.00 per share, the Company would have to pay the additional
amount for each Mercom common share subject to the appraisal proceedings
together with a fair rate of interest. The Company could be ordered by the
Delaware court also to pay reasonable attorney's fees and the fees and expenses
of experts for the shareholders. In addition, the Company would have to pay
their own litigation costs. The Company has already provided for the
consideration of $12.00 per Mercom common share due under the terms of the
merger with Mercom with respect to these shares but has not provided for any
additional amounts or costs. The Company can provide no assurance as to what a
Delaware court would find in any appraisal proceeding or when this matter will
be resolved. Accordingly, the Company cannot assure you that the ultimate
outcome would have no material adverse impact on the Company.
11. ACCOUNTING STANDARDS NOT YET IMPLEMENTED:
The Company is required to adopt Financial Accounting Standards Board
issued Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133) in 2001. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
consolidated balance sheet as either an asset or liability measured at its fair
value and that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The adoption of SFAS No. 133 is not expected to
have a material impact on the consolidated financial statements.
F-387
<PAGE> 599
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers
of Avalon Cable LLC
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in members' interest and
cash flows present fairly, in all material respects, the financial position of
Avalon Cable LLC and its subsidiaries (the "Company") at December 31, 1997 and
1998 and the results of their operations, changes in members' interest and their
cash flows for the period from September 4, 1997 (inception), through December
31, 1997 and for the year ended December 31, 1998 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on the financial statements based on our audits. We conducted our audits
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
March 30, 1999, except for Note 12,
as to which the date is May 13, 1999
F-388
<PAGE> 600
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................ $ 9,288 $ --
Subscriber receivables, less allowance for doubtful accounts
of $943................................................... 5,862 --
Accounts receivable-affiliate............................... 124 --
Deferred income taxes....................................... 479 --
Prepaid expenses and other current assets................... 580 504
-------- ----
Total current assets........................................ 16,333 504
Property, plant and equipment, net.......................... 111,421 --
Intangible assets, net...................................... 462,117 --
Other assets................................................ 227 --
-------- ----
Total assets................................................ $590,098 $504
======== ====
LIABILITIES AND MEMBERS' INTEREST
CURRENT LIABILITIES:
Current portion of notes payable............................ $ 20 $ --
Accounts payable and accrued expenses....................... 11,646 --
Accounts payable, net-affiliate............................. 2,023 500
Advance billings and customer deposits...................... 3,171 --
-------- ----
Total current liabilities................................... 16,860 500
Note payable, net of current portion........................ 402,949 --
Note payable-affiliate...................................... 3,341 --
Deferred income taxes....................................... 1,841 --
-------- ----
Total liabilities........................................... 424,991 500
-------- ----
Minority interest........................................... 13,855 --
Commitments and contingencies (Note 10)
MEMBERS' INTEREST:
Members' capital............................................ 166,630 --
Accumulated earnings (deficit).............................. (15,378) 4
-------- ----
Total member's interest..................................... 151,252 4
-------- ----
Total liabilities and member's interest..................... $590,098 $504
======== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-389
<PAGE> 601
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR SEPTEMBER 4, 1997
ENDED (INCEPTION) THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
REVENUE:
Basic services.......................................... $ 14,976 $ --
Premium services........................................ 1,468 --
Other................................................... 1,743 --
-------- -------
Total revenues.......................................... 18,187 --
Operating expenses:
Selling, general and administrative..................... 4,207 --
Programming............................................. 4,564 --
Technical and operations................................ 1,951 --
Depreciation and amortization........................... 8,183 --
-------- -------
Loss from operations.................................... (718) --
Other income (expense):
Interest income......................................... 173 4
Interest expense........................................ (8,223) --
Other expense, net...................................... (65) --
-------- -------
Income (loss) before income taxes....................... (8,833) 4
Provision for income taxes.............................. (186) --
-------- -------
Income (loss) before minority interest and extraordinary
item.................................................. (9,019) 4
Minority interest in consolidated entity................ (398) --
-------- -------
Income (loss) before the extraordinary loss on early
extinguishment of debt................................ (9,417) 4
Extraordinary loss on early extinguishment of debt...... (5,965) --
-------- -------
Net income (loss)....................................... $(15,382) $ 4
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-390
<PAGE> 602
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST
FROM THE PERIOD FROM SEPTEMBER 4, 1997 (INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
CLASS A CLASS B-1 ACCUMULATED TOTAL
-------------------- ------------------ EARNINGS MEMBERS'
UNITS $ UNITS $ (DEFICIT) INTEREST
--------- -------- ------- -------- ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net income for the period from
September 4, 1997 through
December 31, 1997............. -- $ -- -- $ -- $ 4 $ 4
Issuance of Class A units....... 45,000 45,000 -- -- -- 45,000
Issuance of Class B-1 units in
consideration for Avalon Cable
of New England LLC............ -- -- 64,696 4,345 -- 4,345
Contribution of assets and
liabilities of Avalon Cable of
Michigan Inc.................. -- -- 510,994 117,285 -- 117,285
Net loss for the year ended
December 31, 1998............. -- -- -- -- (15,382) (15,382)
------ ------- ------- -------- -------- --------
Balance at December 31, 1998.... 45,000 $45,000 575,690 $121,630 $(15,378) $151,252
====== ======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-391
<PAGE> 603
AVALON CABLE LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
SEPTEMBER 4, 1997
FOR THE YEAR (INCEPTION)
ENDED THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (15,382) $ 4
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization........................... 8,183 --
Deferred income taxes, net.............................. 1,010 --
Extraordinary loss on extinguishment of debt............ 5,965 --
Provision for loss on accounts receivable............... 75 --
Minority interest in consolidated entity................ 398 --
Accretion of senior discount notes...................... 1,083 --
Changes in operating assets and liabilities Increase in
subscriber receivables................................ (1,679) --
Increase in accounts receivable-affiliates.............. (124) --
Increase in prepaid expenses and other current assets... (76) (4)
Increase in accounts payable and accrued expenses....... 4,863 --
Increase in accounts payable-affiliates................. 1,523 --
Increase in advance billings and customer deposits...... 1,684 --
Change in Other, net.................................... (227) --
--------- ---
Net cash provided by operating activities............... 7,296 --
--------- ---
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (11,468) --
Acquisitions, net of cash acquired...................... (554,402) --
--------- ---
Net cash used in investing activities................... (565,870) --
--------- ---
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of credit facility............... 265,888 --
Principal payment on credit facility.................... (125,013) --
Proceeds from issuance of senior subordinated debt...... 150,000 --
Proceeds from issuance of note payable-affiliate........ 3,341 --
Proceeds from issuance of senior discount notes......... 110,411 --
Proceeds from other notes payable....................... 600 --
Payments for debt issuance costs........................ (3,995) --
Contribution by members................................. 166,630 --
--------- ---
Net cash provided by financing activities............... 567,862 --
Increase in cash........................................ 9,288 --
Cash, beginning of period............................... -- --
--------- ---
Cash, end of period..................................... $ 9,288 $--
========= ===
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest................ $ 3,480 $--
========= ===
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-392
<PAGE> 604
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Avalon Cable LLC ("Avalon"), and its wholly owned subsidiaries Avalon Cable
Holdings Finance, Inc. ("Avalon Holdings Finance") and Avalon Cable of Michigan
LLC ("Avalon Michigan"), were formed in October 1998, pursuant to the laws of
the State of Delaware, as a wholly owned subsidiary of Avalon Cable of New
England Holdings, Inc. ("Avalon New England Holdings").
On November 6, 1998, Avalon New England Holdings contributed its 100%
interest in Avalon Cable of New England LLC ("Avalon New England") to Avalon in
exchange for a membership interest in Avalon. This contribution was between
entities under common control and was accounted for similar to a
pooling-of-interests. Under this pooling-of-interests method, the results of
operations for Avalon include the results of operations from the date of
inception (September 4, 1997) of Avalon New England. On that same date, Avalon
received $63,000 from affiliated entities, which was comprised of (i) a $45,000
capital contribution by Avalon Investors, LLC ("Avalon Investors") and (ii) a
$18,000 promissory note from Avalon Cable Holdings LLC ("Avalon Holdings"),
which was used to make a $62,800 cash contribution to Avalon New England.
The cash contribution received by Avalon New England was used to (i)
extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to
Avalon Holdings Finance which matures on December 31, 2001.
On December 10, 1998, Avalon received a dividend distribution from Avalon
New England in the amount of $18,206, which was used by Avalon to pay off the
promissory note payable to Avalon Holdings, plus accrued interest.
Avalon Cable of Michigan, Inc. was formed in June 1998, pursuant to the
laws of the state of Delaware, as a wholly owned subsidiary of Avalon Cable of
Michigan Holdings, Inc. ("Michigan Holdings".) On June 3, 1998, Avalon Cable of
Michigan, Inc. entered into an Agreement and Plan of Merger (the "Agreement")
among Avalon Cable of Michigan, Inc., Michigan Holdings and Cable Michigan, Inc.
("Cable Michigan"), pursuant to which Avalon Cable of Michigan, Inc. will merge
into Cable Michigan and Cable Michigan will become a wholly owned subsidiary of
Michigan Holdings (the "Merger"). As part of the Merger, the name of the company
was changed to Avalon Cable of Michigan, Inc.
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior
to the effective time of the Merger (other than treasury stock shares owned by
Michigan Holdings or its subsidiaries, or shares as to which dissenters' rights
have been exercised) shall be converted into the right to receive $40.50 in cash
(the "Merger Consideration"), subject to certain possible closing adjustments.
In conjunction with the acquisition of Cable Michigan, Avalon Cable of
Michigan, Inc. acquired Cable Michigan's 62% ownership interest in Mercom, Inc.
("Mercom").
On November 6, 1998, Avalon Cable of Michigan, Inc. completed its Merger.
The total consideration payable in conjunction with the Merger, including fees
and expenses is $431,629, including repayment of all existing Cable Michigan
indebtedness and accrued interest of $135,205. Subsequent to the Merger, the
arrangements with RCN and CTE for certain support
F-393
<PAGE> 605
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
services were terminated. The Agreement also permitted Avalon Cable of Michigan,
Inc. to agree to acquire the remaining shares of Mercom that it did not own.
Michigan Holdings contributed $137,375 in cash to Avalon Cable of Michigan,
Inc., which was used to consummate the Merger. On November 5, 1998, Michigan
Holdings received $105,000 in cash in exchange for promissory notes to lenders
(the "Bridge Agreement"). On November 6, 1998, Michigan Holdings contributed the
proceeds received from the Bridge Agreement and an additional $35,000 in cash to
Avalon Cable of Michigan Inc. in exchange for 100 shares of common stock.
On March 26, 1999, Avalon completed a series of transactions to facilitate
certain aspects of its financing between affiliated entities under common
control. As a result of these transactions:
- Avalon Cable of Michigan Inc. contributed its assets and liabilities
excluding deferred tax liabilities, net to Avalon in exchange for an
approximate 88% voting interest in Avalon. Avalon contributed these
assets and liabilities to its wholly-owned subsidiary, Avalon Cable of
Michigan.
- Avalon Michigan has become the operator of the Michigan cluster replacing
Avalon Cable of Michigan, Inc.
- Avalon Michigan is an obligor on the Senior Subordinated Notes replacing
Avalon Cable of Michigan, Inc., and
- Avalon Cable of Michigan, Inc. is a guarantor of the obligations of
Avalon Michigan under the Senior Subordinated Notes. Avalon Cable of
Michigan, Inc. does not have significant assets, other than its
investment in Avalon.
- Avalon is an obligor on the Senior Discount Notes replacing Avalon Cable
of Michigan Holdings, Inc.
As a result of the reorganization between entities under common control,
Avalon accounted for the reorganization similar to a pooling-of-interests. Under
the pooling-of-interests method, the results of operations for Avalon include
the results of operations from the date of inception (June 2, 1998) inception of
Avalon Cable of Michigan, Inc. and the date of acquisition of the completed
acquisitions.
Avalon New England and Avalon Michigan provide cable service to the western
New England area and the state of Michigan, respectively. Avalon cable systems
offer customer packages of basic and premium cable programming services which
are offered at a per channel charge or are packaged together to form a tier of
services offered at a discount from the combined channel rate. Avalon cable
systems also provide premium cable services to their customers for an extra
monthly charge. Customers generally pay initial connection charges and fixed
monthly fees for cable programming and premium cable services, which constitute
the principal sources of revenue for Avalon.
Avalon Holdings Finance was formed for the sole purpose of facilitating
financings associated with the acquisitions of various cable operating
companies. Avalon Holdings Finance conducts no other activities.
F-394
<PAGE> 606
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements of Avalon and its subsidiaries,
include the accounts of Avalon and its wholly owned subsidiaries, Avalon New
England, Avalon Michigan and Avalon Holdings Finance (collectively, the
"Company"). All significant transactions between Avalon and its subsidiaries
have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the reported amounts of assets and liabilities and the
disclosure for contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reported period. Actual results may vary from estimates used.
Revenue recognition
Revenue is recognized as cable services are provided. Installation fee
revenue is recognized in the period in which the installation occurs to the
extent that direct selling costs meet or exceed installation revenues.
Advertising costs
Advertising costs are charged to operations as incurred. Advertising costs
were $82 for the year ended December 31, 1998.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentration of credit risk include cash and subscriber and other receivables.
The Company had cash in excess of federally insured deposits at financial
institutions at December 31, 1998. The Company does not believe that such
deposits are subject to any unusual credit risk beyond the normal credit risk
associated with operating its business. The Company extends credit to customers
on an unsecured basis in the normal course of business. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
historically exceeded management's expectations. The Company's trade receivables
reflect a customer base centered in the state of Michigan and New England. The
Company routinely assesses the financial strength of its customers; as a result,
concentrations of credit risk are limited.
Property, plant and equipment
Property, plant and equipment is stated at its fair value for items
acquired from Cable Michigan, historical cost for the minority interests share
of Mercom property, plant and equipment and cost for additions subsequent to the
merger. Initial subscribers installation costs, including materials, labor and
overhead costs, are capitalized as a component of cable plant and equipment. The
cost of disconnection and reconnection are charged to expense when incurred.
F-395
<PAGE> 607
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is computed for financial statement purposes using the
straight-line method based upon the following lives:
<TABLE>
<S> <C>
Vehicles.................................................... 5 years
Cable plant and equipment................................... 5-12 years
Office furniture and equipment.............................. 5-10 years
Buildings and improvements.................................. 10-25 years
</TABLE>
Intangible assets
Intangible assets represent the estimated fair value of cable franchises
and goodwill resulting from acquisitions. Goodwill is the excess of the purchase
price over the fair value of the net assets acquired, determined through an
independent appraisal. Deferred financing costs represent direct costs incurred
to obtain long-term financing and are amortized to interest expense over the
term of the underlying debt utilizing the effective interest method.
Amortization is computed for financial statement purposes using the
straight-line method based upon the anticipated economic lives:
<TABLE>
<S> <C>
Cable franchises............................................ 13-15 years
Goodwill.................................................... 15 years
Non-compete agreement....................................... 5 years
</TABLE>
Accounting for impairments
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the Company
estimates the net future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected net future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles expected to be held and used
is based on the fair value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
Financial instruments
The Company estimates that the fair value of all financial instruments at
December 31, 1998 does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet. The
fair value of the notes payable-affiliate are considered to be equal to carrying
values since the Company believes that its credit risk has not changed from the
time this debt instrument was executed and therefore, would obtain a similar
rate in the current market.
Income taxes
The Company is not subject to federal and state income taxes since the
income or loss of the Company is included in the tax returns of Avalon Cable of
Michigan, Inc. and the Company's
F-396
<PAGE> 608
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minority partners. However, Mercom, its majority-owned subsidiary is subject to
taxes that are accounted for using Statement of Financial Accounting Standards
No. 109 -- "Accounting for Income Taxes". The statement requires the use of an
asset and liability approach for financial reporting purposes. The asset and
liability approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between financial reporting basis and tax basis of assets and liabilities. If it
is more likely than not that some portion or all of a deferred tax asset will
not be realized, a valuation allowance is recognized.
3. MEMBERS' CAPITAL
Avalon has authorized two classes of equity units; class A units ("Class A
Units") and class B units ("Class B Units") (collectively, the "Units"). Each
class of the Units represents a fractional part of the membership interests in
Avalon and has the rights and obligations specified in Avalon's Limited
Liability Company Agreement. Each Class B Unit is entitled to voting rights
equal to the percentage such units represents of the aggregate number of
outstanding Class B Units. The Class A Units are not entitled to voting rights.
Class A Units
The Class A Units are participating preferred equity interests. A preferred
return accrues annually (the Company's "Preferred Return") on the initial
purchase price (the Company's "Capital Value") of each Class A Unit at a rate of
15, or 17% under certain circumstances, per annum. The Company cannot pay
distributions in respect of other classes of securities including distributions
made in connection with a liquidation until the Company's Capital Value and
accrued Preferred Return in respect of each Class A Unit is paid to the holders
thereof (such distributions being the Company's "Priority Distributions"). So
long as any portion of the Company's Priority Distributions remains unpaid, the
holders of a majority of the Class A Units are entitled to block certain actions
by the Company including the payment of certain distributions, the issuance of
senior or certain types of pari passu equity securities or the entering into or
amending of certain related-party agreements. In addition to the Company's
Priority Distributions, each Class A Unit is also entitled to participate in
common distributions, pro rata according to the percentage such unit represents
of the aggregate number of the Company's units then outstanding.
Class B Units
The Class B Units are junior equity securities which are divided into two
identical subclasses, Class B-1 Units and Class B-2 Units. After the payment in
full of Avalon's Priority Distributions, each Class B Unit is entitled to
participate in distributions pro rata according to the percentage such unit
represents of the aggregate number of the Avalon units then outstanding.
4. MERGER AND ACQUISITIONS
The Merger was accounted for using the purchase method of accounting.
Accordingly, the consideration was allocated to the net assets acquired based on
their fair market values at the date of the Merger. The purchase price was
allocated as follows: current assets and liabilities at fair values of $470,
approximately $94,000 to property, plant and equipment, $315,000 to cable
franchises and the excess of consideration paid over the fair market value of
the net assets acquired, or goodwill, of $81,705, offset by deferred taxes net
of $60,000.
F-397
<PAGE> 609
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Merger agreement between Michigan Holdings and Avalon Cable of
Michigan, Inc. permitted Avalon Cable of Michigan, Inc. to agree to acquire the
1,822,810 shares (approximately 38% of the outstanding stock) of Mercom that it
did not own (the "Mercom Acquisition"). On September 10, 1998 Avalon Cable of
Michigan, Inc. and Mercom entered into a definitive agreement (the "Mercom
Merger Agreement") providing for the acquisition by Avalon Cable of Michigan,
Inc. of all of such shares at a price of $12.00 per share. Avalon Cable of
Michigan, Inc. completed this acquisition in March 1999. The total estimated
consideration payable in conjunction with the Mercom Acquisition, excluding fees
and expenses was $21,900.
In March 1999, Avalon Michigan acquired the cable television systems of
Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P.
for approximately $7,800, excluding transaction fees.
On May 29, 1998, the Company acquired certain assets of Amrac Clear View, A
Limited Partnership ("Amrac") for consideration of $8,124, including acquisition
costs of $589. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition as
determined through the use of an independent appraisal. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired, or goodwill, was $256.
On July 21, 1998, the Company acquired certain assets and liabilities from
Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc.
(collectively, "Pegasus") for consideration of $30,467, including acquisition
costs of $175. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition as
determined through use of an independent appraisal. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired, or goodwill, was $977.
Unaudited pro forma results of operations of the Company for the year ended
December 31, 1998, as if the Merger and acquisitions occurred on January 1,
1998.
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
(UNAUDITED)
<S> <C>
Revenues.................................................... $ 96,751
========
Loss from operations........................................ $ (5,292)
========
Net loss.................................................... $(22,365)
========
</TABLE>
In September 1998, the Company entered into a definitive agreement to
purchase all of the cable systems of Taconic Technology Corporation ("Taconic")
for approximately $8,525 (excluding transaction fees). As of December 31, 1998,
the Company incurred $41 of transaction costs related to the acquisition of
Taconic. This merger is expected to close in the second quarter of 1999.
F-398
<PAGE> 610
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
At December 31, 1998, property, plant and equipment consists of the
following:
<TABLE>
<S> <C>
Cable plant and equipment................................... $106,602
Vehicles.................................................... 2,572
Office furniture and fixtures............................... 1,026
Buildings and improvements.................................. 2,234
Construction in process..................................... 768
--------
113,202
Less: accumulated depreciation.............................. (1,781)
--------
$111,421
========
</TABLE>
Depreciation expense charged to operations was $1,781 for the year ended
December 31, 1998.
6. INTANGIBLE ASSETS
At December 31, 1998, intangible assets consist of the following:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Cable franchises............................................ $374,773
Goodwill.................................................... 82,928
Deferred financing costs.................................... 10,658
Non-compete agreement....................................... 100
--------
468,459
Less: accumulated amortization.............................. (6,342)
--------
$462,117
========
</TABLE>
Amortization expense was $6,342 for the year ended December 31, 1998.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At December 31, 1998, accounts payable and accrued expenses consist of the
following:
<TABLE>
<S> <C>
Accounts payable............................................ $ 5,321
Accrued corporate expenses.................................. 404
Accrued programming costs................................... 2,388
Taxes payable............................................... 1,383
Other....................................................... 2,150
-------
$11,646
=======
</TABLE>
F-399
<PAGE> 611
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DEBT
At December 31, 1998, Long-term debt consists of the following:
<TABLE>
<S> <C>
Senior Credit Facility...................................... $140,875
Senior Subordinated Notes................................... 150,000
Senior Discount Notes....................................... 111,494
Other Note Payable.......................................... 600
--------
402,969
Less: current portion of notes payable...................... 20
--------
$402,949
========
</TABLE>
Credit Facilities
On May 28, 1998, Avalon New England entered into a term loan and revolving
credit agreement with a major commercial lending institution (the "Credit
Agreement"). The Credit Agreement allowed for aggregate borrowings under Term
Loans A and B (collectively, the "Term Loans") and a revolving credit facility
of $30,000 and $5,000, respectively. The proceeds from the Term Loans and
revolving credit facility were used to fund the acquisitions made by Avalon New
England and to provide for Avalon New England's working capital requirements.
In December 1998, Avalon New England retired the Term Loans and revolving
credit agreement through the proceeds of a capital contribution from Avalon. The
fees and associated costs relating to the early retirement of this debt was
$1,110.
On November 6, 1998, Avalon New England became a co-borrower along with
Avalon Michigan and Avalon Cable Finance, Inc. ("Avalon Finance"), affiliated
companies (collectively referred to as the "Co-Borrowers"), on a $320,888 senior
credit facility, which includes term loan facilities consisting of (i) tranche A
term loans of $120,888 and (ii) tranche B term loans of $170,000, and a
revolving credit facility of $30,000 (collectively, the "Credit Facility").
Subject to compliance with the terms of the Credit Facility, borrowings under
the Credit Facility will be available for working capital purposes, capital
expenditures and pending and future acquisitions. The ability to advance funds
under the tranche A term loan facility terminated on March 31, 1999. The tranche
A term loans are subject to minimum quarterly amortization payments commencing
on January 31, 2001 and maturing on October 31, 2005. The tranche B term loans
are subject to minimum quarterly payments commencing on January 31, 2001 with
substantially all of tranche B term loans scheduled to be repaid in two equal
installments on July 31, 2006 and October 31, 2006. The revolving credit
facility borrowings are scheduled to be repaid on October 31, 2005.
On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit
Facility. In connection with the Senior Subordinated Notes and Senior Discount
Notes offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and the
availability under the Credit Facility was reduced to $195,000. Avalon Michigan
had borrowings of $11,300 and $129,575 outstanding under the tranche A and
tranche B term note facilities, respectively, and had available $30,000 for
borrowings under the revolving credit facility. Avalon New England and Avalon
Finance had no borrowings outstanding under the Credit Facility at December 31,
1998.
The interest rate under the Credit Facility is a rate based on either (i)
the Base Rate (a rate per annum equal to the greater of the prime rate and the
federal funds rate plus one-half of 1%) or (ii) the Eurodollar Rate (a rate per
annum equal to the Eurodollar base rate divided by 1.00 less the Eurocurrency
reserve requirement plus, in either case, the applicable margin). As of
F-400
<PAGE> 612
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1998, the applicable margin was (a) with respect to the tranche B
term loans was 2.75% per annum for Base Rate loans and 3.75% per annum for
Eurodollar loans and (b) with respect to tranche A term loans and the revolving
credit facility was 2.00% per annum for Base Rate loans and 3.00% for Eurodollar
loans. The applicable margin for the tranche A term loans and the revolving
credit facility are subject to performance based grid pricing which is
determined based upon the consolidated leverage ratio of the Co-Borrowers. The
interest rate for the tranche A and tranche B term loans outstanding at December
31, 1998 was 8.58% and 9.33%, respectively. Interest is payable on a quarterly
basis. Accrued interest on the borrowings incurred by Avalon Cable of Michigan
Inc. under the credit facility was $1,389 at December 31, 1998.
The Credit Facility contains restrictive covenants which among other things
require the Co-Borrowers to maintain certain ratios including consolidated
leverage ratios and the interest coverage ratio, fixed charge ratio and debt
service coverage ratio.
The obligations of the Co-Borrowers under the Credit Facility are secured
by substantially all of the assets of the Co-Borrowers. In addition, the
obligations of the Co-Borrowers under the Credit Facility are guaranteed by
affiliated companies; Avalon Cable of Michigan Holdings, Inc., Avalon Cable
Finance Holdings, Inc., Avalon New England Holdings, Inc., Avalon Cable
Holdings, LLC and the Company.
A Change of Control as defined under the Credit Facility agreement would
constitute an event of default under the Credit Facility giving the lender the
right to terminate the credit commitment and declare all amounts outstanding
immediately due and payable.
Subordinated Debt
In December 1998, Avalon New England and Avalon Michigan became co-issuers
of a $150,000 principal balance, Senior Subordinated Notes ("Subordinated
Notes") offering. In conjunction with this financing, Avalon New England
received $18,130 from Avalon Michigan as a partial payment against the Company's
note receivable-affiliate from Avalon Michigan. Avalon Michigan paid $75 in
interest during the period from October 21, 1998 (inception) through December
31, 1998. The cash proceeds received by Avalon New England of $18,206 was paid
to Avalon as a dividend.
The Subordinated Notes mature on December 1, 2008, and interest accrued at
a rate of 9.375% per annum. Interest is payable semi-annually in arrears on June
1 and December 1 of each year, commencing on June 1, 1999. Accrued interest on
the Subordinated Notes was $1,078 at December 31, 1998.
The Senior Subordinated Notes will not be redeemable at the Co-Borrowers'
option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes will
be subject to redemption at any time at the option of the Co-Borrowers, in whole
or in part at the redemption prices (expressed as percentages of principal
amount) set forth below plus accrued and unpaid interest, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- - - ---- ----------
<S> <C>
2003..................................................... 104.688%
2004..................................................... 103.125%
2005..................................................... 101.563%
2006 and thereafter...................................... 100.000%
</TABLE>
F-401
<PAGE> 613
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000
in 2002, $7,000 in 2003, and the remainder thereafter.
At any time prior to December 1, 2001, the Co-Borrowers may on any one or
more occasions redeem up to 35% of the aggregate principal amount of Senior
Subordinate Notes originally issued under the Indenture at a redemption price
equal to 109.375% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Subordinated Notes originally issued remain outstanding immediately after
each such redemption.
As used in the preceding paragraph, "Equity Offering and Strategic Equity
Investment" means any public or private sale of Capital Stock of any of the
Co-Borrowers pursuant to which the Co-Borrowers together receive net proceeds of
at least $25 million, other than issuances of Capital Stock pursuant to employee
benefit plans or as compensation to employees; provided that to the extent such
Capital Stock is issued by the Co-Borrowers, the net cash proceeds thereof shall
have been contributed to one or more of the Co-Borrowers in the form of an
equity contribution.
The Indentures provide that upon the occurrence of a change of control (a
"Change of Control") each holder of the Notes has the right to require the
Company to purchase all or any part (equal to $1,000 or an integral multiple
thereof) of such holder's Notes at an offer price in cash equal to 101% of the
aggregate principal amount thereon plus accrued and unpaid interest and
Liquidated Damages (as defined in the Indentures) thereof, if any, to the date
of purchase.
The Senior Discount Notes
On December 3, 1998, the Company, Avalon Michigan and Avalon Cable Holdings
Finance, Inc. (the "Holding Co-Borrowers") issued $196.0 million aggregate
principal amount at maturity of 117/8% Senior Discount Notes ("Senior Discount
Notes") due 2008.
The Senior Discount Notes were issued at a substantial discount from their
principal amount at maturity, to generate gross proceeds of approximately $110.4
million. Interest on the Senior Discount Notes will accrue but not be payable
before December 1, 2003. Thereafter, interest on the Senior Discount Notes will
accrue on the principal amount at maturity at a rate of 11.875% per annum, and
will be payable semi-annually in arrears on June 1 and December 1 of each year,
commencing December 1, 2003. Prior to December 1, 2003, the accreted value of
the Senior Discount Notes will increase, representing amortization of original
issue discount, between the date of original issuance and December 1, 2003 on a
semi-annual basis using a 360-day year comprised of twelve 30-day months, such
that the accreted value shall be equal to the full principal amount at maturity
of the Senior Discount Notes on December 1, 2003. Original issue discount
accretion on the Senior Discount Notes was $1,083 at December 31, 1998.
On December 1, 2003, the Holding Co-Borrowers will be required to redeem an
amount equal to $369.79 per $1,000 principal amount at maturity of each Senior
Discount Note then outstanding on a pro rata basis at a redemption price of 100%
of the principal amount at maturity of the Senior Discount Notes so redeemed.
On or after December 1, 2003, the Senior Discount Notes will be subject to
redemption at any time at the option of the Holding Co-borrowers, in whole or in
part, at the redemption prices, which are expressed as percentages of principal
amount, shown below plus accrued and unpaid
F-402
<PAGE> 614
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest, if any, and liquidated damages, if any, thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- - - ---- ----------
<S> <C>
2003................................................... 105.938%
2004................................................... 103.958%
2005................................................... 101.979%
2006 and thereafter.................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time before December 1, 2001, the
holding companies may on any one or more occasions redeem up to 35% of the
aggregate principal amount at maturity of senior discount notes originally
issued under the Senior Discount Note indenture at a redemption price equal to
111.875% of the accreted value at the date of redemption, plus liquidated
damages, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Discount Notes originally issued remain outstanding immediately after
each occurrence of such redemption.
Upon the occurrence of a Change of Control, each holder of Senior Discount
Notes will have the right to require the Holding Co-Borrowers to repurchase all
or any part of such holder's Senior Discount Notes pursuant to a Change of
Control offer at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages thereon,
if any, to the date of purchase.
Mercom debt
In August 1997, the Mercom revolving credit agreement for $2,000 expired.
Mercom had no borrowings under the revolving credit agreement in 1996 or 1997.
On September 29, 1997, Cable Michigan, Inc. purchased and assumed all of
the bank's interest in the term credit agreement and the note issued thereunder.
Immediately after the purchase, the term credit agreement was amended in order
to, among other things, provide for less restrictive financial covenants,
eliminate mandatory amortization of principal and provide for a bullet maturity
of principal on December 31, 2002, and remove the change of control event of
default. Mercom's borrowings under the term credit agreement contain pricing and
security provisions substantially the same as those in place prior to the
purchase of the loan. The borrowings are secured by a pledge of the stock of
Mercom's subsidiaries and a first lien on certain of the assets of Mercom and
its subsidiaries, including inventory, equipment and receivables. At December
31, 1998, $14,151 of principal was outstanding. The borrowings under the term
credit agreement are eliminated in the Company's consolidated balance sheet.
Note payable
Avalon New England issued a note payable for $500 which is due on May 29,
2003, and bears interest at a rate of 7% per annum (which approximates Avalon
New England's incremental borrowing rate) payable annually. Additionally, Avalon
New England has a $100 non-compete agreement. The agreement calls for five
annual payments of $20, commencing on May 29, 1999.
F-403
<PAGE> 615
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The income tax provision in the accompanying consolidated financial
statements of operations relating to Mercom, Inc., a majority-owned subsidiary,
is comprised of the following:
<TABLE>
<CAPTION>
1998
----
<S> <C>
CURRENT
Federal..................................................... $ --
State....................................................... --
----
Total Current............................................... --
----
DEFERRED
Federal..................................................... 171
State....................................................... 15
----
Total Deferred.............................................. 186
----
Total provision for income taxes............................ $186
====
</TABLE>
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35% for 1998. The differences
are as follows:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Loss before provision for income taxes...................... $(8,833)
=======
Federal tax provision at statutory rates.................... $(3,092)
State income taxes.......................................... (182)
Allocated to members........................................ 3,082
Goodwill.................................................... 6
-------
Provision for income taxes.................................. $ 186
=======
</TABLE>
<TABLE>
<CAPTION>
TAX NET
OPERATING EXPIRATION
YEAR LOSSES DATE
- - - ---- --------- ----------
<S> <C> <C>
1998................................................... $922 2018
</TABLE>
Temporary differences that give rise to significant portion of deferred tax
assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
NOL carryforwards........................................... $ 922
Reserves.................................................... 459
Other, net.................................................. 20
-------
Total deferred assets....................................... 1,401
-------
Property, plant and equipment............................... (2,725)
Intangible assets........................................... (38)
-------
Total deferred liabilities.................................. (2,763)
-------
Subtotal.................................................... (1,362)
-------
Valuation allowance......................................... --
-------
Total deferred taxes........................................ $(1,362)
=======
</TABLE>
F-404
<PAGE> 616
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
Leases
Avalon New England and Avalon Michigan rent poles from utility companies
for use in their operations. While rental agreements are generally short-term,
Avalon New England and Avalon Michigan anticipate such rentals will continue in
the future. Avalon New England and Avalon Michigan also lease office facilities
and various items of equipment under month-to-month operating leases. Rent
expense was $58 for the year ended December 31, 1998. Rental commitments are
expected to continue at approximately $1 million a year for the foreseeable
future, including pole rental commitments which are cancelable.
Legal matters
Avalon and its subsidiaries are subject to regulation by the Federal
Communications Commission ("FCC") and other franchising authorities.
Avalon and its subsidiaries are subject to the provisions of the Cable
Television Consumer Protection and Competition Act of 1992, as amended, and the
Telecommunications Act of 1996. Avalon and its Subsidiaries have either settled
challenges or accrued for anticipated exposures related to rate regulation;
however, there is no assurance that there will not be further additional
challenges to its rates.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition or results of operations of
Avalon and its subsidiaries.
11. RELATED PARTY TRANSACTIONS AND BALANCES
During 1998, Avalon New England received $3,341 from Avalon Holdings. In
consideration for this amount, Avalon New England executed a note payable to
Avalon Holdings. This note is recorded as note payable-affiliate on the balance
sheet at December 31, 1998. Interest accrues at a rate of 5.57% per year and
Avalon New England has recorded accrued interest on this note of $100 at
December 31, 1998.
12. SUBSEQUENT EVENT
In May 1999, the Company signed an agreement with Charter Communications,
Inc. ("Charter Communications") under which Charter Communications agreed to
purchase Avalon Cable LLC's cable television systems and assume some of their
debt. The acquisition by Charter Communications is subject to regulatory
approvals. The Company expects to consummate this transaction in the fourth
quarter of 1999.
This agreement, if closed, would constitute a change in control under the
Indenture pursuant to which the Senior Subordinated Notes and the Senior
Discount Notes (collectively, the "Notes") were issued. The Indenture provides
that upon the occurrence of a change of control of the Company (a "Change of
Control") each holder of the Notes has the right to require the Company to
purchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereon (or 101% of the accreted value for the Senior Discount
Notes as of the date of purchase if prior to the full accretion date) plus
accrued and unpaid interest and Liquidated Damages (as defined in the Indenture)
thereof, if any, to the date of purchase.
F-405
<PAGE> 617
AVALON CABLE LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This agreement, if closed, would represent a Change of Control which, on
the closing date, constitutes an event of default under the Credit Facility
giving the lender the right to terminate the credit commitment and declare all
amounts outstanding immediately due and payable. Charter Communications has
agreed to repay all amounts due under the Credit Facility or cause all events of
default under the Credit Facility arising from the Change of Control to be
waived.
F-406
<PAGE> 618
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of
Avalon Cable of Michigan Holdings, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of Avalon Cable of Michigan Holdings, Inc. and subsidiaries (collectively, the
"Company") at December 31, 1997 and 1998, and the results of their operations,
changes in shareholders' equity and their cash flows for the period from
September 4, 1997 (inception) through December 31, 1997, and for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statements presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
March 30, 1999, except for Note 13,
as to which the date is May 13, 1999
F-407
<PAGE> 619
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash........................................................ $ 9,288 $ --
Accounts receivable, net of allowance for doubtful accounts
of $943................................................... 5,862 --
Prepayments and other current assets........................ 1,388 504
Accounts receivable from related parties.................... 124 --
Deferred income taxes....................................... 377 --
-------- ----
Current assets.............................................. 17,039 504
Property, plant and equipment, net.......................... 111,421 --
Intangible assets, net...................................... 462,117 --
Deferred charges and other assets........................... 1,302 --
-------- ----
Total assets................................................ $591,879 $504
======== ====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of notes payable............................ $ 20 $ --
Accounts payable and accrued expenses....................... 11,646 --
Advance billings and customer deposits...................... 3,171 --
Accounts payable-affiliate.................................. 2,023 500
-------- ----
Current liabilities......................................... 16,860 500
Long-term debt.............................................. 402,949 --
Notes payable-affiliate..................................... 3,341 --
Deferred income taxes....................................... 80,811 --
-------- ----
Total liabilities........................................... 503,961 500
-------- ----
Commitments and contingencies (Note 11)..................... -- --
Minority interest........................................... 61,836 4
-------- ----
Stockholders equity:
Common stock................................................ -- --
Additional paid-in capital.................................. 35,000 --
Accumulated deficit......................................... (8,918) --
-------- ----
Total shareholders' equity.................................. 26,082 --
-------- ----
Total liabilities and shareholders' equity.................. $591,879 $504
======== ====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-408
<PAGE> 620
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR SEPTEMBER 4, 1997
ENDED (INCEPTION) THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
REVENUE:
Basic services.......................................... $14,976 $ --
Premium services........................................ 1,468 --
Other................................................... 1,743 --
------- -------
18,187 --
OPERATING EXPENSES:
Selling, general and administrative..................... 4,207 --
Programming............................................. 4,564 --
Technical and operations................................ 1,951 --
Depreciation and amortization........................... 8,183 --
------- -------
Loss from operations.................................... (718) --
Interest income......................................... 173 4
Interest expense........................................ (8,223) --
Other expense, net...................................... (65) --
------- -------
Income (loss) before income taxes....................... (8,833) 4
(Benefit) from income taxes............................. (2,754) --
------- -------
Income (loss) before minority interest and extraordinary
item.................................................. (6,079) 4
Minority interest in income of consolidated entity...... 1,331 (4)
------- -------
Income (loss) before extraordinary item................. (4,748) --
Extraordinary loss on extinguishment of debt (net of tax
of $1,743)............................................ (4,170) --
------- -------
Net income (loss)....................................... $(8,918) $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-409
<PAGE> 621
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM SEPTEMBER 4, 1997 (INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON ADDITIONAL TOTAL
SHARES COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT EQUITY
----------- ------ ---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net income from date of
inception through December
31, 1997.................... -- $-- $ -- $ -- $ --
Balance, January 1, 1998...... 100 -- -- -- --
Net loss...................... -- -- -- (8,918) (8,918)
Contributions by parent....... -- -- 35,000 -- 35,000
--- -- ------- ------- -------
Balance, December 31, 1998.... 100 $-- $35,000 $(8,918) $26,082
=== == ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-410
<PAGE> 622
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
SEPTEMBER 4, 1997
FOR THE YEAR ENDED (INCEPTION) THROUGH
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (8,918) $ 4
Extraordinary loss on extinguishment of debt............ 4,170 --
Depreciation and amortization........................... 8,183 --
Deferred income taxes, net.............................. 82,370 --
Provision for loss on accounts receivable............... 75 --
Increase in minority interest........................... 1,331 --
Accretion on senior discount notes...................... 1,083 --
Net change in certain assets and liabilities, net of
business acquisitions Increase in accounts
receivable............................................ (1,679) --
Increase in accounts receivable from related parties.... (124) --
Increase in prepayment and other current assets......... (884) (4)
Increase in accounts payable and accrued expenses....... 4,863 --
Increase in accounts payable to related parties......... 1,523 --
Increase in deferred revenue............................ 1,684 --
Change in Other, net.................................... 1,339 --
--------- ---------
Net cash provided by operating activities............... 92,338 --
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.............. (11,468) --
Payment for acquisition................................. (554,402) --
--------- ---------
Net cash used in investing activities................... 565,870 --
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of the Credit Facility....... 265,888 --
Principal payment on debt............................... (125,013) --
Proceeds from the issuance of senior subordinated
notes................................................. 150,000 --
Payments made on bridge loan............................ (105,000) --
Proceeds from bridge loan............................... 105,000 --
Proceeds from the senior discount notes................. 110,411 --
Proceeds from sale to minority interest................. 46,588 --
Proceeds from other notes payable....................... 600 --
Proceeds from the issuance of note payable affiliate.... 3,341 --
Payments made for debt financing costs.................. (3,995) --
Proceeds from the issuance of common stock.............. 35,000 --
--------- ---------
Net cash provided by financing activities............... 482,820 --
--------- ---------
Net increase in cash.................................... 9,288 --
Cash at beginning of the period......................... -- --
--------- ---------
Cash at end of the period............................... $ 9,288 $ --
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for Interest.................. $ 3,480 $ --
Income taxes............................................ -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-411
<PAGE> 623
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Avalon Cable of Michigan Holdings, Inc. ("the Company") was formed in June
1998, pursuant to the laws of the state of Delaware. Avalon Cable of Michigan
Inc. ("Avalon Michigan") was formed in June 1998, pursuant to the laws of the
state of Delaware as a wholly owned subsidiary of the Company. On June 3, 1998,
Avalon Michigan entered into an Agreement and Plan of Merger (the "Agreement")
among the Company, Cable Michigan, Inc. ("Cable Michigan") and Avalon Michigan,
pursuant to which Avalon Michigan will merge into Cable Michigan and Cable
Michigan will become a wholly owned subsidiary of the Company (the "Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior
to the effective time of the Merger (other than treasury stock shares owned by
the Company or its subsidiaries, or shares as to which dissenters' rights have
been exercised) shall be converted into the right to receive $40.50 in cash (the
"Merger Consideration"), subject to certain possible closing adjustments.
In conjunction with the acquisition of Cable Michigan, Avalon Michigan
acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom").
On November 6, 1998, Avalon Michigan completed its merger into and with
Cable Michigan. The total consideration paid in conjunction with the merger,
including fees and expenses was $431,629, including repayment of all existing
Cable Michigan indebtedness and accrued interest of $135,205. Subsequent to the
merger, the arrangements with RCN and CTE for certain support services were
terminated. The Agreement also permitted Avalon Michigan to agree to acquire the
remaining shares of Mercom that it did not own.
The Company contributed $137,375 in cash to Avalon Michigan, which was used
to consummate the Merger. On November 5, 1998, the Company received $105,000 in
cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On
November 6, 1998, the Company contributed the proceeds received from the Bridge
Agreement and an additional $35,000 in cash to Avalon Michigan in exchange for
100 shares of common stock.
On November 6, 1998, Avalon Cable of New England Holdings, Inc. contributed
its 100% interest in Avalon Cable of New England LLC ("Avalon New England") to
Avalon Cable LLC in exchange for a membership interest in Avalon Cable LLC. This
contribution was between entities under common control and was accounted for
similar to a pooling-of-interests. Under this pooling-of-interests method, the
results of operations for Avalon include the results of operations from the date
of inception (September 4, 1997) of Avalon New England. On that same date,
Avalon Cable LLC received $63,000 from affiliated entities, which was comprised
of (i) a $45,000 capital contribution by Avalon Investors, LLC ("Avalon
Investors") and (ii) a $18,000 promissory note from Avalon Cable Holdings LLC
("Avalon Holdings"), which was used to make a $62,800 cash contribution to
Avalon New England.
The cash contribution received by Avalon New England was used to (i)
extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to
Avalon Holdings Finance which matures on December 31, 2001.
F-412
<PAGE> 624
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
On December 10, 1998, Avalon Cable LLC received a dividend distribution
from Avalon New England in the amount of $18,206, which was used by Avalon Cable
LLC to pay off the promissory note payable to Avalon Holdings, plus accrued
interest.
On March 26, 1999, after the acquisition of Mercom, Inc., the Company
completed a series of transactions to facilitate certain aspects of its
financing between affiliated entities under common control. As a result of these
transactions:
- Avalon Michigan contributed its assets and liabilities excluding deferred
tax liabilities, net to Avalon Cable LLC in exchange for an approximate
88% voting interest in Avalon Cable LLC. Avalon Cable LLC contributed
these assets and liabilities to its wholly-owned subsidiary, Avalon Cable
of Michigan LLC ("Avalon Michigan LLC");
- Avalon Michigan LLC has become the operator of the Michigan cluster
replacing Avalon Michigan;
- Avalon Michigan LLC is an obligor on the Senior Subordinated Notes
replacing Avalon Michigan; and
- Avalon Michigan is a guarantor of the obligations of Avalon Michigan LLC
under the Senior Subordinated Notes. Avalon Michigan does not have
significant assets, other than its investment in Avalon Cable LLC.
- The Company contributed the Senior Discount Notes to Avalon Cable LLC and
became a guarantor of the Senior Discount Notes. The Company does not
have significant assets, other than its 88% investment in Avalon Cable
LLC.
As a result of this reorganization between entities under common control,
the Company accounted for the reorganization similar to a pooling-of-interests.
Under the pooling-of-interests method, the results of operations include the
results of operations from the earliest date that a member became a part of the
control group by inception or acquisition. For the Company, the results of
operations are from the date of inception (September 4, 1997) for Avalon New
England, a wholly-owned subsidiary of Avalon Cable LLC.
Avalon Michigan has a majority-interest in Avalon Cable LLC. Avalon Cable
LLC wholly-owns Avalon Cable Holdings Finance, Avalon New England, and Avalon
Michigan LLC.
Avalon New England and Avalon Michigan provide cable service to the western
New England area and the state of Michigan, respectively. Avalon New England and
Avalon Michigan LLC's cable systems offer customer packages for basic cable
programming services which are offered at a per channel charge or packaged
together to form a tier of services offered at a discount from the combined
channel rate. Avalon New England and Avalon Michigan LLC's cable systems also
provide premium cable services to their customers for an extra monthly charge.
Customers generally pay initial connection charges and fixed monthly fees for
cable programming and premium cable services, which constitute the principle
sources of revenue for the Company.
Avalon Holdings Finance was formed for the sole purpose of facilitating
financings associated with the acquisitions of various cable operating
companies. Avalon Holdings Finance conducts no other activities.
F-413
<PAGE> 625
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements of the Company include the accounts
of the Company and of all its wholly and majority owned subsidiaries. All
significant transactions between the Company and its subsidiaries have been
eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenues from cable services are recorded in the month the service is
provided. Installation fee revenue is recognized in the period in which the
installation occurs to the extent that direct selling costs meet or exceed
installation revenues.
Advertising expense
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $82 for the year ended December 31, 1998.
Concentration of credit risk
Financial instruments which potentially expose the Company to a
concentration of credit risk include cash and subscriber and other receivables.
The Company had cash in excess of federally insured deposits at financial
institutions at December 31, 1998. The Company does not believe that such
deposits are subject to any unusual credit risk beyond the normal credit risk
associated with operating its business. The Company extends credit to customers
on an unsecured basis in the normal course of business. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
historically exceeded management's expectations. The Company's trade receivables
reflect a customer base centered in Michigan and New England. The Company
routinely assesses the financial strength of its customers; as a result,
concentrations of credit risk are limited.
Property, plant and equipment
Property, plant and equipment is stated at its fair value for items
acquired from Cable Michigan, historical cost for the minority interests' share
of Mercom property, plant and equipment and cost for additions subsequent to the
merger. Initial subscribers installation costs, including materials, labor and
overhead costs, are capitalized as a component of cable plant and equipment. The
cost of disconnection and reconnection are charged to expense when incurred.
F-414
<PAGE> 626
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
Depreciation is computed for financial statement purposes using the
straight-line method based on the following lives:
<TABLE>
<S> <C>
Buildings and improvements.................................. 10-25 years
Cable plant and equipment................................... 5-12 years
Vehicles.................................................... 5 years
Office furniture and equipment.............................. 5-10 years
</TABLE>
Intangible assets
Intangible assets represent the estimated fair value of cable franchises
and goodwill resulting from acquisitions. Cable franchises are amortized over a
period ranging from 13 to 15 years on a straight-line basis. Goodwill is the
excess of the purchase price over the fair value of the net assets acquired,
determined through an independent appraisal, and is amortized over 15 years
using the straight-line method. Deferred financing costs represent direct costs
incurred to obtain long-term financing and are amortized to interest expense
over the term of the underlying debt utilizing the effective interest method.
Accounting for impairments
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the Company
estimates the net future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected net future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles expected to be held and used
is based on the fair value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
Fair value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
a. The Company estimates that the fair value of all financial
instruments at December 31, 1998 does not differ materially from the
aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The fair value of the notes payable-affiliate
are considered to be equal to carrying values since the Company believes
that its credit risk has not changed from the time this debt instrument was
executed and therefore, would obtain a similar rate in the current market.
b. The fair value of the cash and temporary cash investments
approximates fair value because of the short maturity of these instruments.
F-415
<PAGE> 627
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
Income taxes
The Company and Mercom file separate consolidated federal income tax
returns. The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 -- "Accounting for Income Taxes". The statement
requires the use of an asset and liability approach for financial reporting
purposes. The asset and liability approach requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between financial reporting basis and tax basis of assets and
liabilities. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation allowance is recognized.
3. MERGER AND ACQUISITIONS
The Merger was accounted for using the purchase method of accounting.
Accordingly, the consideration was allocated to the net assets acquired based on
their fair market values at the date of the Merger. The purchase price was
allocated as follows: current assets and liabilities at fair values of $470,
approximately $94,000 to property, plant and equipment, $315,000 to cable
franchises and the excess of consideration paid over the fair market value of
the net assets acquired, or goodwill, of $81,705, offset by deferred taxes, net
of $60,000.
The Merger agreement between the Company and Avalon Michigan permitted
Avalon Michigan to agree to acquire the 1,822,810 shares (approximately 38% of
the outstanding stock) of Mercom that it did not own (the "Mercom Acquisition").
On September 10, 1998 Avalon Michigan and Mercom entered into a definitive
agreement (the "Mercom Merger Agreement") providing for the acquisition by
Avalon Michigan of all of such shares at a price of $12.00 per share. Avalon
Michigan completed this acquisition in March 1999. The total estimated
consideration payable in conjunction with the Mercom Acquisition, excluding fees
and expenses was $21,900.
On May 29, 1998, the Company acquired certain assets of Amrac Clear View, A
Limited Partnership ("Amrac") for consideration of $8,124, including acquisition
costs of $589. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition as
determined through the use of an independent appraisal. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired, or goodwill, was $256.
On July 21, 1998, the Company acquired certain assets and liabilities from
Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc.
(collectively, "Pegasus") for consideration of $30,467, including acquisition
costs of $175. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the consideration was allocated to the net assets
acquired based on the fair market values at the date of acquisition as
determined through use of an independent appraisal. The excess of the
consideration paid over the estimated fair market value of the net assets
acquired, or goodwill, was $977.
F-416
<PAGE> 628
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
Following is the unaudited pro forma results of operations for the year
ended December 31, 1998, as if the Merger and acquisitions occurred on January
1, 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
(UNAUDITED)
<S> <C>
Revenue..................................................... $ 96,751
========
Loss from operations........................................ $ (5,292)
========
Net loss.................................................... $(22,365)
========
</TABLE>
In March 1999, Avalon Michigan acquired the cable television systems of
Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P.
for approximately $7,800, excluding transaction fees.
In September 1998, the Company entered into a definitive agreement to
purchase all of the cable systems of Taconic Technology Corporation ("Taconic")
for approximately $8,525 (excluding transaction fees). As of December 31, 1998,
the Company incurred $41 of transaction costs related to the acquisition of
Taconic. This merger is expected to close in the second quarter of 1999.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Cable plant and equipment................................... $106,602
Vehicles.................................................... 2,572
Buildings and improvements.................................. 1,026
Office furniture and equipment.............................. 2,234
Construction in process..................................... 768
--------
Total property, plant and equipment......................... 113,202
Less-accumulated depreciation............................... (1,781)
--------
Property, plant and equipment, net.......................... $111,421
========
</TABLE>
Depreciation expense was $1,781 for the year ended December 31, 1998.
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<S> <C>
Cable Franchise............................................. $374,773
Goodwill.................................................... 82,928
Deferred Financing Costs.................................... 10,658
Non-compete agreement....................................... 100
--------
Total....................................................... 468,459
Less-accumulated amortization............................... (6,342)
--------
Intangible assets, net...................................... $462,117
========
</TABLE>
F-417
<PAGE> 629
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
Amortization expense for the year ended December 31, 1998 was $6,342.
6. ACCOUNT PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<S> <C>
Accounts payable............................................ $ 5,321
Accrued corporate expenses.................................. 404
Accrued cable programming costs............................. 2,388
Accrued taxes............................................... 1,383
Other....................................................... 2,150
-------
$11,646
=======
</TABLE>
7. INCOME TAXES
The income tax provision (benefit) in the accompanying consolidated
financial statements of operations is comprised of the following:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
CURRENT
Federal..................................................... $ 243
State....................................................... --
-------
Total Current............................................... 243
-------
DEFERRED
Federal..................................................... (2,757)
State....................................................... (240)
-------
Total Deferred.............................................. (2,997)
-------
Total (benefit) for income taxes............................ $(2,754)
=======
</TABLE>
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35% for 1998. The differences
are as follows:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
(Loss) before (benefit) for income taxes.................... $(8,833)
=======
Federal tax (benefit) at statutory rates.................... $(3,092)
State income taxes.......................................... (177)
Goodwill.................................................... 77
Benefit for taxes allocated to minority partners............ 84
-------
(Benefit) for income taxes.................................. $(3,108)
=======
</TABLE>
<TABLE>
<CAPTION>
TAX NET
OPERATING EXPIRATION
YEAR LOSSES DATE
- - - ---- --------- ----------
<S> <C> <C>
1998................................................... $10,360 2018
</TABLE>
F-418
<PAGE> 630
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
Temporary differences that give rise to significant portion of deferred tax
assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
NOL carryforwards........................................... $ 5,363
Alternative minimum tax credits............................. 141
Reserves.................................................... 210
Other, net.................................................. 309
--------
Total deferred assets....................................... 6,023
--------
Property, plant and equipment............................... (10,635)
Intangible assets........................................... (76,199)
--------
Total deferred liabilities.................................. (86,834)
--------
Subtotal.................................................... (80,811)
--------
Valuation allowance......................................... --
--------
Total deferred taxes........................................ $(80,811)
========
</TABLE>
The tax benefit related to the loss on extinguishment of debt results in
deferred tax, and it approximates the statutory U.S. tax rate. The tax benefit
of $2,036 related to the exercise of certain stock options of Cable Michigan
Inc. was charged directly to goodwill in conjunction with the closing of the
merger.
8. DEBT
At December 31, 1998, long-term debt consists of the following:
<TABLE>
<S> <C>
Senior Credit Facility...................................... $140,875
Senior Subordinated Notes................................... 150,000
Senior Discount Notes....................................... 111,494
Other Note Payable.......................................... 600
--------
402,969
Current portion............................................. 20
--------
$402,949
========
</TABLE>
Credit Facilities
On May 28, 1998, Avalon New England entered into a term loan and revolving
credit agreement with a major commercial lending institution (the "Credit
Agreement"). The Credit Agreement allowed for aggregate borrowings under Term
Loans A and B (collectively, the "Term Loans") and a revolving credit facility
of $30,000 and $5,000, respectively. The proceeds from the Term Loans and
revolving credit facility were used to fund the acquisitions made by Avalon New
England and to provide for Avalon New England's working capital requirements.
In December 1998, Avalon New England retired the Term Loans and revolving
credit agreement through the proceeds of a capital contribution from Avalon
Cable LLC. The fees and associated costs relating to the early retirement of
this debt was $1,110.
F-419
<PAGE> 631
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
On November 6, 1998, Avalon Michigan became a co-borrower along with Avalon
New England and Avalon Cable Finance, Inc. (Avalon Finance), affiliated
companies, collectively referred to as the ("Co-Borrowers") on a $320,888 senior
credit facility, which includes term loan facilities consisting of (i) tranche A
term loans of $120,888 and (ii) tranche B term loans of $170,000 and a revolving
credit facility of $30,000 (collectively, the "Credit Facility"). Subject to
compliance with the terms of the Credit Facility, borrowings under the Credit
Facility will be available for working capital purposes, capital expenditures
and pending and future acquisitions. The ability to advance funds under the
tranche A term loan facility terminated on March 31, 1999. The tranche A term
loans are subject to minimum quarterly amortization payments commencing on
January 31, 2001 and maturing on October 31, 2005. The tranche B term loans are
scheduled to be repaid in two equal installments on July 31, 2006 and October
31, 2006. The revolving credit facility borrowings are scheduled to be repaid on
October 31, 2005.
On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit
Facility in order to consummate the Merger. In connection with the Senior
Subordinated Notes (as defined below) and Senior Discount Notes (as defined
below) offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and
the availability under the Credit Facility was reduced to $195,000. Avalon
Michigan had borrowings of $11,300 and $129,575 outstanding under the tranche A
and tranche B term note facilities, and had available $30,000 for borrowings
under the revolving credit facility. Avalon New England and Avalon Finance had
no borrowings outstanding under the Credit Facility at December 31, 1998.
The interest rate under the Credit Facility is a rate based on either (i)
the base rate (a rate per annum equal to the greater of the Prime Rate and the
Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar rate (a rate
per annum equal to the Eurodollar Base Rate divided by 1.00 less the
Eurocurrency Reserve Requirements) plus, in either case, the applicable margin.
As of December 31, 1998, the applicable margin was (a) with respect to the
tranche B term loans was 2.75% per annum for Base Rate loans and 3.75% per annum
for Eurodollar loans and (b) with respect to tranche A term loans and the
revolving credit facility was 2.00% per annum for Base Rate loans and 3.00% for
Eurodollar loans. The applicable margin for the tranche A term loans and the
revolving credit facility are subject to performance based grid pricing which is
determined based on upon the consolidated leverage ratio of the Co-Borrowers.
The interest rate for the tranche B term loans outstanding at December 31, 1998
was 9.19%. Interest is payable on a quarterly basis. Accrued interest on the
borrowings under the credit facility was $1,389 at December 31, 1998.
The Credit Facility contains restrictive covenants which among other things
require the Co-Borrowers to maintain certain ratios including consolidated
leverage ratios and the interest coverage ratio, fixed charge ratio and debt
service coverage ratio.
The obligations of the Co-Borrowers under the Credit Facility are secured
by substantially all of the assets of the Co-Borrowers. In addition, the
obligations of the Co-Borrowers under the Credit Facility are guaranteed by the
Company, Avalon Cable LLC, Avalon Cable Finance Holdings, Inc., Avalon Cable of
New England Holdings, Inc. and Avalon Cable Holdings, LLC.
A Change of Control as defined under the Credit Facility agreement would
constitute an event of default under the Credit Facility giving the lender the
right to terminate the credit commitment and declare all amounts outstanding
immediately due and payable.
F-420
<PAGE> 632
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
Subordinated Debt
In December 1998, Avalon Michigan became a co-issuer of a $150,000
principal balance, Senior Subordinated Notes ("Subordinated Notes") offering and
Michigan Holdings became a co-issuer of a $196,000, gross proceeds, Senior
Discount Notes (defined below) offering. In conjunction with these financings,
Avalon Michigan paid $18,130 to Avalon Finance as a partial payment against
Avalon Michigan's note payable-affiliate. Avalon Michigan paid $76 in interest
on this note payable-affiliate during the period from inception (June 2, 1998)
through December 31, 1998.
The Subordinated Notes mature on December 1, 2008, and interest accrued at
a rate of 9.375% per annum. Interest is payable semi-annually in arrears on June
1 and December 1 of each year, commencing on June 1, 1999. Accrued interest on
the Subordinated Notes was $1,078 at December 31, 1998.
The Senior Subordinated Notes will not be redeemable at the Co-Borrowers'
option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes will
be subject to redemption at any time at the option of the Co-Borrowers, in whole
or in part at the redemption prices (expressed as percentages of principal
amount) plus accrued and unpaid interest, if any, thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- - - ---- ----------
<S> <C>
2003..................................................... 104.688%
2004..................................................... 103.125%
2005..................................................... 101.563%
2006 and thereafter...................................... 100.000%
</TABLE>
The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000
in 2002, $72,479 in 2003, and the remainder thereafter.
At any time prior to December 1, 2001, the Co-Borrowers may on any one or
more occasions redeem up to 35% of the aggregate principal amount of Senior
Subordinate Notes originally issued under the Indenture at a redemption price
equal to 109.375% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Subordinated Notes originally issued remain outstanding immediately after
each such redemption.
As used in the preceding paragraph, "Equity Offering and Strategic Equity
Investment" means any public or private sale of Capital Stock of any of the
Co-Borrowers pursuant to which the Co-Borrowers together receive net proceeds of
at least $25 million, other than issuances of Capital Stock pursuant to employee
benefit plans or as compensation to employees; provided that to the extent such
Capital Stock is issued by the Co-Borrowers, the net cash proceeds thereof shall
have been contributed to one or more of the Co-Borrowers in the form of an
equity contribution.
The Indentures provide that upon the occurrence of a change of control (a
"Change of Control") each holder of the Notes has the right to require the
Company to purchase all or any part (equal to $1,000 or an integral multiple
thereof) of such holder's Notes at an offer price in cash to 101% of the
aggregate principal amount thereon plus accrued and unpaid interest and
Liquidated Damages (as defined in the Indentures) thereof, if any, to the date
of purchase.
F-421
<PAGE> 633
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
The Senior Discount Notes
On December 3, 1998, the Company, Avalon Cable LLC and Avalon Cable
Holdings Finance, Inc. ("Holdings Co-Borrowers") issued $196.0 million aggregate
principal amount at maturity of 11 7/8% Senior Discount Notes ("Senior Discount
Notes") due 2008.
The Senior Discount Notes were issued at a substantial discount from their
principal amount at maturity, to generate gross proceeds of approximately $110.4
million. Interest on the Senior Discount Notes will accrue but not be payable
before December 1, 2003. Thereafter, interest on the Senior Discount Notes will
accrue on the principal amount at maturity at a rate of 11.875% per annum, and
will be payable semi-annually in arrears on June 1 and December 1 of each year,
commencing December 1, 2003. Prior to December 1, 2003, the accreted value of
the Senior Discount Notes will increase, representing amortization of original
issue discount, between the date of original issuance and December 1, 2003 on a
semi-annual basis using a 360-day year comprised of twelve 30-day months, such
that the accreted value shall be equal to the full principal amount at maturity
of the Senior Discount Notes on December 1, 2003. Original issue discount
accretion on the Senior Discount Notes was $1,083 at December 31, 1998.
On December 1, 2003, the Holding Co-borrowers will be required to redeem an
amount equal to $369.79 per $1,000 principal amount at maturity of each Senior
Discount Note then outstanding on a pro rata basis at a redemption price of 100%
of the principal amount at maturity of the Senior Discount Notes so redeemed.
On or after December 1, 2003, the Senior Discount Notes will be subject to
redemption at any time at the option of the Holding Co-borrowers, in whole or in
part, at the redemption prices, which are expressed as percentages of principal
amount, shown below plus accrued and unpaid interest, if any, and liquidated
damages, if any, thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on December 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- - - ---- ----------
<S> <C>
2003..................................................... 105.938%
2004..................................................... 103.958%
2005..................................................... 101.979%
2006 and thereafter...................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time before December 1, 2001, the
holding companies may on any one or more occasions redeem up to 35% of the
aggregate principal amount at maturity of senior discount notes originally
issued under the Senior Discount Note indenture at a redemption price equal to
111.875% of the accreted value at the date of redemption, plus liquidated
damages, if any, to the redemption date, with the net cash proceeds of any
equity offering and/or the net cash proceeds of a strategic equity investment;
provided that at least 65% of the aggregate principal amount at maturity of
Senior Discount Notes originally issued remain outstanding immediately after
each occurrence of such redemption.
Upon the occurrence of a Change of Control, each holder of Senior Discount
Notes will have the right to require the Holding Co-borrowers to repurchase all
or any part of such holder's Senior Discount Notes pursuant to a Change of
Control offer at an offer price in cash equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest and liquidated damages thereon,
if any, to the date of purchase.
F-422
<PAGE> 634
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
Note Payable
Avalon New England issued a note payable for $500 which is due on May 29,
2003, and bears interest at a rate of 7% per annum (which approximates Avalon
New England's incremental borrowing rate) payable annually. Additionally, Avalon
New England has a $100 non-compete agreement. The agreement calls for five
annual payments of $20, commencing on May 29, 1999.
Mercom debt
In August 1997, the Mercom revolving credit agreement for $2,000 expired.
Mercom had no borrowings under the revolving credit agreement in 1996 or 1997.
On September 29, 1997, Avalon Michigan purchased and assumed all of the
bank's interest in the term credit agreement and the note issued thereunder.
Immediately after the purchase, the term credit agreement was amended in order
to, among other things, provide for less restrictive financial covenants,
eliminate mandatory amortization of principal and provide for a bullet maturity
of principal on December 31, 2002, and remove the change of control event of
default. Mercom's borrowings under the term credit agreement contain pricing and
security provisions substantially the same as those in place prior to the
purchase of the loan. The borrowings are secured by a pledge of the stock of
Mercom's subsidiaries and a first lien on certain of the assets of Mercom and
its subsidiaries, including inventory, equipment and receivables at December 31,
1998, $14,151 of principal was outstanding. The borrowings under the term credit
agreement are eliminated in the Company's consolidated balance sheet.
9. MINORITY INTEREST
The activity in minority interest for the year ended December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
AVALON
CABLE
MERCOM LLC TOTAL
------- ------- -------
<S> <C> <C> <C>
Issuance of Class A units by Avalon Cable LLC....... $ -- $45,000 $45,000
Issuance of Class B-1 units by Avalon Cable LLC..... -- 4,345 4,345
Allocated to minority interest prior to
restructuring..................................... -- 365 365
Purchase of Cable Michigan, Inc..................... 13,457 -- 13,457
Income (loss) allocated to minority interest........ 398 (1,729) (1,331)
------- ------- -------
Balance at December 31, 1998........................ $13,855 $47,981 $61,836
======= ======= =======
</TABLE>
10. EMPLOYEE BENEFIT PLANS
Avalon Michigan has a qualified savings plan under Section 401(K) of the
Internal Revenue Code. Contributions charged to expense for the period from
November 5, 1998 to December 31, 1998 was $30.
11. COMMITMENTS AND CONTINGENCIES
Leases
Avalon New England and Avalon Michigan rent poles from utility companies
for use in their operations. While rental agreements are generally short-term,
Avalon New England and Avalon
F-423
<PAGE> 635
AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
Michigan anticipate such rentals will continue in the future. Avalon New England
and Avalon Michigan also lease office facilities and various items of equipment
under month-to-month operating leases. Rent expense was $58 for the year ended
December 31, 1998. Rental commitments are expected to continue at approximately
$1 million a year for the foreseeable future, including pole rental commitments
which are cancelable.
Legal Matters
The Company and its subsidiaries are subject to regulation by the Federal
Communications Commission ("FCC") and other franchising authorities.
The Company and its subsidiaries are subject to the provisions of the Cable
Television Consumer Protection and Competition Act of 1992, as amended, and the
Telecommunications Act of 1996. The Company and its subsidiaries have either
settled challenges or accrued for anticipated exposures related to rate
regulation; however, there is no assurance that there will not be further
additional challenges to its rates.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition or results of operations of
the Company and its subsidiaries.
12. RELATED PARTY TRANSACTIONS AND BALANCES
During 1998, Avalon New England received $3,341 from Avalon Holdings. In
consideration for this amount, Avalon New England executed a note payable to
Avalon Holdings. This note is recorded as note payable-affiliate on the balance
sheet at December 31, 1998. Interest accrues at the rate of 5.57% per year and
Avalon New England has recorded accrued interest on this note of $100 at
December 31, 1998.
13. SUBSEQUENT EVENT
In May 1999, the Company signed an agreement with Charter Communications,
Inc. ("Charter Communications") under which Charter Communications agreed to
purchase Avalon Cable LLC's cable television systems and assume some of their
debt. The acquisition by Charter Communications is subject to regulatory
approvals. The Company expects to consummate this transaction in the fourth
quarter of 1999.
This agreement, if closed, would constitute a change in control under the
Indenture pursuant to which the Senior Subordinated Notes and the Senior
Discount Notes (collectively, the "Notes") were issued. The Indenture provides
that upon the occurrence of a change of control of the Company (a "Change of
Control") each holder of the Notes has the right to require the Company to
purchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at an offer price in cash equal to 101% of the aggregate
principal amount thereon (or 101% of the accreted value for the Senior Discount
Notes as of the date of purchase if prior to the full accretion date) plus
accrued and unpaid interest and Liquidated Damages (as defined in the Indenture)
thereof, if any, to the date of purchase.
This agreement, if closed, would represent a Change of Control which, on
the closing date, constitutes an event of default under the Credit Facility
giving the lender the right to terminate the credit commitment and declare all
amounts outstanding immediately due and payable. Charter Communications has
agreed to repay all amounts due under the Credit Facility or cause all events of
default under the Credit Facility arising from the Change of Control to be
waived.
F-424
<PAGE> 636
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Avalon Cable of Michigan, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and changes in shareholders'
deficit and of cash flows present fairly, in all material respects, the
financial position of Cable Michigan, Inc. and subsidiaries (collectively, the
"Company") at December 31, 1996 and 1997 and November 5, 1998, and the results
of their operations and their cash flows for each of the two years ended
December 31, 1996 and 1997 and the period from January 1, 1998 to November 5,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
March 30, 1999
F-425
<PAGE> 637
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and temporary cash investments......................... $ 17,219 $ 6,093
Accounts receivable, net of reserve for doubtful accounts of
$541 at December 31, 1997 and $873 at November 5, 1998.... 3,644 4,232
Prepayments and other....................................... 663 821
Accounts receivable from related parties.................... 166 396
Deferred income taxes....................................... 1,006 541
-------- --------
Total current assets........................................ 22,698 12,083
Property, plant and equipment, net.......................... 73,836 77,565
Intangible assets, net...................................... 45,260 32,130
Deferred charges and other assets........................... 803 9,442
-------- --------
Total assets................................................ $142,597 $131,220
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current portion of long-term debt........................... $ -- $ 15,000
Accounts payable............................................ 5,564 8,370
Advance billings and customer deposits...................... 2,242 1,486
Accrued taxes............................................... 167 1,035
Accrued cable programming expense........................... 2,720 5,098
Accrued expenses............................................ 4,378 2,052
Accounts payable to related parties......................... 1,560 343
-------- --------
Total current liabilities................................... 16,631 33,384
Long-term debt.............................................. 143,000 120,000
Deferred income taxes....................................... 22,197 27,011
-------- --------
Total liabilities........................................... 181,828 180,395
-------- --------
Minority interest........................................... 14,643 14,690
-------- --------
Commitments and contingencies (Note 11)..................... -- --
Preferred Stock............................................. -- --
Common stock................................................ -- --
Common shareholders' deficit................................ (53,874) (63,865)
-------- --------
Total Liabilities and Shareholders' Deficit................. $142,597 $131,220
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-426
<PAGE> 638
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE
DECEMBER 31, PERIOD FROM
------------------------ JANUARY 1, 1998 TO
1996 1997 NOVEMBER 5, 1998
---------- ---------- ------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE
AND SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues....................................... $ 76,187 $ 81,299 $ 74,521
Costs and expenses, excluding management fees
and depreciation and amortization............ 40,593 44,467 41,552
Management fees................................ 3,498 3,715 3,156
Depreciation and amortization.................. 31,427 32,082 28,098
Merger related expenses........................ -- -- 5,764
---------- ---------- ----------
Operating income............................... 669 1,035 (4,049)
Interest income................................ 127 358 652
Interest expense............................... (15,179) (11,751) (8,034)
Gain on sale of Florida cable system........... -- 2,571 --
Other (expense), net........................... (736) (738) (937)
---------- ---------- ----------
(Loss) before income taxes..................... (15,119) (8,525) (12,368)
(Benefit) from income taxes.................... (5,712) (4,114) (1,909)
---------- ---------- ----------
(Loss) before minority interest and equity in
unconsolidated entities...................... (9,407) (4,411) (10,459)
Minority interest in loss (income) of
consolidated entity.......................... 1,151 53 (75)
---------- ---------- ----------
Net (Loss)..................................... $ (8,256) $ (4,358) $ (10,534)
========== ========== ==========
Basic and diluted earnings per average common
share Net (loss) to shareholders............. $ (1.20) $ (.63) $ (1.53)
Average common shares and common stock
equivalents outstanding...................... 6,864,799 6,870,528 6,891,932
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-427
<PAGE> 639
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 AND
THE PERIOD FROM JANUARY 1, 1998 TO NOVEMBER 5, 1998
----------------------------------------------------------------------------
COMMON ADDITIONAL SHAREHOLDER'S TOTAL
SHARES COMMON PAID-IN NET SHAREHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT INVESTMENT DEFICIT
----------- ------ ---------- -------- ------------- -------------
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995..... 1,000 $ 1 $ -- $ -- $(73,758) $(73,757)
Net loss....................... -- -- -- -- (8,256) (8,256)
Transfers from CTE............. -- -- -- -- 2,272 2,272
--------- ------ ---- -------- -------- --------
Balance, December 31, 1996..... 1,000 1 -- -- (79,742) (79,741)
Net loss from 1/1/97 through
9/30/97...................... -- -- -- -- (3,251) (3,251)
Net loss from 10/1/97 through
12/31/97..................... -- -- -- (1,107) -- (1,107)
Transfers from RCN
Corporation.................. -- -- -- -- 30,225 30,225
Common stock issued in
connection with the
Distribution................. 6,870,165 6,870 -- (59,638) 52,768 --
--------- ------ ---- -------- -------- --------
Balance, December 31, 1997..... 6,871,165 6,871 -- (60,745) -- (53,874)
Net loss from January 1, 1998
to November 5, 1998.......... -- -- -- (10,534) -- (10,534)
Exercise of stock options...... 30,267 30 351 -- -- 381
Tax benefits of stock option
exercises.................... -- -- 162 -- -- 162
--------- ------ ---- -------- -------- --------
Balance, November 5, 1998...... 6,901,432 $6,901 $513 $(71,279) $ -- $(63,865)
========= ====== ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-428
<PAGE> 640
CABLE MICHIGAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31, FOR THE PERIOD FROM
-------------------- JANUARY 1, 1998 TO
1996 1997 NOVEMBER 5, 1998
-------- --------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss).................................................. $ (8,256) $ (4,358) $(10,534)
Gain on pension curtailment/settlement...................... (855) -- --
Depreciation and amortization............................... 31,427 32,082 28,098
Deferred income taxes, net.................................. 988 (4,359) (3,360)
Provision for losses on accounts receivable................. 843 826 710
Gain on sale of Florida cable systems....................... -- (2,571) --
Increase (decrease) in minority interest.................... (1,151) (53) 47
Other non-cash items........................................ 2,274 1,914 --
Net change in certain assets and liabilities, net of
business acquisitions
Accounts receivable and customer deposits................... (1,226) (617) (2,054)
Accounts payable............................................ 1,365 2,234 2,806
Accrued expenses............................................ 125 580 52
Accrued taxes............................................... (99) 61 868
Accounts receivable from related parties.................... 567 1,549 (230)
Accounts payable to related parties......................... 1,314 (8,300) (1,217)
Other, net.................................................. 501 (644) (158)
-------- --------- --------
Net cash provided by operating activities................... 27,817 18,344 15,028
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment.................. (9,605) (14,041) (18,697)
Acquisitions, net of cash acquired.......................... -- (24) --
Proceeds from sale of Florida cable systems................. -- 3,496 --
Other....................................................... 390 560 --
-------- --------- --------
Net cash used in investing activities....................... (9,215) (10,009) (18,697)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt.................................. -- 128,000 --
Redemption of long-term debt................................ (1,500) (17,430) (8,000)
Proceeds from the issuance of common stock.................. -- -- 543
Transfers from CTE.......................................... -- 12,500 --
Change in affiliate notes, net.............................. (16,834) (116,836) --
Payments made for debt financing costs...................... -- (647) --
-------- --------- --------
Net cash provided by (used in) financing activities......... (18,334) 5,587 (7,457)
Net increase/(decrease) in cash and temporary cash
investments............................................... 268 13,922 (11,126)
Cash and temporary cash investments at beginning of year.... 3,029 3,297 17,219
-------- --------- --------
Cash and temporary cash investments at end of year.......... $ 3,297 $ 17,219 $ 6,093
======== ========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for Interest...................... $ 15,199 $ 11,400 $ 7,777
Income taxes................................................ 29 370 315
</TABLE>
Supplemental Schedule of Non-cash Investing and Financing Activities:
In September 1997, in connection with the transfer of CTE's investment in
Mercom to the Company, the Company assumed CTE's $15,000 Term Credit Facility.
Certain intercompany accounts receivable and payable and intercompany note
balances were transferred to shareholders' net investment in connection with
the Distribution described in note 1.
The accompanying notes are an integral part of these consolidated financial
statements.
F-429
<PAGE> 641
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31, 1998
1. BACKGROUND AND BASIS OF PRESENTATION
Prior to September 30, 1997, Cable Michigan, Inc. and subsidiaries (the
"Company") was operated as part of C-TEC Corporation ("C-TEC"). On September 30,
1997, C-TEC distributed 100 percent of the outstanding shares of common stock of
its wholly owned subsidiaries, RCN Corporation ("RCN") and the Company to
holders of record of C-TEC's Common Stock and C-TEC's Class B Common Stock as of
the close of business on September 19, 1997 (the "Distribution") in accordance
with the terms of the Distribution Agreement dated September 5, 1997 among
C-TEC, RCN and the Company. The Company consists of C-TEC's Michigan cable
operations, including its 62% ownership in Mercom, Inc. ("Mercom"). In
connection with the Distribution, C-TEC changed its name to Commonwealth
Telephone Enterprises, Inc. ("CTE"). RCN consists primarily of C-TEC's bundled
residential voice, video and Internet access operations in the Boston to
Washington, D.C. corridor, its existing New York, New Jersey and Pennsylvania
cable television operations, a portion of its long distance operations and its
international investment in Megacable, S.A. de C.V. C-TEC, RCN, and the Company
continue as entities under common control until the Company completes the Merger
(as described below).
On June 3, 1998, the Company entered into an Agreement and Plan of Merger
(the "Agreement") among the Company, Avalon Cable of Michigan Holdings Inc.
("Avalon Holdings") and Avalon Cable of Michigan Inc. ("Avalon Sub"), pursuant
to which Avalon Sub will merge into the Company and the Company will become a
wholly owned subsidiary of Avalon Holdings (the "Merger").
In accordance with the terms of the Agreement, each share of common stock,
par value $1.00 per share ("common stock"), of the Company outstanding prior to
the effective time of the Merger (other than treasury stock, shares owned by
Avalon Holdings or its subsidiaries, or shares as to which dissenters' rights
have been exercised) shall be converted into the right to receive $40.50 in cash
(the "Merger Consideration"), subject to certain possible closing adjustments.
On November 6, 1998, the Company completed its merger into and with Avalon
Cable Michigan, Inc. The total consideration payable in conjunction with the
merger, including fees and expenses is approximately 431,600. Subsequent to the
merger, the arrangements with RCN and CTE (as described below) were terminated.
The Merger agreement also permitted the Company to agree to acquire the
remaining shares of Mercom that it did not own.
Cable Michigan provides cable services to various areas in the state of
Michigan. Cable Michigan's cable television systems offer customer packages for
basic cable programming services which are offered at a per channel charge or
packaged together to form a tier of services offered at a discount from the
combined channel rate. Cable Michigan's cable television systems also provide
premium cable services to their customers for an extra monthly charge. Customers
generally pay initial connection charges and fixed monthly fees for cable
programming and premium cable services, which constitute the principle sources
of revenue for the Company.
The consolidated financial statements have been prepared using the
historical basis of assets and liabilities and historical results of operations
of all wholly and majority owned subsidiaries. However, the historical financial
information presented herein reflects periods during which the Company did not
operate as an independent company and accordingly, certain assumptions were made
in preparing such financial information. Such information, therefore, may not
necessarily reflect the results of operations, financial condition or cash flows
of the Company
F-430
<PAGE> 642
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in the future or what they would have been had the Company been an independent,
public company during the reporting periods. All material intercompany
transactions and balances have been eliminated.
RCN's corporate services group has historically provided substantial
support services such as finance, cash management, legal, human resources,
insurance and risk management. Prior to the Distribution, the corporate office
of C-TEC allocated the cost for these services pro rata among the business units
supported primarily based on assets; contribution to consolidated earnings
before interest, depreciation, amortization, and income taxes; and number of
employees. In the opinion of management, the method of allocating these costs is
reasonable; however, such costs are not necessarily indicative of the costs that
would have been incurred by the Company on a stand-alone basis.
CTE, RCN and the Company have entered into certain agreements subsequent to
the Distribution, and governing various ongoing relationships, including the
provision of support services between the three companies, including a
distribution agreement and a tax-sharing agreement.
The fee per year for support services from RCN will be 4.0% of the revenues
of the Company plus a direct allocation of certain consolidated cable
administration functions of RCN. The direct charge for customer service along
with the billing service and the cable guide service will be a pro rata share
(based on subscribers) of the expenses incurred by RCN to provide such customer
service and to provide such billing and cable guide service for RCN and the
Company.
CTE has agreed to provide or cause to be provided to RCN and the Company
certain financial data processing services for a transitional period after the
Distribution. The fees for such services will be an allocated portion (based on
relative usage) of the cost incurred by CTE to provide such financial data
processing services to all three groups.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and temporary cash investments
For purposes of reporting cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be temporary cash investments. Temporary cash investments are stated at cost,
which approximates market.
Property, plant and equipment and depreciation
Property, plant and equipment reflects the original cost of acquisition or
construction, including payroll and related costs such as taxes, pensions and
other fringe benefits, and certain general administrative costs.
F-431
<PAGE> 643
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is provided on the straight-line method based on the useful
lives of the various classes of depreciable property. The average estimated
lives of depreciable cable property, plant and equipment are:
<TABLE>
<S> <C>
Buildings................................................... 12-25 years
Cable television distribution equipment..................... 8.5-12 years
Vehicles.................................................... 5 years
Other equipment............................................. 12 years
</TABLE>
Maintenance and repair costs are charged to expense as incurred. Major
replacements and betterments are capitalized. Gain or loss is recognized on
retirements and dispositions.
Intangible assets
Intangible assets are amortized on a straight-line basis over the expected
period of benefit ranging from 5 to 19.3 years. Intangible assets include cable
franchises. The cable systems owned or managed by the Company are constructed
and operated under fixed-term franchises or other types of operating authorities
(referred to collectively herein as "franchises") that are generally
nonexclusive and are granted by local governmental authorities. The provisions
of these local franchises are subject to federal regulation. Costs incurred to
obtain or renew franchises are capitalized and amortized over the term of the
applicable franchise agreement.
Accounting for impairments
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In performing the review for recoverability, the Company
estimates the net future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected net future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for long-lived assets and identifiable intangibles expected to be held and used
is based on the fair value of the asset.
No impairment losses have been recognized by the Company pursuant to SFAS
121.
Revenue recognition
Revenues from cable programming services are recorded in the month the
service is provided. Installation fee revenue is recognized in the period in
which the installation occurs.
Advertising expense
Advertising costs are expensed as incurred. Advertising expense charged to
operations was $514, $560, and $505 in 1996, 1997, and for the period from
January 1, 1998 to November 5, 1998 respectively.
F-432
<PAGE> 644
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-based compensation
The Company applies Accounting Principles Board Opinion No.
25 -- "Accounting for Stock Issued to Employees" ("APB 25") in accounting for
its stock plans. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 -- "Accounting for
Stock-Based Compensation" ("SFAS 123").
Earnings (loss) per share
The Company has adopted statement of Financial Accounting Standards No.
128 -- "Earnings Per Share" ("SFAS 128"). Basic earnings (loss) per share is
computed based on net income (loss) divided by the weighted average number of
shares of common stock outstanding during the period.
Diluted earnings (loss) per share is computed based on net income (loss)
divided by the weighted average number of shares of common stock outstanding
during the period after giving effect to convertible securities considered to be
dilutive common stock equivalents. The conversions of stock options during
periods in which the Company incurs a loss from continuing operations is not
assumed since the effect is anti-dilutive. The number of stock options which
would have been converted in 1997 and in 1998 and had a dilutive effect if the
Company had income from continuing operations are 55,602 and 45,531,
respectively.
For periods prior to October 1, 1997, during which the Company was a wholly
owned subsidiary of C-TEC, earnings (loss) per share was calculated by dividing
net income (loss) by one-fourth the average common shares of C-TEC outstanding,
based upon a distribution ratio of one share of Company common stock for each
four shares of C-TEC common equity owned.
Income taxes
The Company and Mercom file separate consolidated federal income tax
returns. Prior to the Distribution, income tax expense was allocated to C-TEC's
subsidiaries on a separate return basis except that C-TEC's subsidiaries receive
benefit for the utilization of net operating losses and investment tax credits
included in the consolidated tax return even if such losses and credits could
not have been used on a separate return basis. The Company accounts for income
taxes using Statement of Financial Accounting Standards No. 109 -- "Accounting
for Income Taxes". The statement requires the use of an asset and liability
approach for financial reporting purposes. The asset and liability approach
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between financial reporting
basis and tax basis of assets and liabilities. If it is more likely than not
that some portion or all of a deferred tax asset will not be realized, a
valuation allowance is recognized.
Reclassification
Certain amounts have been reclassified to conform with the current year's
presentation.
3. BUSINESS COMBINATION AND DISPOSITIONS
The Agreement between Avalon Cable of Michigan Holdings, Inc. and the
Company permitted the Company to agree to acquire the 1,822,810 shares
(approximately 38% of the outstanding stock) of Mercom that it did not own (the
"Mercom Acquisition"). On September 10, 1998 the Company and Mercom entered into
a definitive agreement (the "Mercom Merger Agreement") providing for the
acquisition by the Company of all of such shares at a price of $12.00 per share.
The Company completed this acquisition in March 1999.
F-433
<PAGE> 645
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total estimated consideration payable in conjunction with the Mercom
Acquisition, excluding fees and expenses was $21,900.
In March 1999, Avalon Michigan Inc. acquired the cable television systems
of Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII,
L.P. for approximately $7,800, excluding transaction fees.
In July 1997, Mercom sold its cable system in Port St. Lucie, Florida for
cash of approximately $3,500. The Company realized a pretax gain of $2,571 on
the transaction.
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
<S> <C> <C>
Cable plant....................................... $158,655 $ 174,532
Buildings and land................................ 2,837 2,917
Furniture, fixtures and vehicles.................. 5,528 6,433
Construction in process........................... 990 401
-------- ---------
Total property, plant and equipment............... 168,010 184,283
Less accumulated depreciation..................... (94,174) (106,718)
-------- ---------
Property, plant and equipment, net................ $ 73,836 $ 77,565
======== =========
</TABLE>
Depreciation expense was $15,728, $16,431 and $14,968 for the years ended
December 31, 1996 and 1997, and the period from January 1, 1998 to November 5,
1998, respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
<S> <C> <C>
Cable Franchises.................................. $134,889 $ 134,889
Noncompete agreements............................. 473 473
Goodwill.......................................... 3,990 3,990
Other............................................. 1,729 1,729
-------- ---------
Total............................................. 141,081 141,081
Less accumulated amortization..................... (95,821) (108,951)
-------- ---------
Intangible assets, net............................ $ 45,260 $ 32,130
======== =========
</TABLE>
Amortization expense charged to operations for the years ended December 31,
1996 and 1997 was $15,699 and $15,651, respectively, and $13,130 for the period
from January 1, 1998 to November 5, 1998.
F-434
<PAGE> 646
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The income tax provision (benefit) in the accompanying consolidated
financial statements of operations is comprised of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
CURRENT:
Federal............................................. $(6,700) $ 245 $ 320
State............................................... -- -- 28
------- ------- -------
Total Current....................................... (6,700) 245 348
------- ------- -------
DEFERRED:
Federal............................................. 988 (4,359) (2,074)
State............................................... -- -- (183)
------- ------- -------
Total Deferred...................................... 988 (4,359) (2,257)
------- ------- -------
Total (benefit) for income taxes.................... $(5,712) $(4,114) $(1,909)
======= ======= =======
</TABLE>
The benefit for income taxes is different from the amounts computed by
applying the U.S. statutory federal tax rate of 35% for 1996, 34% for 1997 and
35% for the period from January 1, 1998 to November 5, 1998. The differences are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM
------------------- JANUARY 1, 1998 TO
1996 1997 NOVEMBER 11, 1998
-------- ------- ------------------
<S> <C> <C> <C>
(Loss) before (benefit) for income
taxes.................................. $(15,119) $(8,525) $(12,368)
======== ======= ========
Federal tax (benefit) at statutory
rates.................................. $ (5,307) $(2,899) $ (4,329)
State income taxes....................... -- -- (101)
Goodwill................................. 175 171 492
Increase (decrease) in valuation
allowance.............................. (518) (1,190) --
Nondeductible expenses................... -- 147 2,029
Benefit of rate differential applied to
reversing timing differences........... -- (424) --
Other, net............................... (62) 81 --
-------- ------- --------
(Benefit) for income taxes............... $ (5,712) $(4,114) $ (1,909)
======== ======= ========
</TABLE>
Mercom, which files a separate consolidated income tax return, has the
following net operating losses available:
<TABLE>
<CAPTION>
TAX NET
OPERATING EXPIRATION
YEAR LOSSES DATE
- - - ---- --------- ----------
<S> <C> <C>
1992..................................................... $ 435 2007
1995..................................................... $2,713 2010
</TABLE>
In 1997, Mercom was liable for Federal Alternative Minimum Tax (AMT). At
December 31, 1997 and at November 5, 1998, the cumulative minimum tax credits
are $141 and $141, respectively. This amount can be carried forward indefinitely
to reduce regular tax liabilities that exceed AMT in future years.
F-435
<PAGE> 647
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences that give rise to a significant portion of deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
<S> <C> <C>
NOL carryforwards................................... $ 1,588 $ 1,132
Alternative minimum tax credits..................... 141 141
Reserves............................................ 753 210
Other, net.......................................... 230 309
-------- --------
Total deferred assets............................... 2,712 1,792
-------- --------
Property, plant and equipment....................... (11,940) (10,515)
Intangible assets................................... (11,963) (10,042)
-------- --------
Total deferred liabilities.......................... (23,903) (20,557)
-------- --------
Subtotal............................................ (21,191) (18,765)
Valuation allowance................................. -- --
-------- --------
Total deferred taxes................................ $(21,191) $(18,765)
======== ========
</TABLE>
In the opinion of management, based on the future reversal of taxable
temporary differences, primarily depreciation and amortization, the Company will
more likely than not be able to realize all of its deferred tax assets. As a
result, the net change in the valuation allowance for deferred tax assets during
1997 was a decrease of $1,262, which $72 related to Mercom of Florida.
Due to the sale of Mercom of Florida, the Company's deferred tax
liabilities decreased by $132.
7. DEBT
Long-term debt outstanding at November 5, 1998 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 5,
1997 1998
------------ -----------
<S> <C> <C>
Term Credit Facility................................ $100,000 $100,000
Revolving Credit Facility........................... 28,000 20,000
Term Loan........................................... 15,000 15,000
-------- --------
Total............................................... 143,000 135,000
Current portion of long-term debt................... -- 15,000
-------- --------
Total Long-Term Debt................................ $143,000 $120,000
======== ========
</TABLE>
Credit Facility
The Company had an outstanding line of credit with a banking institution
for $3 million. No amounts were outstanding under this facility.
The Company has in place two secured credit facilities (the "Credit
Facilities") pursuant to a single credit agreement with a group of lenders for
which First Union National Bank acts as agent (the "Credit Agreement"), which
was effective as of July 1, 1997. The first is a five-year revolving credit
facility in the amount of $65,000 (the "Revolving Credit Facility"). The second
is an eight-year term credit facility in the amount of $100,000 (the "Term
Credit Facility").
F-436
<PAGE> 648
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The interest rate on the Credit Facilities will be, at the election of the
Company, based on either a LIBOR or a Base Rate option (6.25% at November 5,
1998) (each as defined in the Credit Agreement).
The entire amount of the Term Credit Facility has been drawn and as of
November 5, 1998, $100,000 of the principal was outstanding thereunder. The
entire amount of the Revolving Credit Facility is available to the Company until
June 30, 2002. As of November 5, 1998, $20,000 of principal was outstanding
thereunder. Revolving loans may be repaid and reborrowed from time to time.
The Term Credit Facility is payable over six years in quarterly
installments, from September 30, 1999 through June 30, 2005. Interest only is
due through June 1999. The Credit Agreement is currently unsecured.
The Credit Agreement contains restrictive covenants which, among other
things, require the Company to maintain certain debt to cash flow, interest
coverage and fixed charge coverage ratios and place certain limitations on
additional debt and investments. The Company does not believe that these
covenants will materially restrict its activities.
Term Loan
On September 30, 1997, the Company assumed all obligations of CTE under a
$15 million credit facility extended by a separate group of lenders for which
First Union National Bank also acts as agent (the "$15 Million Facility"). The
$15 Million Facility matures in a single installment on June 30, 1999 and is
collateralized by a first priority pledge of all shares of Mercom owned by the
Company. The $15 Million Facility has interest rate provisions (6.25% at
November 5, 1998), covenants and events of default substantially the same as the
Credit Facilities.
On November 6, 1998, the long-term debt of the Company was paid off in
conjunction with the closing of the merger.
Mercom debt
In August 1997, the Mercom revolving credit agreement for $2,000 expired.
Mercom had no borrowings under the revolving credit agreement in 1996 or 1997.
On September 29, 1997, the Company purchased and assumed all of the bank's
interest in the term credit agreement and the note issued thereunder.
Immediately after the purchase, the term credit agreement was amended in order
to, among other things, provide for less restrictive financial covenants,
eliminate mandatory amortization of principal and provide for a bullet maturity
of principal on December 31, 2002, and remove the change of control event of
default. Mercom's borrowings under the term credit agreement contain pricing and
security provisions substantially the same as those in place prior to the
purchase of the loan. The borrowings are secured by a pledge of the stock of
Mercom's subsidiaries and a first lien on certain of the assets of Mercom and
its subsidiaries, including inventory, equipment and receivables. At November 5,
1998, $14,151 of principal was outstanding. The borrowings under the term credit
agreement are eliminated in the Company's consolidated balance sheet.
8. COMMON STOCK AND STOCK PLANS
The Company has authorized 25,000,000 shares of $1 par value common stock,
and 50,000,000 shares of $1 par value Class B common stock. The Company also has
authorized 10,000,000 shares of $1 par value preferred stock. At November 5,
1998, 6,901,432 common shares are issued and outstanding.
F-437
<PAGE> 649
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Distribution, the Company Board of Directors (the
"Board") adopted the Cable Michigan, Inc. 1997 Equity Incentive Plan (the "1997
Plan"), designed to provide equity-based compensation opportunities to key
employees when shareholders of the Company have received a corresponding benefit
through appreciation in the value of Cable Michigan Common Stock.
The 1997 Plan contemplates the issuance of incentive stock options, as well
as stock options that are not designated as incentive stock options,
performance-based stock options, stock appreciation rights, performance share
units, restricted stock, phantom stock units and other stock-based awards
(collectively, "Awards"). Up to 300,000 shares of Common Stock, plus shares of
Common Stock issuable in connection with the Distribution related option
adjustments, may be issued pursuant to Awards granted under the 1997 Plan.
All employees and outside consultants to the Company and any of its
subsidiaries and all Directors of the Company who are not also employees of the
Company are eligible to receive discretionary Awards under the 1997 Plan.
Unless earlier terminated by the Board, the 1997 Plan will expire on the
10th anniversary of the Distribution. The Board or the Compensation Committee
may, at any time, or from time to time, amend or suspend and, if suspended,
reinstate, the 1997 Plan in whole or in part.
Prior to the Distribution, certain employees of the Company were granted
stock option awards under C-TEC's stock option plans. In connection with the
Distribution, 380,013 options covering Common Stock were issued. Each C-Tec
option was adjusted so that each holder would hold options to purchase shares of
Commonwealth Telephone Enterprise Common Stock, RCN Common Stock and Cable
Michigan Common Stock. The number of shares subject to, and the exercise price
of, such options were adjusted to take into account the Distribution and to
ensure that the aggregate intrinsic value of the resulting RCN, the Company and
Commonwealth Telephone Enterprises options immediately after the Distribution
was equal to the aggregate intrinsic value of the C-TEC options immediately
prior to the Distribution.
Information relating to the Company stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding December 31, 1995............................... 301,000
Granted..................................................... 33,750 $ 8.82
Exercised................................................... (7,250) --
Canceled.................................................... (35,500) 10.01
------- ------
Outstanding December 31, 1996............................... 292,000 8.46
Granted..................................................... 88,013 8.82
Exercised................................................... -- --
Canceled.................................................... (375) 10.01
------- ------
Outstanding December 31, 1997............................... 379,638 8.82
Granted..................................................... 47,500 31.25
Exercised................................................... (26,075) 26.21
Canceled.................................................... (10,250) --
------- ------
Outstanding November 5, 1998................................ 390,813 $11.52
======= ======
Shares exercisable November 5, 1998......................... 155,125 $ 8.45
</TABLE>
F-438
<PAGE> 650
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The range of exercise prices for options outstanding at November 5, 1998
was $8.46 to $31.25.
No compensation expense related to stock option grants was recorded in
1997. For the period ended November 5, 1998 compensation expense in the amount
of $161 was recorded relating to services rendered by the Board.
Under the term of the Merger Agreement the options under the 1997 Plan vest
upon the closing of the merger and each option holder will receive $40.50 per
option.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its stock options under the fair value method of SFAS 123. The fair value of
these options was estimated at the date of grant using a Black Scholes option
pricing model with the following weighted average assumptions for the period
ended November 5, 1998. The fair value of these options was estimated at the
date of grant using a Black Scholes option pricing model with weighted average
assumptions for dividend yield of 0% for 1996, 1997 and 1998; expected
volatility of 39.5% for 1996, 38.6% prior to the Distribution and 49.8%
subsequent to the Distribution for 1997 and 40% for 1998; risk-free interest
rate of 5.95%, 6.52% and 5.68% for 1996, 1997 and 1998 respectively, and
expected lives of 5 years for 1996 and 1997 and 6 years for 1998.
The weighted-average fair value of options granted during 1997 and 1998 was
$4.19 and $14.97, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net earnings and earnings per share were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE PERIOD
ENDED DECEMBER 31, FROM JANUARY 1,
------------------ TO NOVEMBER 5,
1996 1997 1998
------- ------- ---------------
<S> <C> <C> <C>
Net (Loss) as reported........................... $(8,256) $(4,358) $(10,534)
Net (Loss) pro forma............................. (8,256) (4,373) (10,174)
Basic (Loss) per share-as reported............... (1.20) (0.63) (1.45)
Basic (Loss) per share-pro forma................. (1.20) (0.64) (1.48)
Diluted (Loss) per share-as reported............. (1.20) (0.63) (1.45)
Diluted (Loss) per share-pro forma............... (1.20) (0.64) (1.48)
</TABLE>
In November 1996, the C-TEC shareholders approved a stock purchase plan for
certain key executives (the "Executive Stock Purchase Plan" or "C-TEC ESPP").
Under the C-TEC ESPP, participants may purchase shares of C-TEC Common Stock in
an amount of between 1% and 20% of their annual base compensation and between 1%
and 100% of their annual bonus compensation and provided, however, that in no
event shall the participant's total contribution exceed 20% of the sum of their
annual compensation, as defined by the C-TEC ESPP. Participant's accounts are
credited with the number of share units derived by dividing the amount of the
participant's contribution by the average price of a share of C-TEC Common Stock
at approximately the time such contribution is made. The share units credited to
participant's account do not give such participant any rights as a shareholder
with respect to, or any rights as a holder or record owner of, any shares of
C-TEC Common Stock. Amounts representing share units that have been credited to
a participant's account will be distributed, either in a lump sum or in
installments, as elected by the participant, following the earlier of the
participant's termination of employment with the Company or three calendar years
following the date on which
F-439
<PAGE> 651
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the share units were initially credited to the participant's account. It is
anticipated that, at the time of distribution, a participant will receive one
share of C-TEC Common Stock for each share unit being distributed.
Following the crediting of each share unit to a participant's account, a
matching share of Common Stock is issued in the participant's name. Each
matching share is subject to forfeiture as provided in the C-TEC ESPP. The
issuance of matching shares will be subject to the participant's execution of an
escrow agreement. A participant will be deemed to be the holder of, and may
exercise all the rights of a record owner of, the matching shares issued to such
participant while such matching shares are held in escrow. Shares of restricted
C-TEC Common Stock awarded under the C-TEC ESPP and share units awarded under
the C-TEC ESPP that relate to C-TEC Common Stock were adjusted so that following
the Distribution, each such participant was credited with an aggregate
equivalent value of restricted shares of common stock of CTE, the Company and
RCN. In September 1997, the Board approved the Cable Michigan, Inc. Executive
Stock Purchase Plan, ("the "Cable Michigan ESPP"), with terms substantially the
same as the C-TEC ESPP. The number of shares which may be distributed under the
Cable Michigan ESPP as matching shares or in payment of share units is 30,000.
9. PENSIONS AND EMPLOYEE BENEFITS
Prior to the Distribution, the Company's financial statements reflect the
costs experienced for its employees and retirees while included in the C-TEC
plans.
Through December 31, 1996, substantially all employees of the Company were
included in a trusteed noncontributory defined benefit pension plan, maintained
by C-TEC. Upon retirement, employees are provided a monthly pension based on
length of service and compensation. C-TEC funds pension costs to the extent
necessary to meet the minimum funding requirements of ERISA. Substantially, all
employees of C-TEC's Pennsylvania cable television operations (formerly Twin
Country Trans Video, Inc.) were covered by an underfunded plan which was merged
into C-TEC's overfunded plan on February 28, 1996.
The information that follows relates to the entire C-TEC noncontributory
defined benefit plan. The components of C-TEC's pension cost are as follows for
1996:
<TABLE>
<S> <C>
Benefits earned during the year (service costs)............. $ 2,365
Interest cost on projected benefit obligation............... 3,412
Actual return on plan assets................................ (3,880)
Other components -- net..................................... (1,456)
-------
Net periodic pension cost................................... $ 441
=======
</TABLE>
The following assumptions were used in the determination of the
consolidated projected benefit obligation and net periodic pension cost (credit)
for December 31, 1996:
<TABLE>
<S> <C>
Discount Rate............................................... 7.5%
Expected long-term rate of return on plan assets............ 8.0%
Weighted average long-term rate of compensation increases... 6.0%
</TABLE>
The Company's allocable share of the consolidated net periodic pension
costs (credit), based on the Company's proportionate share of consolidated
annualized salaries as of the valuation date, was approximately $10 for 1996.
These amounts are reflected in operating expenses. As discussed below, no
pension cost (credit) was recognized in 1997.
F-440
<PAGE> 652
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the restructuring, C-TEC completed a comprehensive study
of its employee benefit plans in 1996. As a result of this study, effective
December 31, 1996, in general, employees of the Company no longer accrue
benefits under the defined benefit pension plans and became fully vested in
their benefit accrued through that date. C-TEC notified affected participants in
December 1996. In December 1996, C-TEC allocated pension plan assets of $6,984
and the related liabilities to a separate plan for employees who no longer
accrue benefits after sum distributions. The allocation of assets and
liabilities resulted in a curtailment/settlement gain of $4,292. The Company's
allocable share of this gain was $855. This gain results primarily from the
reduction of the related projected benefit obligation. The curtailed plan has
assets in excess of the projected benefit obligation.
C-TEC sponsors a 401(k) savings plan covering substantially all employees
of the Company who are not covered by collective bargaining agreements.
Contributions made by the Company to the 401(k) plan are based on a specific
percentage of employee contributions. Contributions charged to expense were $128
in 1996. Contributions charged to expense in 1997 prior to the Distribution were
$107.
In connection with the Distribution, the Company established a qualified
saving plan under Section 401(k) of the Code. Contributions charged to expense
in 1997 were $53. Contributions charged to expense for the period from January
1, 1998 to November 5, 1998 were $164.
10. COMMITMENTS AND CONTINGENCIES
Total rental expense, primarily for office space and pole rental, was $984,
$908 and $1,077 for the year ended December 31, 1996, 1997 and for the period
from January 1, 1998 to November 5, 1998, respectively. Rental commitments are
expected to continue to approximate $1 million a year for the foreseeable
future, including pole rental commitments which are cancelable.
The Company is subject to the provisions of the Cable Television Consumer
Protection and Competition Act of 1992, as amended, and the Telecommunications
Act of 1996. The Company has either settled challenges or accrued for
anticipated exposures related to rate regulation; however, there is no assurance
that there will not be further additional challenges to its rates. The 1996
statements of operations include charges aggregating approximately $833 relating
to cable rate regulation liabilities. No additional charges were incurred in the
year ended December 31, 1997 and for the period from January 1, 1998 to November
5, 1998.
In the normal course of business, there are various legal proceedings
outstanding. In the opinion of management, these proceedings will not have a
material adverse effect on the financial condition or results of operations of
the Company.
The Company has agreed to indemnify RCN and C-TEC and their respective
subsidiaries against any and all liabilities which arise primarily from or
relate primarily to the management or conduct of the business of the Company
prior to the effective time of the Distribution. The Company has also agreed to
indemnify RCN and C-TEC and their respective subsidiaries against 20% of any
liability which arises from or relates to the management or conduct prior to the
effective time of the Distribution of the businesses of C-TEC and its
subsidiaries and which is not a true C-TEC liability, a true RCN liability or a
true Company liability.
The Tax Sharing Agreement, by and among the Company, RCN and C-TEC (the
"Tax Sharing Agreement"), governs contingent tax liabilities and benefits, tax
contests and other tax matters with respect to tax returns filed with respect to
tax periods, in the case of the Company, ending or deemed to end on or before
the Distribution date. Under the Tax Sharing Agreement,
F-441
<PAGE> 653
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjustments to taxes that are clearly attributable to the Company group, the RCN
group, or the C-TEC group will be borne solely by such group. Adjustments to all
other tax liabilities will be borne 50% by C-TEC, 20% by the Company and 30% by
RCN.
Notwithstanding the above, if as a result of the acquisition of all or a
portion of the capital stock or assets of the Company, the Distribution fails to
qualify as a tax-free distribution under Section 355 of the Internal Revenue
Code, then the Company will be liable for any and all increases in tax
attributable thereto.
11. AFFILIATE AND RELATED PARTY TRANSACTIONS
The Company has the following transactions with affiliates:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE
ENDED PERIOD ENDED
----------------- NOVEMBER 5,
1996 1997 1998
------- ------ ------------
<S> <C> <C> <C>
Corporate office costs allocated to the Company... $ 3,498 $3,715 $1,866
Cable staff and customer service costs allocated
from RCN Cable.................................. 3,577 3,489 3,640
Interest expense on affiliate notes............... 13,952 8,447 795
Royalty fees charged by CTE....................... 585 465 --
Charges for engineering services.................. 296 -- --
Other affiliate expenses.......................... 189 171 157
</TABLE>
In addition, RCN has agreed to obtain programming from third party
suppliers for Cable Michigan, the costs of which will be reimbursed to RCN by
Cable Michigan. In those circumstances where RCN purchases third party
programming on behalf of both RCN and the Company, such costs will be shared by
each company, on a pro rata basis, based on each company's number of
subscribers.
At December 31, 1997 and November 5, 1998, the Company has accounts
receivable from related parties of $166 and $396 respectively, for these
transactions. At December 31, 1997 and November 5, 1998, the Company has
accounts payable to related parties of $1,560 and $343 respectively, for these
transactions.
The Company had a note payable to RCN Corporation of $147,567 at December
31, 1996 primarily related to the acquisition of the Michigan cable operations
and its subsequent operations. The Company repaid approximately $110,000 of this
note payable in 1997. The remaining balance was transferred to shareholder's net
investment in connection with the Distribution.
12. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
The Company places its cash and temporary investments with high credit
quality financial institutions. The Company also periodically evaluates the
creditworthiness of the institutions with which it invests. The Company does,
however, maintain unsecured cash and temporary cash investment balances in
excess of federally insured limits.
The Company's trade receivables reflect a customer base centered in the
state of Michigan. The Company routinely assesses the financial strength of its
customers; as a result, concentrations of credit risk are limited.
F-442
<PAGE> 654
CABLE MICHIGAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
a. The fair value of the revolving credit agreement is considered to
be equal to carrying value since the debt re-prices at least every six
months and the Company believes that its credit risk has not changed from
the time the floating rate debt was borrowed and therefore, would obtain
similar rates in the current market.
b. The fair value of the cash and temporary cash investments
approximates fair value because of the short maturity of these instruments.
14. QUARTERLY INFORMATION (UNAUDITED)
The Company estimated the following quarterly data based on assumptions
which it believes are reasonable. The quarterly data may differ from quarterly
data subsequently presented in interim financial statements.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
Revenue.................................. $20,734 $22,311 $22,735 $ 8,741
Operating income before depreciation,
amortization, and management fees...... 9,043 10,047 10,185 12,277
Operating income (loss).................. 7,000 (3,324) (674) (7,051)
Net (loss)............................... (1,401) (5,143) (2,375) (1,615)
Net (loss) per average Common Share...... (0.20) (0.75) (0.34) (0.23)
1997
Revenue.................................. $19,557 $20,673 $20,682 $20,387
Operating income before depreciation,
amortization, and management fees...... 8,940 9,592 9,287 9,013
Operating income (loss).................. 275 809 (118) 69
Net (loss)............................... N/A N/A N/A (1,107)
Net (loss) per average Common Share...... N/A N/A N/A (0.16)
</TABLE>
The fourth quarter information for the quarter ended December 31, 1998
includes the results of operations of the Company for the period from October 1,
1998 through November 5, 1998.
F-443
<PAGE> 655
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers
of Avalon Cable of New England LLC
In our opinion, the accompanying balance sheet and the related statements
of operations, partners' equity (deficit) and of cash flows present fairly, in
all material respects, the financial position of Amrac Clear View, a Limited
Partnership, (the "Partnership"), as of May 28, 1998 and the results of its
operations and its cash flows for the period ended May 28, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
September 11, 1998
F-444
<PAGE> 656
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
BALANCE SHEET
MAY 28, 1998
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents................................... $ 415,844
Subscribers and other receivables, net of allowance for
doubtful accounts of $16,445.............................. 45,359
Prepaid expenses and other current assets................... 129,004
----------
Total current assets........................................ 590,207
Property, plant and equipment, net.......................... 483,134
----------
$1,073,341
==========
</TABLE>
<TABLE>
<S> <C>
LIABILITIES AND PARTNERS' EQUITY
Accounts payable............................................ $ 57,815
Accrued expenses............................................ 84,395
----------
Total current liabilities................................... 142,210
----------
Commitments and contingencies (Note 7)
Partners' equity............................................ 931,131
----------
$1,073,341
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-445
<PAGE> 657
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MAY 28, 1998
<TABLE>
<S> <C>
REVENUE:
Basic services.............................................. $651,878
Premium services............................................ 78,365
Other....................................................... 49,067
--------
779,310
--------
OPERATING EXPENSES:
Programming................................................. 193,093
Selling, general and administrative......................... 151,914
Technical and operations.................................... 98,628
Depreciation and amortization............................... 47,268
Management fees............................................. 41,674
--------
Income from operations...................................... 246,733
Interest income............................................. 2,319
Interest (expense).......................................... (1,871)
--------
Net income.................................................. $247,181
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-446
<PAGE> 658
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MAY 28, 1998
<TABLE>
<CAPTION>
CLASS A CLASS B INVESTOR
GENERAL LIMITED LIMITED LIMITED
PARTNER PARTNER PARTNER PARTNERS TOTAL
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Partners' (deficit) equity at
December 31, 1997................ $(6,756) $(6,756) $(2,703) $700,165 $683,950
Net income......................... 6,180 6,180 2,472 232,349 247,181
------- ------- ------- -------- --------
Partners' equity at May 28,
1998............................. $ (576) $ (576) $ (231) $932,514 $931,131
======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-447
<PAGE> 659
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MAY 28, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $247,181
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization............................... 47,268
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease in subscribers and other receivables............... 21,038
Increase in prepaid expenses and other current assets....... (52,746)
Increase in accounts payable................................ 9,866
Increase in accrued expenses................................ 3,127
--------
Net cash provided by operating activities................... 275,734
--------
CASH FLOWS FOR INVESTING ACTIVITIES
Capital expenditures........................................ (61,308)
--------
Cash flows for financing activities Repayment of long-term
debt...................................................... (560,500)
--------
Net increase in cash and cash equivalents................... (346,074)
--------
Cash and cash equivalents, beginning of the period.......... 761,918
--------
Cash and cash equivalents, end of the period................ $415,844
========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest.................................................... $ 6,939
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-448
<PAGE> 660
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
The Partnership is a Massachusetts limited partnership created pursuant to
a Limited Partnership Agreement, dated as of October 1, 1986, as amended (the
"Partnership Agreement"), by and among (1) Amrac Telecommunications as the
general partner (the "General Partner"), (2) Clear View Cablevision, Inc. as the
class A limited partner (the "Class A Limited Partner"), (3) Schuparra
Properties, Inc., as the class B limited partner (the "Class B Limited
Partner"), and (4) those persons admitted to the Partnership from time to time
as investor limited partners (the "Investor Limited Partner").
The Partnership provides cable television service to the towns of Hadley
and Belchertown located in western Massachusetts. At May 28, 1998, the
Partnership provided services to approximately 5,100 customers residing in those
towns.
The Partnership's cable television systems offer customer packages of basic
and cable programming services which are offered at a per channel charge or are
packaged together to form a tier of services offered at a discount from the
combined channel rate. The Partnership's cable television systems also provide
premium television services to their customers for an extra monthly charge.
Customers generally pay initial connection charges and fixed monthly fees for
cable programming and premium television services, which constitute the
principal sources of revenue for the Partnership.
On October 7, 1997, the Partnership entered into a definitive agreement
with Avalon Cable of New England LLC ("Avalon New England") whereby Avalon New
England would purchase the assets and operations of the Partnership for
$7,500,000. This transaction was consummated and became effective on May 29,
1998. The assets and liabilities at May 28, 1998, have not been adjusted or
reclassified to reflect this transaction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and use
assumptions that affect the reported amounts of assets and liabilities and the
disclosure for contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reported period. Actual results may vary from estimates used.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments purchased with
an initial maturity of three months or less.
Revenue Recognition
Revenue is recognized as cable television services are provided.
Concentration of Credit Risk
Financial instruments which potentially expose the Partnership to a
concentration of credit risk include cash, cash equivalents and subscriber and
other receivables. The Partnership does not believe that such deposits are
subject to any unusual credit risk beyond the normal credit risk associated with
operating its business. The Partnership extends credit to customers on an
unsecured basis in the normal course of business. The Partnership maintains
reserves for potential credit losses and such losses, in the aggregate, have not
historically exceeded management's expectations.
F-449
<PAGE> 661
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment is stated at cost. Initial subscriber installation
costs, including material, labor and overhead costs, are capitalized as a
component of cable plant and equipment. Depreciation is computed for financial
statement purposes using the straight-line method based upon the following
lives:
<TABLE>
<S> <C>
Cable plant and equipment................................... 10 years
Office furniture and equipment.............................. 5 to 10 years
Vehicles.................................................... 6 years
</TABLE>
Financial Instruments
The Partnership estimates that the fair value of all financial instruments
at May 28, 1998 does not differ materially from the aggregate carrying values of
its financial instruments recorded in the accompanying balance sheet.
Income Taxes
The Partnership is not subject to federal and state income taxes.
Accordingly, no recognition has been given to income taxes in the accompanying
financial statements of the Partnership since the income or loss of the
Partnership is to be included in the tax returns of the individual partners.
Allocation of Profits and Losses and Distributions of Cash Flow
Partnership profits and losses (other than those arising from capital
transactions, described below) and distributions of cash flow are allocated 94%
to the Investor Limited Partners, 2.5% to the Class A Limited Partner, 1% to the
Class B Limited Partner and 2.5% to the General Partner until Payout (as defined
in the Partnership Agreement) and after Payout, 65% to the Investor Limited
Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner
and 15% to the General Partner.
Partnership profits and capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and second, in proportion to any distributed cash
proceeds resulting from the capital transaction and third, any remaining profit,
if any, is allocated 65% to the Investor Limited Partners, 15% to the Class A
Limited Partner, 5% to the Class B Limited Partner, and 15% to the General
Partner.
Partnership losses from capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and, second, any remaining loss, if any, is allocated
65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to
the Class B Limited Partner, and 15% to the General Partner.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in financial
statements. SFAS No. 130 states that comprehensive income includes reported net
income of a company, adjusted for items that are currently accounted for as
direct entries to equity, such as the net unrealized gain or loss on securities
available for sale. SFAS No. 130 is effective for both interim and annual
periods beginning after December 15, 1997. Management does not anticipate that
adoption of SFAS No. 130 will have a material effect on the financial
statements.
F-450
<PAGE> 662
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which establishes standards for
reporting by public companies about operating segments of their business. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131 is effective for
periods beginning after December 15, 1997. Management does not anticipate that
the adoption of SFAS No. 131 will have a material effect on the financial
statements.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
At May 28, 1998, prepaid expenses and other current assets consist of the
following:
<TABLE>
<S> <C>
Deferred transaction costs.................................. $ 91,024
Other....................................................... 37,980
--------
$129,004
========
</TABLE>
Deferred transaction costs consist primarily of attorney fees related to
the sale of assets of the Partnership (Note 1).
4. PROPERTY, PLANT AND EQUIPMENT
At May 28, 1998, property, plant and equipment consists of the following:
<TABLE>
<S> <C>
Cable plant and equipment................................... $ 3,460,234
Office furniture and equipment.............................. 52,531
Vehicles.................................................... 32,468
-----------
3,545,233
Accumulated depreciation.................................... (3,062,099)
-----------
$ 483,134
===========
</TABLE>
Depreciation expense was $47,018 for the period from January 1, 1998
through May 28, 1998.
5. ACCRUED EXPENSES
At May 28, 1998, accrued expenses consist of the following:
<TABLE>
<S> <C>
Accrued compensation and benefits........................... $17,004
Accrued programming costs................................... 24,883
Accrued legal costs......................................... 25,372
Other....................................................... 17,136
-------
$84,395
=======
</TABLE>
6. LONG-TERM DEBT
The Partnership repaid its term loan, due to a bank, on January 15, 1998.
Interest on the loan was paid monthly and accrued at the bank's prime rate plus
2% (10.5% at December 31, 1997). The loan was collateralized by substantially
all of the assets of the Partnership and a pledge of all partnership interests.
The total principal outstanding at December 31, 1997 was $560,500.
F-451
<PAGE> 663
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
The Partnership rents poles from utility companies for use in its
operations. These rentals amounted to approximately $15,918 of rent expense
during the period. While rental agreements are generally short-term, the
Partnership anticipates such rentals will continue in the future. The
Partnership leases office facilities and various items of equipment under
month-to-month operating leases. Rental expense under operating leases amounted
to $8,171 during the period.
The operations of the Partnership are subject to regulation by the Federal
Communications Commission and various franchising authorities.
From time to time the Partnership is also involved with claims that arise
in the normal course of business. In the opinion of management, the ultimate
liability with respect to these claims will not have a material adverse effect
on the operations, cash flows or financial position of the Partnership.
8. RELATED PARTY TRANSACTIONS
The General Partner provides management services to the Partnership for
which it receives a management fee of 5% of revenue. The General Partner also
allocates, in accordance with a management agreement, certain general,
administrative and payroll costs to the Partnership. For the period from January
1, 1998 through May 28, 1998, management fees totaled $41,674 and allocated
general, administrative and payroll costs totaled $3,625, which are included in
selling general and administrative expenses.
The Partnership believes that these fees and allocations were made on a
reasonable basis. However, the amounts paid are not necessarily indicative of
the level of expenses that might have been incurred had the Partnership
contracted directly with third parties. The Partnership has not attempted to
obtain quotes from third parties to determine what the cost of obtaining such
services from third parties would have been.
F-452
<PAGE> 664
INDEPENDENT AUDITORS' REPORT
To the Partners of
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
We have audited the accompanying balance sheets of Amrac Clear View, a
Limited Partnership as of December 31, 1996 and 1997, and the related statements
of net earnings, changes in partners' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amrac Clear View, a Limited
Partnership as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ GREENFIELD, ALTMAN, BROWN, BERGER
& KATZ, P.C.
Canton, Massachusetts
February 13, 1998
F-453
<PAGE> 665
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
BALANCE SHEETS
AT DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 475,297 $ 761,918
Subscribers and other receivables, net of allowance for
doubtful accounts of $2,500 in 1996 and $3,000 in 1997.... 49,868 66,397
Prepaid expenses:
Legal....................................................... -- 53,402
Miscellaneous............................................... 28,016 20,633
---------- ----------
Total current assets........................................ 553,181 902,350
---------- ----------
Property and equipment, net of accumulated depreciation
$2,892,444 in 1996 and $3,015,081 in 1997................. 473,438 468,844
---------- ----------
OTHER ASSETS:
Franchise cost, net of accumulated amortization of $6,757 in
1996 and $7,417 in 1997................................... 3,133 2,473
Deferred financing costs, net of accumulated amortization of
$60,247 in 1996 and $73,447 in 1997....................... 13,200 --
---------- ----------
16,333 2,473
---------- ----------
$1,042,952 $1,373,667
========== ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt........................ $ 356,500 $ 397,500
Accounts payable-trade...................................... 34,592 47,949
Accrued expenses:
Utilities................................................... 59,668 --
Miscellaneous............................................... 50,074 81,268
---------- ----------
Total current liabilities................................... 500,834 526,717
---------- ----------
Long-term debt, net of current maturities................... 488,000 163,000
---------- ----------
Commitments and contingencies (Note 4)
Partners' equity............................................ 54,118 683,950
---------- ----------
$1,042,952 $1,373,667
========== ==========
</TABLE>
See notes to financial statements
F-454
<PAGE> 666
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENTS OF NET EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues........................................... $1,701,322 $1,807,181 $1,902,080
Less cost of service............................... 644,736 656,881 687,433
---------- ---------- ----------
Net revenues....................................... 1,056,586 1,150,300 1,214,647
---------- ---------- ----------
Operating expenses excluding management fees and
depreciation and amortization.................... 330,574 388,284 351,031
Management fees.................................... 94,317 96,742 101,540
Depreciation and amortization...................... 330,913 340,166 136,497
---------- ---------- ----------
755,804 825,192 589,068
---------- ---------- ----------
Earnings from operations........................... 300,782 325,108 625,579
---------- ---------- ----------
OTHER EXPENSES (INCOME):
Interest income.................................... -- (7,250) (23,996)
Interest expense................................... 130,255 98,603 70,738
Utility refunds.................................... -- -- (50,995)
---------- ---------- ----------
130,255 91,353 (4,253)
---------- ---------- ----------
Net earnings....................................... $ 170,527 $ 233,755 $ 629,832
========== ========== ==========
</TABLE>
See notes to financial statements
F-455
<PAGE> 667
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
CLASS A CLASS B INVESTOR
GENERAL LIMITED LIMITED LIMITED
PARTNER PARTNER PARTNER PARTNERS TOTAL
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Partners' deficit at December 31,
1994............................ $(31,012) $(31,012) $(12,405) $(211,905) $(286,334)
Net earnings for the year......... 4,263 4,263 1,705 160,296 170,527
Partners' distributions during the
year............................ (1,596) (1,596) (638) (60,000) (63,830)
-------- -------- -------- --------- ---------
Partners' deficit at December 31,
1995............................ (28,345) (28,345) (11,338) (111,609) (179,637)
Net earnings for the year......... 5,844 5,844 2,337 219,730 233,755
-------- -------- -------- --------- ---------
Partners' equity (deficit) at
December 31, 1996............... (22,501) (22,501) (9,001) 108,121 54,118
Net earnings for the year......... 15,745 15,745 6,298 592,044 629,832
-------- -------- -------- --------- ---------
Partners' equity (deficit) at
December 31, 1997............... $ (6,756) $ (6,756) $ (2,703) $ 700,165 $ 683,950
======== ======== ======== ========= =========
</TABLE>
See notes to financial statements
F-456
<PAGE> 668
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings......................................... $ 170,527 $ 233,755 $ 629,832
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization........................ 330,913 340,166 136,497
Changes in assets and liabilities:
(Increase) decrease in:
Subscribers and other receivables.................... 4,573 (12,093) (16,529)
Prepaid expenses..................................... (3,378) (9,468) (46,019)
Increase (decrease) in accounts payable and accrued
expenses........................................... (66,424) 69,262 (15,117)
--------- --------- ---------
Net cash provided by operating activities............ 436,211 621,622 688,664
--------- --------- ---------
CASH FLOWS FOR INVESTING ACTIVITIES
Purchases of equipment............................... (116,794) (74,879) (118,043)
--------- --------- ---------
CASH FLOWS FOR FINANCING ACTIVITIES
Repayment of long-term debt.......................... (239,250) (260,750) (284,000)
Distributions to partners............................ (63,830)
--------- --------- ---------
Net cash used by financing activities................ (303,080) (260,750) (284,000)
--------- --------- ---------
Net increase in cash and cash equivalents............ 16,337 285,993 286,621
Cash and cash equivalents, beginning of year......... 172,967 189,304 475,297
--------- --------- ---------
Cash and cash equivalents, end of year............... $ 189,304 $ 475,297 $ 761,918
========= ========= =========
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest............................................. $ 133,540 $ 94,038 $ 73,124
========= ========= =========
</TABLE>
See notes to financial statements
F-457
<PAGE> 669
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1. SUMMARY OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES:
This summary of significant accounting policies of Amrac Clear View, a
Limited Partnership (the "Partnership"), is presented to assist in understanding
the Partnership's financial statements. The financial statements and notes are
representations of the Partnership's management, which is responsible for their
integrity and objectivity. The accounting policies conform to generally accepted
accounting principles and have been consistently applied in the preparation of
the financial statements.
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were used.
Operations:
The Partnership provides cable television service to the residents of the
towns of Hadley and Belchertown in western Massachusetts.
Credit concentrations:
The Partnership maintains cash balances at several financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. At various times during the year the Partnership's
cash balances exceeded the federally insured limits.
Concentration of credit risk with respect to subscriber receivables are
limited due to the large number of subscribers comprising the Partnership's
customer base.
Property and equipment/depreciation:
Property and equipment are carried at cost. Minor additions and renewals
are expensed in the year incurred. Major additions and renewals are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Total depreciation for the years ended
December 31, 1995, 1996 and 1997 was $321,872, $331,707 and $122,637,
respectively.
Other assets/amortization:
Amortizable assets are recorded at cost. The Partnership amortizes
intangible assets using the straight-line method over the useful lives of the
various items. Total amortization for the years ended December 31, 1995, 1996
and 1997 was $9,041, $8,459 and $13,860, respectively.
Cash equivalents:
For purposes of the statements of cash flows, the Partnership considers all
short-term instruments purchased with a maturity of three months or less to be
cash equivalents. There were no cash equivalents at December 31, 1995 and 1997.
Cash equivalents at December 31, 1996, amounted to $300,000.
Advertising:
The Partnership follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense was $1,681, $1,781 and $2,865 for the
years ended December 31, 1995, 1996 and 1997, respectively.
F-458
<PAGE> 670
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Income taxes:
The Partnership does not incur a liability for federal or state income
taxes. The current income or loss of the Partnership is included in the taxable
income of the partners, and therefore, no provision for income taxes is
reflected in the financial statements.
Revenues:
The principal sources of revenues are the monthly charges for basic and
premium cable television services and installation charges in connection
therewith.
Allocation of profits and losses and distributions of cash flow:
Partnership profits and losses, (other than those arising from capital
transactions, described below), and distributions of cash flow are allocated 94%
to the Investor Limited Partners, 2.5% to the Class A Limited Partner, 1% to the
Class B Limited Partner and 2.5% to the General Partner until Payout (as defined
in the Partnership Agreement) and after Payout, 65% to the Investor Limited
Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner
and 15% to the General Partner.
Partnership profits from capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and second, in proportion to any distributed cash
proceeds resulting from the capital transaction and third, any remaining profit,
if any, is allocated 65% to the Investor Limited Partners, 15% to the Class A
Limited Partner, 5% to the Class B Limited Partner, and 15% to the General
Partner.
Partnership losses from capital transactions are allocated first, in
proportion to the partners' respective capital accounts until their respective
account balances are zero and, second, any remaining loss, if any, is allocated
65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to
the Class B Limited Partner, and 15% to the General Partner.
2. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Cable plant and equipment......................... $3,274,684 $3,391,750
Office furniture and equipment.................... 63,373 64,350
Vehicles.......................................... 27,825 27,825
---------- ----------
$3,365,882 $3,483,925
========== ==========
</TABLE>
Depreciation is provided over the estimated useful lives of the above items
as follows:
<TABLE>
<S> <C>
Cable plant and equipment................................... 10 years
Office furniture and equipment.............................. 5-10 years
Vehicles.................................................... 6 years
</TABLE>
3. LONG-TERM DEBT:
The Partnership's term loan, due to a bank, is payable in increasing
quarterly installments through June 30, 1999. Interest on the loan is paid
monthly and accrues at the bank's prime rate plus 2% (10.5% at December 31,
1997). The loan is collateralized by substantially all of the assets of the
Partnership and a pledge of all partnership interests. The total principal
outstanding at December 31, 1997 was $560,500.
F-459
<PAGE> 671
AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Annual maturities are as follows:
<TABLE>
<S> <C>
1998........................................................ $397,500
1999........................................................ 163,000
--------
$560,500
========
</TABLE>
The loan agreement contains covenants including, but not limited to,
maintenance of certain debt ratios as well as restrictions on capital
expenditures and investments, additional indebtedness, partner distributions and
payment of management fees. The Partnership was in compliance with all covenants
at December 31, 1996 and 1997. In 1995, the Partnership obtained, from the bank,
unconditional waivers of the following covenant violations: (1) to make a one-
time cash distribution of $63,830, (2) to increase the capital expenditure limit
to $125,000, and (3) to waive certain other debt ratio and investment
restrictions, which were violated during the year.
4. COMMITMENTS AND CONTINGENCIES:
The Partnership rents poles from utility companies in its operations. These
rentals amounted to approximately $31,000, $39,500 and $49,000 for the years
ended December 31, 1995, 1996 and 1997, respectively. While rental agreements
are generally short-term, the Partnership anticipates such rentals will continue
in the future.
The Partnership leases a motor vehicle under an operating lease that
expires in December 1998. The minimum lease cost for 1998 is approximately
$6,000.
5. RELATED-PARTY TRANSACTIONS:
The General Partner provides management services to the Partnership for
which it receives a management fee of 5% of revenue. The General Partner also
allocates, in accordance with a management agreement, certain general,
administrative and payroll costs to the Partnership. For the years ended
December 31, 1995, 1996 and 1997, management fees totaled $87,800, $90,242 and
$95,040, respectively and allocated general, administrative and payroll costs
totaled $7,200, $7,450 and $8,700, respectively. During each year the
Partnership also incurred tap audit fees payable to the General Partner totaling
$4,000. At December 31, 1996, the balance due from the General Partner was
$12,263. The balance due to Amrac Telecommunications at December 31, 1997 was
$4,795.
6. SUBSEQUENT EVENTS:
On October 7, 1997, the Partnership entered into an agreement with another
cable television service provider to sell all of its assets for $7,500,000. The
Partnership received, in escrow, $250,000, which shall be released as
liquidating damages if the closing fails to occur solely as a result of a breach
of the agreement. As of December 31, 1997, the Partnership incurred $53,402 in
legal costs associated with the sale which are included in prepaid expenses.
Subject to certain regulatory approvals, it is anticipated that the transaction
will be consummated in the Spring of 1998.
On January 15, 1998, the Partnership paid, prior to the maturity date, its
outstanding term loan due to a bank as described in Note 3.
F-460
<PAGE> 672
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers of
Avalon Cable of New England LLC
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, changes in stockholder's deficit and cash
flows present fairly, in all material respects, the financial position of the
Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the
Massachusetts Operations of Pegasus Cable Television, Inc. at December 31, 1996
and 1997 and June 30, 1998, and the results of their operations, changes in
stockholder's deficit and their cash flows for each of the three years in the
period ended December 31, 1997 and for the six months ended June 30, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
March 30, 1999
F-461
<PAGE> 673
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC.
AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 389,097 $ 1,092,084 $ 1,708,549
Accounts receivable, less allowance for doubtful
accounts at December 31, 1996 and 1997 and
June 30, 1998 of $11,174, $3,072 and $0,
respectively.................................. 140,603 116,112 144,653
Prepaid expenses and other...................... 62,556 90,500 92,648
----------- ----------- -----------
Total current assets............................ 592,256 1,298,696 1,945,850
Property and equipment, net..................... 4,164,545 3,565,597 3,005,045
Intangible assets, net.......................... 2,174,084 2,096,773 1,939,904
Accounts receivable, affiliates................. 4,216,682 5,243,384 5,692,013
Deposits and other.............................. 436,382 456,135 406,135
----------- ----------- -----------
Total assets.................................... $11,583,949 $12,660,585 $12,988,947
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt............... $ 71,744 $ 34,272 $14,993,581
Accounts payable................................ 786,284 803,573 764,588
Accrued incentive compensation.................. 117,692 149,823 220,724
Accrued franchise fees.......................... 193,369 173,735 86,332
Accrued pole rental............................. 83,910 78,345 52,954
Accrued expenses................................ 383,572 203,561 42,038
----------- ----------- -----------
Total current liabilities....................... 1,636,571 1,443,309 16,160,217
Long-term debt, net............................. 15,043,763 15,018,099 --
Accrued interest................................ 2,811,297 4,685,494 5,622,593
Other........................................... 299,030 299,030 299,030
----------- ----------- -----------
Total liabilities............................... 19,790,661 21,445,932 22,081,840
Commitments and contingent liabilities.......... -- -- --
STOCKHOLDER'S DEFICIT:
Common stock-par value $1 per share; 10,000
shares authorized; 7,673 shares issued and
outstanding................................... 7,673 7,673 7,673
Accumulated deficit............................. (8,214,385) (8,793,020) (9,100,566)
----------- ----------- -----------
Total stockholder's deficit..................... (8,206,712) (8,785,347) (9,092,893)
----------- ----------- -----------
Total liabilities and stockholder's deficit..... $11,583,949 $12,660,585 $12,988,947
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements
F-462
<PAGE> 674
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE
MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS
----------------------------------------- ENDED
1995 1996 1997 JUNE 30, 1998
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Basic and satellite service...... $ 4,371,736 $ 4,965,377 $ 5,353,735 $2,841,711
Premium services................. 619,035 640,641 686,513 348,628
Other............................ 144,300 169,125 150,714 86,659
----------- ----------- ----------- ----------
Total revenues................... 5,135,071 5,775,143 6,190,962 3,276,998
OPERATING EXPENSES:
Programming...................... 1,119,540 1,392,247 1,612,458 876,588
General and administrative....... 701,420 811,795 829,977 391,278
Technical and operations......... 713,239 702,375 633,384 341,249
Marketing and selling............ 20,825 15,345 19,532 12,041
Incentive compensation........... 48,794 101,945 94,600 70,900
Management fees.................. 368,085 348,912 242,267 97,714
Depreciation and amortization.... 1,658,455 1,669,107 1,565,068 834,913
----------- ----------- ----------- ----------
Income from operations........... 504,713 733,417 1,193,676 652,315
Interest expense................. (1,745,635) (1,888,976) (1,884,039) (937,662)
Interest income.................. 956 2,067 93,060 29
Other income (expense), net...... 794 (2,645) (27,800) (17,228)
----------- ----------- ----------- ----------
Loss before state income taxes... (1,239,172) (1,156,137) (625,103) (302,546)
Provision for state income
taxes.......................... 20,000 25,000 16,000 5,000
----------- ----------- ----------- ----------
Net loss......................... $(1,259,172) $(1,181,137) $ (641,103) $ (307,546)
=========== =========== =========== ==========
</TABLE>
See accompanying notes to combined financial statements
F-463
<PAGE> 675
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC.
AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
------------------- TOTAL
NUMBER OF PAR ACCUMULATED STOCKHOLDER'S
SHARES VALUE DEFICIT DEFICIT
--------- ------ ----------- -------------
<S> <C> <C> <C> <C>
Balances at January 1, 1995.............. 7,673 $7,673 $(5,774,076) $(5,766,403)
Net loss................................. -- -- (1,259,172) (1,259,172)
----- ------ ----------- -----------
Balances at December 31, 1995............ 7,673 7,673 (7,033,248) (7,025,575)
Net loss................................. -- -- (1,181,137) (1,181,137)
----- ------ ----------- -----------
Balances at December 31, 1996............ 7,673 7,673 (8,214,385) (8,206,712)
Net loss................................. -- -- (641,103) (641,103)
Stock incentive compensation............. -- -- 62,468 62,468
----- ------ ----------- -----------
Balances at December 31, 1997............ 7,673 7,673 (8,793,020) (8,785,347)
Net loss................................. -- -- (307,546) (307,546)
----- ------ ----------- -----------
Balances at June 30, 1998................ 7,673 $7,673 $(9,100,566) $(9,092,893)
===== ====== =========== ===========
</TABLE>
See accompanying notes to combined financial statements
F-464
<PAGE> 676
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC.
AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS
--------------------------------------- ENDED
1995 1996 1997 JUNE 30, 1998
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................... $(1,259,172) $(1,181,137) $ (641,103) $ (307,546)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization.......... 1,658,455 1,669,107 1,565,068 834,913
Bad debt expense....................... 26,558 48,566 45,839 36,074
Change in assets and liabilities:
Accounts receivable.................... (75,263) (88,379) (21,348) (64,615)
Prepaid expenses and other............. (403,212) 75,208 (27,944) (2,148)
Accounts payable and accrued
expenses............................. 239,207 981,496 (93,322) 221,219
Accrued interest....................... 902,006 1,874,198 1,874,197 937,099
Deposits and other..................... 83,431 -- (19,753) 50,000
----------- ----------- ----------- ----------
Net cash provided by operating
activities........................... 1,172,010 3,379,059 2,681,634 1,704,996
----------- ----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................... (163,588) (1,174,562) (691,269) (114,221)
Purchase of intangible assets.......... (127,340) (72,753) (197,540) (3,271)
----------- ----------- ----------- ----------
Net cash used for investing
activities........................... (290,928) (1,247,315) (888,809) (117,492)
----------- ----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt........... 37,331 -- -- --
Repayments of long-term debt........... (13,764) -- -- (10,837)
Capital lease repayments............... (19,764) (52,721) (63,136) (47,952)
Advances to affiliates, net............ (404,576) (2,562,295) (1,026,702) (912,250)
----------- ----------- ----------- ----------
Net cash used by financing
activities........................... (400,773) (2,615,016) (1,089,838) (971,039)
----------- ----------- ----------- ----------
Net increase in cash and cash
equivalents.......................... 480,309 (483,272) 702,987 616,465
Cash and cash equivalents, beginning of
year................................. 392,060 872,369 389,097 1,092,084
----------- ----------- ----------- ----------
Cash and cash equivalents, end of
year................................. $ 872,369 $ 389,097 $ 1,092,084 $1,708,549
=========== =========== =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for
interest............................. $ 843,629 $ 14,778 $ 9,842 $ 563
Cash paid during the year for income
taxes................................ -- -- $ 9,796 $ 25,600
Supplemental Non-Cash Investing and
Financing Activities:
Capital contribution and related
accrued incentive compensation....... -- -- $ 62,468 --
Acquisition of plant under capital
leases............................... $ 298,250 $ 48,438 -- --
</TABLE>
See accompanying notes to combined financial statements
F-465
<PAGE> 677
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC.
AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
These financial statements reflect the results of operations and financial
position of Pegasus Cable Television of Connecticut, Inc. ("PCT-CT"), a wholly
owned subsidiary of Pegasus Cable Television, Inc. ("PCT"), and the
Massachusetts Operations of Pegasus Cable Television, Inc. ("PCT-MA" or the
"Massachusetts Operations") (referred herein as the "Combined Operations"). PCT
is a wholly owned subsidiary of Pegasus Media & Communications, Inc. ("PM&C").
PM&C is a wholly owned subsidiary of Pegasus Communications Corporation ("PCC").
On July 21, 1998, PCT sold the assets of its Combined Operations to Avalon
Cable of New England, LLC. for $30.1 million. In January 1997, PCT sold the
assets of its only other operating division, a cable television system that
provided service to individual and commercial subscribers in New Hampshire (the
"New Hampshire Operations") for $7.1 million.
In presenting the historical financial position, results of operations and
cash flows of the Combined Operations, it has been necessary to eliminate the
results and financial position of the New Hampshire Operations. Many items are
identifiable as relating to the New Hampshire or Massachusetts divisions as PCT
has historically separated results of operations as well as billing and
collection activity. However, in certain areas, assumptions and estimates have
been required in order to eliminate the New Hampshire Operations for periods
prior to its sale. For purposes of eliminating the following balances: Prepaid
expenses and other; Deposits and other; Accounts payable; and Accrued expenses,
balances have been apportioned between the New Hampshire Operations and the
Massachusetts Operations on the basis of subscriber counts. Amounts due to and
due from affiliates have been allocated to PCT-MA and are included in these
financial statements.
Prior to October 1996, BDI Associates, L.P. provided substantial support
services such as finance, accounting and human resources to PCT. Since October
1996, these services have been provided by PCC. All non-accounting costs of PCC
are allocated on the basis of average time spent servicing the divisions, while
the costs of the accounting function are allocated on the basis of revenue. In
the opinion of management, the methods used in allocating costs from PCC are
reasonable; however, the costs of these services as allocated are not
necessarily indicative of the costs that would have been incurred by the
Combined Operations on a stand-alone basis.
The financial information included herein may not necessarily reflect the
results of operations, financial position and cash flows of the Combined
Operations in the future or what they would have been had it been a separate,
stand-alone entity during the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and disclosure of contingencies. Actual results could differ from
those estimates.
Property and Equipment:
Property and equipment are stated at cost. The cost and related accumulated
depreciation of assets sold, retired, or otherwise disposed of are removed from
the respective accounts, and any
F-466
<PAGE> 678
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC.
AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
resulting gains or losses are included in the statement of operations. Initial
subscriber installation costs, including material, labor and overhead costs of
the hookup, are capitalized as part of the distribution facilities. The costs of
disconnection and reconnection are charged to expense.
Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:
<TABLE>
<S> <C>
Reception and distribution facilities....................... 7 to 11 years
Building and improvements................................... 12 to 39 years
Equipment, furniture and fixtures........................... 5 to 10 years
Vehicles.................................................... 3 to 5 years
</TABLE>
Intangible Assets:
Intangible assets are stated at cost and amortized by the straight-line
method. Costs of successful franchise applications are capitalized and amortized
over the lives of the related franchise agreements, while unsuccessful franchise
applications and abandoned franchises are charged to expense. Financing costs
incurred in obtaining long-term financing are amortized over the term of the
applicable loan. Intangible assets are reviewed periodically for impairment or
whenever events or circumstances provide evidence that suggest that the carrying
amounts may not be recoverable. The Company assesses the recoverability of its
intangible assets by determining whether the amortization of the respective
intangible asset balance can be recovered through projected undiscounted future
cash flows.
Amortization of intangible assets is computed for financial reporting
purposes using the straight-line method based upon the following lives:
<TABLE>
<S> <C>
Organization costs.......................................... 5 years
Other intangibles........................................... 5 years
Deferred franchise costs.................................... 15 years
</TABLE>
Revenue:
The Combined Operations recognize revenue when video and audio services are
provided.
Advertising Costs:
Advertising costs are charged to operations as incurred and totaled
$20,998, $12,768, $14,706 and $8,460 for the years ended December 31, 1995, 1996
and 1997 and for the six months ended June 30, 1998, respectively.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid investments purchased with
an initial maturity of three months or less. The Combined Operations have cash
balances in excess of the federally insured limits at various banks.
Income Taxes:
The Combined Operations is not a separate tax paying entity. Accordingly,
its results of operations have been included in the tax returns filed by PCC.
The accompanying financial statements include tax computations assuming the
Combined Operations filed separate returns and reflect the application of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109").
F-467
<PAGE> 679
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC.
AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk:
Financial instruments which potentially subject the Combined Operations to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Combined Operation's customer
base.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Land.................................... $ 8,000 $ 8,000 $ 8,000
Reception and distribution facilities... 8,233,341 9,009,179 9,123,402
Building and improvements............... 242,369 250,891 250,891
Equipment, furniture and fixtures....... 307,844 312,143 312,143
Vehicles................................ 259,503 287,504 287,504
Other equipment......................... 139,408 79,004 79,004
----------- ----------- -----------
9,190,465 9,946,721 10,060,944
Accumulated depreciation................ (5,025,920) (6,381,124) (7,055,899)
----------- ----------- -----------
Net property and equipment.............. $ 4,164,545 $ 3,565,597 $ 3,005,045
=========== =========== ===========
</TABLE>
Depreciation expense amounted to $1,059,260, $1,267,831, $1,290,217 and
$674,775 for the years ended December 31, 1995, 1996 and 1997 and for the six
months ended June 30, 1998, respectively.
4. INTANGIBLES:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ ----------
<S> <C> <C> <C>
Deferred franchise costs.................. $4,367,594 $ 4,486,016 $4,486,333
Deferred financing costs.................. 1,042,079 1,156,075 1,159,027
Organization and other costs.............. 439,188 389,187 389,187
---------- ------------ ----------
5,848,861 6,031,278 6,034,547
---------- ------------ ----------
Accumulated amortization.................. (3,674,777) (3,934,505) (4,094,643)
---------- ------------ ----------
Net intangible assets..................... $2,174,084 $ 2,096,773 $1,939,904
========== ============ ==========
</TABLE>
Amortization expense amounted to $599,195, $401,276, $274,851 and $160,138
for the years ended December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1998, respectively.
F-468
<PAGE> 680
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC.
AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
Note payable to PM&C, payable by PCT,
interest is payable quarterly at an annual
rate of 12.5%. Principal is due on July 1,
2005. The note is collateralized by
substantially all of the assets of the
Combined Operations and imposes certain
restrictive covenants..................... $14,993,581 $14,993,581 $14,993,581
Capital lease obligations................... 121,926 58,790 --
----------- ----------- -----------
15,115,507 15,052,371 14,993,581
Less current maturities..................... 71,744 34,272 14,993,581
----------- ----------- -----------
Long-term debt.............................. $15,043,763 $15,018,099 $ --
=========== =========== ===========
</TABLE>
6. LEASES:
The Combined Operations lease utility pole attachments and occupancy of
underground conduits. Rent expense for the years ended December 31, 1995, 1996
and 1997 and for the six months ended June 30, 1998 was $184,386, $185,638,
$173,930 and $90,471, respectively. The Combined Operations lease equipment
under long-term leases and have the option to purchase the equipment for a
nominal cost at the termination of the leases. The related obligations are
included in long-term debt. There are no future minimum lease payments on
capital leases at June 30, 1998. Property and equipment that was leased include
the following amounts that have been capitalized:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Billing and phone systems........................ $ 56,675 $ 56,675
Vehicles......................................... 166,801 129,227
-------- ---------
223,476 185,902
Accumulated depreciation......................... (69,638) (101,397)
-------- ---------
Total............................................ $153,838 $ 84,505
======== =========
</TABLE>
7. RELATED PARTY TRANSACTIONS:
The Combined Operations pay management fees to various related parties. The
management fees are for certain administrative and accounting services, billing
and programming services, and the reimbursement of expenses incurred therewith.
For the years ended December 31, 1995, 1996 and 1997 and for the six months
ended June 30, 1998, the fees and expenses were $368,085, $348,912, $242,267 and
$97,714, respectively.
As described in Note 5, PCT has an outstanding loan from its parent
company. This loan has been allocated to PCT-MA and is included in these
financial statements. Interest expense on that loan was $916,274, $1,874,198,
$1,874,195 and $937,098 for the years ended December 31, 1995, 1996 and 1997 and
for the six months ended June 30, 1998 respectively. Other related party
transaction balances at December 31, 1996 and 1997 and June 30, 1998 included
F-469
<PAGE> 681
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC.
AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
$4,216,682, $5,243,384 and $5,692,013 in accounts receivable, affiliates;
$581,632, $6,433 and $331,374 in accounts payable; and $299,030, $299,030 and
$299,030 in other liabilities, respectively. These related party balances arose
primarily as a result of financing capital expenditures, interest payments,
programming and other operating expenses.
8. INCOME TAXES:
The deferred income tax assets and liabilities recorded in the balance
sheet are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS:
Excess of tax basis over book basis from tax
gain recognized upon incorporation of PCT And
PCT-CT........................................ $ 707,546 $ 707,546 $ 707,546
Loss carryforwards.............................. 1,324,236 1,039,849 957,318
Other........................................... 6,997 11,856 11,856
----------- ----------- -----------
Total deferred tax assets....................... 2,038,779 1,759,251 1,676,720
----------- ----------- -----------
LIABILITIES:
Excess of book basis over tax basis of property,
plant and equipment and intangible asset...... (258,311) (294,934) (335,014)
Other........................................... (118,086) (134,859) (135,267)
----------- ----------- -----------
Total deferred tax liabilities.................. (376,397) (429,793) (470,281)
----------- ----------- -----------
Net deferred tax assets......................... 1,662,382 1,329,458 1,206,439
Valuation allowance............................. (1,662,382) (1,329,458) (1,206,439)
----------- ----------- -----------
Net deferred tax liabilities.................... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The Combined Operations have recorded a valuation allowance to reflect the
estimated amount of deferred tax assets which may not be realized due to the
expiration of deferred tax assets related to the incorporation of PCT and PCT-CT
and the expiration of net operating loss carryforwards.
9. EMPLOYEE BENEFIT PLANS:
The Company employees participate in PCC's stock option plan that awards
restricted stock (the "Restricted Stock Plan") to eligible employees of the
Company.
Restricted Stock Plan
The Restricted Stock Plan provides for the granting of restricted stock
awards representing a maximum of 270,000 shares (subject to adjustment to
reflect stock dividends, stock splits, recapitalizations and similar changes in
the capitalization of PCC) of Class A Common Stock of the Company to eligible
employees who have completed at least one year of service. Restricted stock
received under the Restricted Stock Plan vests over four years. The Plan
terminates in September 2006. The expense for this plan amounted to $82,425,
$80,154 and $63,533 in 1996 and 1997 and for the six months ended June 30, 1998,
respectively.
F-470
<PAGE> 682
THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC.
AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
401(k) Plans
Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "US 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. Substantially all Company employees who, as of the enrollment date
under the 401(k) Plans, have completed at least one year of service with the
Company are eligible to participate in one of the 401(k) Plans. Participants may
make salary deferral contributions of 2% to 6% of their salary to the 401(k)
Plans. The expense for this plan amounted to $19,520, $14,446 and $7,367 in 1996
and 1997 and for the six months ended June 30, 1998, respectively.
All employee contributions to the 401(k) Plans are fully vested at all
times and all Company contributions, if any, vest 34% after two years of service
with the Company (including years before the 401(k) Plans were established), 67%
after three years of service and 100% after four years of service. A participant
also becomes fully vested in Company contributions to the 401(k) Plans upon
attaining age 65 or upon his or her death or disability.
10. COMMITMENTS AND CONTINGENT LIABILITIES:
Legal Matters:
The operations of PCT-CT and PCT-MA are subject to regulation by the
Federal Communications Commission ("FCC") and other franchising authorities.
From time to time the Combined Operations are also involved with claims
that arise in the normal course of business. In the opinion of management, the
ultimate liability with respect to these claims will not have a material adverse
effect on the operations, cash flows or financial position of the Combined
Operations.
F-471
<PAGE> 683
INDEPENDENT AUDITORS' REPORT
The Common Member and Manager
BRESNAN COMMUNICATIONS GROUP LLC:
We have audited the accompanying consolidated balance sheets of Bresnan
Communications Group LLC and its subsidiaries as of December 31, 1998 and 1999,
and the related consolidated statements of operations and members' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Bresnan Communications Group LLC's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bresnan
Communications Group LLC, as of December 31, 1998 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Denver, Colorado
January 28, 2000, except as to Note 8,
which is as of February 14, 2000
F-472
<PAGE> 684
BRESNAN COMMUNICATIONS GROUP LLC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 6,636 $ 5,995
Restricted cash (note 3).................................... 47,199 290
Trade and other receivables, net............................ 8,874 9,006
Property and equipment, at cost:
Land and buildings........................................ 4,123 6,879
Distribution systems...................................... 443,114 534,812
Support equipment......................................... 50,178 62,283
-------- --------
497,415 603,974
Less accumulated depreciation............................. 190,752 228,868
-------- --------
306,663 375,106
Franchise costs, net........................................ 291,103 328,068
Other assets, net of amortization........................... 3,961 19,038
-------- --------
Total assets........................................... $664,436 $737,503
======== ========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Accounts payable............................................ $ 3,193 $ 18,900
Accrued expenses............................................ 13,395 35,613
Accrued interest............................................ 21,835 11,748
Debt........................................................ 232,617 895,607
Other liabilities........................................... 11,648 10,020
-------- --------
Total Liabilities...................................... 282,688 971,888
Members' equity (deficit)................................... 381,748 (234,385)
-------- --------
Commitments and contingencies
Total liabilities and members' equity (deficit)........ $664,436 $737,503
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-473
<PAGE> 685
BRESNAN COMMUNICATIONS GROUP LLC
CONSOLIDATED STATEMENTS OF OPERATIONS AND MEMBERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
REVENUE............................................. $247,108 $ 261,964 $ 283,574
Operating costs and expenses:
Programming (note 6).............................. 53,857 63,686 72,355
Operating......................................... 31,906 28,496 31,624
Selling, general and administrative (note 6)...... 50,572 56,634 67,351
Organizational and divestiture costs.............. -- 1,934 5,281
Depreciation and amortization..................... 53,249 54,308 59,752
-------- --------- ---------
189,584 205,058 236,363
-------- --------- ---------
Operating income............................. 57,524 56,906 47,211
OTHER INCOME (EXPENSE):
Interest expense:
Related party (note 4)......................... (1,892) (1,872) (152)
Other.......................................... (16,823) (16,424) (67,139)
Gain on sale of cable television systems.......... -- 27,027 556
Other, net........................................ (978) (273) (900)
-------- --------- ---------
(19,693) 8,458 (67,635)
-------- --------- ---------
Net earnings (loss).......................... 37,831 65,364 (20,424)
MEMBERS' EQUITY (DEFICIT):
Beginning of year................................. 347,188 359,098 381,748
Operating expense allocations and charges (notes 4
and 6)......................................... 60,389 71,648 --
Net assets of acquired system (note 3)............ 33,635 -- --
Capital contributions by members.................. -- -- 136,500
Capital distributions to members.................. -- -- (732,209)
Cash transfers, net............................... (119,945) (114,362) --
-------- --------- ---------
End of year....................................... $359,098 $ 381,748 $(234,385)
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-474
<PAGE> 686
BRESNAN COMMUNICATIONS GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................................... $ 37,831 $ 65,364 $ (20,424)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization...................... 53,249 54,308 59,752
Amortization of debt discount and deferred
financing costs.................................. 1,629 534 18,683
Gain on sale of cable television systems........... -- (27,027) (556)
Other noncash charges.............................. 2,141 452 --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Change in receivables............................ (3,413) 2,826 621
Change in other assets........................... 164 -- 429
Change in accounts payable, accrued expenses,
accrued interest and other liabilities........ 2,305 6,141 25,457
Other, net....................................... (1,358) (237) --
-------- -------- ---------
Net cash provided by operating Activities..... 92,548 102,361 83,962
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expended for property and equipment and for
franchise costs.................................... (35,282) (58,728) (90,879)
Cash paid in acquisitions............................. -- (30,298) (78,680)
Cash received in disposals............................ 1,179 58,949 4,956
Change in restricted cash............................... -- (47,199) 46,999
-------- -------- ---------
Net cash used in investing activities......... (34,103) (77,276) (117,604)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under note agreement....................... 31,300 49,400 597,530
Proceeds from Senior Notes............................ -- -- 170,000
Proceeds from Senior Discount Notes................... -- -- 175,021
Repayments under note agreement....................... (24,364) (30,953) (294,672)
Deferred finance costs paid........................... (2,121) (1,139) (19,169)
Contributions by members.............................. -- -- 136,500
Distributions to members.............................. (59,556) (42,714) (732,209)
-------- -------- ---------
Net cash provided by (used in) financing
activities.................................. (54,741) (25,406) 33,001
-------- -------- ---------
Net increase (decrease) in cash............... 3,704 (321) (641)
CASH AND CASH EQUIVALENTS:
Beginning of year..................................... 3,253 6,957 6,636
-------- -------- ---------
End of year........................................... $ 6,957 $ 6,636 $ 5,995
======== ======== =========
Supplemental disclosure of cash flow information --
Cash paid during the year for interest................ $ 16,971 $ 16,792 $ 58,695
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-475
<PAGE> 687
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
(1) BASIS OF PRESENTATION
Bresnan Communications Group LLC and its subsidiaries ("BCG" or the
"Company") are wholly owned by Bresnan Communications Company Limited
Partnership, a Michigan limited partnership ("BCCLP"). BCG is a Delaware limited
liability corporation formed on August 5, 1998 for the purpose of acting as
co-issuer with its wholly-owned subsidiary, Bresnan Capital Corporation ("BCC"),
of $170,000 aggregate principal amount at maturity of 8% Senior Notes and
$275,000 aggregate principal amount at maturity of 9.25% Senior Discount Notes,
both due in 2009 (collectively the "Notes"). Also, at this time, BTC borrowed
approximately $508,000 of $650,000 available under a new credit facility (the
"Senior Credit Facility"). (See Note 4, Debt.) Prior to the issuance of the
Notes on February 2, 1999, BCCLP completed the terms of a contribution agreement
dated June 3, 1998, as amended, whereby certain affiliates of AT&T Broadband and
Internet Services, formerly Tele-Communications, Inc. ("TCI"), contributed
certain cable television systems along with assumed TCI debt of approximately
$708,854 to BCCLP which was repaid with the proceeds of the Notes and the Senior
Credit Facility. In addition, Blackstone BC Capital Partners L.P. ("Blackstone")
and affiliates contributed $136,500 to BCCLP. Upon completion of the Notes
offering on February 2, 1999 BCCLP contributed all of its assets and liabilities
to BCG, which formed a wholly owned subsidiary, Bresnan Telecommunications
Company LLC ("BTC"), into which it contributed all of its assets and certain
liabilities. The above noted contributed assets and liabilities were accounted
for at predecessor cost because of the common ownership and control of TCI and
have been reflected in the accompanying financial statements in a manner similar
to a pooling of interests.
The consolidated financial statements include the accounts of BCG and those
of its wholly owned subsidiary, BTC, subsequent to the aforementioned formation
transaction.
The Company owns and operates cable television systems in small- and
medium-sized communities in the midwestern United States.
Prior to the transactions noted above, TCI and William J. Bresnan and
certain entities which he controls (collectively, the "Bresnan Entities"), held
78.4% and 21.6% interests, respectively, in BCCLP. As of February 2, 1999, TCI,
Blackstone and the Bresnan Entities held 50.00%, 39.79% and 10.21% interests,
respectively. Subsequent to December 31, 1999, these interests were sold to
Charter Communications Holding Company, LLC. (See Note 8, Sale of the Company.)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CASH EQUIVALENTS
Cash equivalents consist of investments which are readily convertible into
cash and have maturities of three months or less at the time of acquisition.
(B) TRADE AND OTHER RECEIVABLES
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1998 and 1999 was not significant.
F-476
<PAGE> 688
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(C) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired. Construction costs, including interest
during construction and applicable overhead, are capitalized. During 1997, 1998
and 1999, interest capitalized was $324,000, $47,000 and $1,027,000
respectively.
Depreciation is computed on a straight-line basis using estimated useful
lives of 3 to 15 years for distribution systems and 3 to 40 years for support
equipment and buildings.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such property
are charged to accumulated depreciation, and salvage, if any, is credited
thereto. Gains or losses are only recognized in connection with the sales of
properties in their entirety.
(D) FRANCHISE COSTS
Franchise costs represent the difference between the cost of acquiring
cable television systems and amounts allocated to their tangible assets. Such
amounts are generally amortized on a straight-line basis over 40 years. Costs
incurred in negotiating and renewing franchise agreements are amortized on a
straight-line basis over the life of the franchise, generally 10 to 20 years.
(E) IMPAIRMENT OF LONG-LIVED ASSETS
Management periodically reviews the carrying amounts of property and
equipment and identifiable intangible assets to determine whether current events
or circumstances warrant adjustments to such carrying amounts. If an impairment
adjustment is deemed necessary, such loss is measured by the amount that the
carrying value of such assets exceeds their fair value. Considerable management
judgment is necessary to estimate the fair value of assets. Accordingly, actual
results could vary significantly from such estimates. Assets to be disposed of
are carried at the lower of their financial statement carrying amount or fair
value less costs to sell.
(F) FINANCIAL INSTRUMENTS
The Company has entered into fixed interest rate exchange agreements
("Interest Rate Swaps") which are used to manage interest rate risk arising from
its financial liabilities. Such Interest Rate Swaps are accounted for as a
hedge; accordingly, amounts receivable or payable under the Interest Rate Swaps
are recognized as adjustments to interest expense. These instruments are not
used for trading purposes.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which is effective for all fiscal years
beginning after June 15, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments and hedging activities by requiring that
all derivative instruments be reported as assets or liabilities and measured at
their fair values. Under SFAS 133, changes in the fair values of derivative
instruments are recognized immediately in earnings unless those instruments
qualify as hedges of the (1) fair values of existing assets, liabilities, or
firm commitments, (2) variability of cash flows of forecasted transactions, or
(3) foreign currency exposures of net investments in foreign operations.
F-477
<PAGE> 689
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Although management has not completed its assessment of the impact of SFAS 133
on its combined results of operations and financial position, management
estimates that the impact of SFAS 133 will not be material.
(G) INCOME TAXES
The majority of BCG's net assets were historically held in partnerships. In
addition, BCG has been formed as a limited liability company, to be treated for
tax purposes as a flow-through entity. Accordingly, no provision has been made
for income tax expense or benefit in the accompanying combined financial
statements as the earnings or losses of Bresnan Communications Group LLC will be
reported in the respective tax returns of BCG's members. (See Note 5, Income
Taxes).
(H) REVENUE RECOGNITION
Cable revenue for customer fees, equipment rental, advertising,
pay-per-view programming and revenue sharing agreements is recognized in the
period that services are delivered. Installation revenue is recognized in the
period the installation services are provided to the extent of direct selling
and installation costs. Any remaining amount is deferred and recognized over the
estimated average period that customers are expected to remain connected to the
cable distribution system.
(I) STATEMENT OF CASH FLOWS
Except for acquisition transactions described in Note 3, transactions
effected through Members' equity (deficit) have been considered constructive
cash receipts and payments for purposes of the statement of cash flows.
(J) ADVERTISING COSTS
All advertising costs are expensed as incurred.
(K) RECLASSIFICATIONS
Certain of the prior year comparative figures have been reclassified to
conform to the presentation adopted in the current year.
(L) ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
(3) ACQUISITIONS AND SYSTEM DISPOSITIONS
In 1998, the Company acquired two cable systems which were accounted for
under the purchase method. The purchase prices were allocated to the assets
acquired in relation to their fair values as increases in property and equipment
of $7,099 and franchise costs of $21,651.
During 1998, the Company also disposed of two cable systems for gross
proceeds of $58,949, which resulted in gain on sale of cable television systems
of $27,027. In connection with
F-478
<PAGE> 690
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
one of the dispositions, a third party intermediary received $47,199 of cash
that was designated to be reinvested in certain identified assets for income tax
purposes and accordingly recognized as restricted cash on the Company's
Consolidated Balance Sheet at December 31, 1998 and 1999.
In 1999, BCG acquired three cable systems that were accounted for under the
purchase method. The purchase prices were allocated to the assets acquired in
relation to their fair values as increases to property and equipment of $24,098
and franchise costs of $54,582. In connection with two of the acquisitions, the
aforementioned third party intermediary disbursed $46,999 of cash to complete
the reinvestment in certain identified assets for income tax purposes.
Finally, in 1999, BCG disposed of cable systems for gross proceeds of
$4,956, which resulted in a gain of $556.
The results of operations of these cable television systems have been
included in the accompanying combined statements of operations from their dates
of acquisition or their disposition, as applicable. Pro forma information on the
acquisitions and dispositions has not been presented because the effects were
not significant.
(4) DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
--------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Senior Credit Facility(a)................................... $ -- $534,200
Senior Notes Payable(b)..................................... -- 170,000
Senior Discount Notes Payable(b)............................ -- 190,132
Notes payable to banks(c)................................... 209,000 --
Note payable to partner(d).................................. 22,100 --
Other debt.................................................. 1,517 1,275
-------- --------
$232,617 $895,607
======== ========
</TABLE>
- - - ---------------
(a) The Senior Credit Facility represents borrowings under a $650,000 senior
reducing revolving credit and term loan facility as documented in the loan
agreement as of February 2, 1999. The Senior Credit Facility has a current
available commitment of $650,000 of which $534,200 is outstanding at
December 31, 1999. The Senior Credit Facility provides for three tranches, a
revolving loan tranche for $150,000 (the "Revolving Loan"), a term loan
tranche of $328,000 (the "A Term Loan" and together with the Revolving Loan,
"Facility A") and a term loan tranche of $172,000 (the "Facility B").
The commitments under the Senior Credit Facility will reduce commencing with
the quarter ending March 31, 2002. Facility A permanently reduces in
quarterly amounts ranging from 2.5% to 7.5% of the Facility A amount
starting March 31, 2002 and matures approximately eight and one half years
after February 2, 1999. Facility B is also to be repaid in quarterly
installments of .25% of the Facility B amount beginning in March 2002 and
matures approximately nine years after February 2, 1999, on which date all
remaining amounts of Facility B will be due and payable. Additional
reductions of the Senior Credit Facility will also be required upon certain
asset sales, subject to the right of the Company and its subsidiaries to
reinvest asset sale proceeds under certain circumstances. The interest rate
options
F-479
<PAGE> 691
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
include a LIBOR option and a Prime Rate option plus applicable margin rates
based on the Company's total leverage ratio, as defined. The rate applicable
to balances outstanding at December 31, 1999 ranged from 7.57% to 9.00%.
Covenants of the Senior Credit Facility require, among other conditions, the
maintenance of specific levels of the ratio of cash flows to future debt and
interest expense and certain limitations on additional investments,
indebtedness, capital expenditures, asset sales and affiliate transactions.
In addition, the Company is required to pay a commitment fee on the unused
revolver portion of Facility A which will accrue at a rate ranging from .25%
to .375% per annum, depending on the Company's total leverage ratio, as
defined.
(b) On February 2, 1999, the Company issued $170,000 aggregate principal amount
senior notes payable (the "Senior Notes"). In addition, on the same date,
the Company issued $275,000 aggregate principal amount at maturity of senior
discount notes, (the "Senior Discount Notes") for approximately $175,021
gross proceeds (collectively the "Notes").
The Senior Notes are unsecured and will mature on February 1, 2009. The
Senior Notes bear interest at 8% per annum payable semi-annually on February
1 and August 1 of each year, commencing August 1, 1999.
The Senior Discount Notes are unsecured and will mature on February 1, 2009.
The Senior Discount Notes were issued at a discount to their aggregate
principal amount at maturity and will accrete at a rate of approximately
9.25% per annum, compounded semi-annually, to an aggregate principal amount
of $275,000 on February 1, 2004. Subsequent to February 1, 2004, the Senior
Discount Notes will bear interest at a rate of 9.25% per annum payable
semi-annually in arrears on February 1 and August 1 of each year, commencing
August 1, 2004.
The Company may elect, upon not less than 60 days prior notice, to commence
the accrual of interest on all outstanding Senior Discount Notes on or after
February 1, 2002, in which case the outstanding principal amount at maturity
of each Senior Discount Note will on such commencement date be reduced to
the accreted value of such Senior Discount Note as of such date and interest
shall be payable with respect to the Senior Discount Notes on each February
and August 1 thereafter.
The Company may not redeem the Notes prior to February 1, 2004 except that
prior to February 1, 2002, the Company may redeem up to 35% of the Senior
Notes and Senior Discount Notes at redemption prices equal to 108% and
109.25% of the applicable principal amount and accreted value, respectively,
with proceeds of an equity offering. Subsequent to February 1, 2004, the
Company may redeem the Notes at redemption prices declining annually from
approximately 104% of the principal amount or accreted value.
Bresnan Communications Group LLC and its wholly owned subsidiary Bresnan
Capital Corporation are the sole obligors of the Senior Notes and Senior
Discount Notes. Bresnan Communications Group LLC has no other assets or
liabilities other than its investment in its wholly owned subsidiary Bresnan
Telecommunications Company LLC. Bresnan Capital Corporation has no other
assets or liabilities.
Upon change of control of the Company, the holders of the notes have the
right to require the Company to purchase the outstanding notes at a price
equal to 101% of the principal amount or accreted value plus accrued and
unpaid interest. (See Note 8 "Sale of the Company").
F-480
<PAGE> 692
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) The notes payable to banks represented borrowings under a $250,000 senior
unsecured reducing revolving credit and term loan facility (the "Bank
Facility") as documented in the loan agreement as amended and restated as of
August 5, 1998. The Bank Facility called for a current available commitment
of $250,000 of which $209,000 was outstanding at December 31, 1998. The
rates applicable to balances outstanding at December 31, 1998 ranged from
6.815% to 8.000%. The Bank Facility was repaid on February 2, 1999. (See
Note 1, Basis of Presentation.)
(d) The note payable to a partner was comprised of a $25,000 subordinated note
of which $22,100 was outstanding at December 31, 1998. The note, dated May
12, 1988, was junior and subordinate to the Bank Facility. Interest was
provided for at the prime rate (as defined) and was payable quarterly, to
the extent allowed under the bank subordination agreement, or at the
maturity date of the note, which was the earlier of April 30, 2001 or the
first business day following the full repayment of the entire amount due
under the notes payable to banks. The interest rate at December 31, 1998 was
7.75%. This note was repaid on February 2, 1999. (See Note 1, Basis of
Presentation.)
The Company entered into interest rate swap agreements to effectively fix
or set maximum interest rates on a portion of its floating rate long-term
debt. The Company is exposed to credit loss in the event of nonperformance
by the counterparties to the interest rate swap agreements.
At December 31, 1999, such interest rate swap agreements effectively fixed
or set a maximum LIBOR base interest rates between 8.0% and 8.02% on an
aggregate notional principal amount of $50,000, which rates would become
effective upon the occurrence of certain events. The effect of the interest
rate swap on interest expense for the twelve months ended December 31, 1999
was not significant. The expiration dates of the interest rate swaps ranges
from April 1, 2000 to April 3, 2000. The difference between the fair market
value and book value of long-term debt and the interest rate swaps at
December 31, 1998 and 1999 is not significant.
(5) INCOME TAXES
Taxable earnings differ from those reported in the accompanying
consolidated statements of operations due primarily to differences in
depreciation and amortization methods and estimated useful lives under
regulations prescribed by the Internal Revenue Service. At December 31, 1999,
the financial statement carrying amount of the Company's assets exceeded its tax
basis by approximately $431 million.
(6) TRANSACTIONS WITH RELATED PARTIES
BCG and its predecessor purchased, at TCI's cost, substantially all of its
pay television and other programming from affiliates of TCI. Charges for such
programming were $48,588, $58,562 and $62,502 for the years ended December 31,
1997, 1998 and 1999, respectively, and are included in programming expenses in
the accompanying consolidated financial statements.
Prior to February 2, 1999, certain affiliates of the partners of BCCLP
provided administrative services to BCG and assumed managerial responsibility of
BCG's cable television system operations and construction. As compensation for
these services, BCG paid a monthly fee calculated pursuant to certain agreed
upon formulas. Subsequent to the TCI Transaction on February 2, 1999, certain
affiliates of a partner of BCCLP provide administrative services and have
assumed managerial responsibilities of BCG. As compensation for these services
BCG pays
F-481
<PAGE> 693
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a quarterly fee equal to approximately 3% of gross revenues. Such aggregate
charges totaled $11,801, $13,086 and $10,498 and have been included in selling,
general and administrative expenses for years ended December 31, 1997, 1998 and
1999, respectively.
(7) COMMITMENTS AND CONTINGENCIES
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") imposed certain rate regulations on the cable television
industry. Under the 1992 Cable Act, all cable systems are subject to rate
regulation, unless they face "effective competition," as defined by the 1992
Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"),
in their local franchise area.
Although the Federal Communications Commission (the "FCC") has established
regulations required by the 1992 Cable Act, local government units (commonly
referred to as local franchising authorities) are primarily responsible for
administering the regulation of a cable system's basic service tier ("BST"). The
FCC itself directly administered rate regulation of any cable programming
service tier ("CPST"). The FCC's authority to regulate CPST rates expired on
March 31, 1999. The FCC has taken the position that it will still adjudicate
CPST complaints filed after this sunset date (but no later than 180 days after
the last CPST rate increase imposed prior to March 31, 1999), and will strictly
limit its review (and possible refund orders) to the time period predating the
sunset date.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price structure that allows for the recovery
of inflation and certain associated costs, as well as providing some incentive
for expanding channel carriage. Operators also have the opportunity to bypass
this "benchmark" regulatory structure in favor of the traditional "cost-of-
service" regulation in cases where the latter methodology appears favorable.
Premium cable service offered on a per-channel or per-program basis remain
unregulated, as do affirmatively marketed packages consisting entirely of new
programming product.
The management of BCG believes that it has complied in all material
respects with the provisions of the 1992 Cable Act and the 1996 Act, including
its rate setting provisions. If, as a result of the review process, a system
cannot substantiate its rates, it could be required to retroactively reduce its
rates to the appropriate benchmark and refund the excess portion of rates
received. Any refunds of the excess portion of CPST rates would be retroactive
to the date of complaint. Any refunds of the excess portion of BST or equipment
rates would be retroactive to one year prior to the implementation of the rate
reductions.
Certain plaintiffs have filed or threatened separate class action
complaints against certain of the systems of BCG, alleging that the systems'
practice of assessing an administrative fee to the subscribers whose payments
are delinquent constitutes an invalid liquidated damage provision and a breach
of contract, and violates local consumer protection statutes. Plaintiffs seek
recovery of all late fees paid to the subject systems as a class purporting to
consist of all subscribers who were assessed such fees during the applicable
limitation period, plus attorney fees and costs.
BCG has additional contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
possible that BCG may incur losses upon conclusion of these matters and the
matters referred to above, an estimate of any loss or range of loss cannot
presently be made. Based upon the facts available, management believes that,
although no assurance can be given as to the outcome of these actions, the
ultimate disposition should not have material adverse effect upon the combined
financial condition of BCG.
F-482
<PAGE> 694
BRESNAN COMMUNICATIONS GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 12, 2000, the Company also purchased two cable systems from one
operator. The system in Wisconsin was a stock purchase and the system in
Minnesota was an asset purchase. The total purchase price of these transactions
was approximately $36,232, funded by cash flow from operations and additional
borrowings.
The Company also entered into a letter of intent with a cable operator
pursuant to which the Company acquires a small cable television system in
Minnesota. The transaction would result in a net cost of approximately $13,000
and will be funded by cash flow from operations and additional borrowings.
BCG leases business offices, has entered into pole attachment agreements
and uses certain equipment under lease arrangements. Rental expense under such
arrangements amounted to $3,221, $2,833 and $3,547 during the years ended
December 31, 1997, 1998 and 1999, respectively.
Future minimum lease payments under noncancelable operating leases are
estimated to approximate $2,240 per year for each of the next five years.
It is expected that, in the normal course of business, expiring leases will
be renewed or replaced by leases on the same or similar properties.
(8) SALE OF THE COMPANY
In June 1999, the Partners of BCCLP entered into an agreement to sell all
of their partnership interests in BCCLP to Charter Communications Holding
Company, LLC for a purchase price of approximately $3.1 billion in cash and
equity instruments of Charter and its subsidiaries (including the Company) which
will be reduced by the assumption of BCCLP's debt at closing. In conjunction
with the sale of the partnership interests, Charter assumed the Company's
outstanding indebtedness under the Senior Credit Facility (See Note 4, Debt.)
The accompanying financial statements do not reflect the effect of the
adjustments, if any, resulting from the sale of the partnership's interests.
F-483
<PAGE> 695
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-485
Report of Independent Auditors............................ F-486
Report of Independent Auditors............................ F-487
Supplemental Consolidated Balance Sheets as of December
31, 1999 and 1998....................................... F-488
Supplemental Consolidated Statements of Operations for the
Year ended December 31, 1999, and for the Period from
December 24, 1998, through December 31, 1998............ F-489
Supplemental Consolidated Statements of Changes in
Member's Equity for the Year ended December 31, 1999,
and for the Period from December 24, 1998, through
December 31, 1998....................................... F-490
Supplemental Consolidated Statements of Cash Flows for the
Year ended December 31, 1999, and for the Period from
December 24, 1998, through December 31, 1998............ F-491
Notes to Supplemental Consolidated Financial Statements... F-492
</TABLE>
F-484
<PAGE> 696
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying supplemental consolidated balance sheets of
Charter Communications Holdings, LLC and subsidiaries (collectively, "the
Company") as of December 31, 1999 and 1998, and the related supplemental
consolidated statements of operations, changes in member's equity and cash flows
for the year ended December 31, 1999, and for the period from December 24, 1998,
through December 31, 1998. The supplemental consolidated statements give
retroactive effect to the transfer of certain cable systems from Charter
Communications Holding Company, LLC to the Company on January 1, 2000, which has
been accounted for as a reorganization of entities under common control as
described in Note 1. These supplemental consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these supplemental consolidated financial statements based on our
audits.
We did not audit the financial statements of Charter Communications VI Operating
Company, LLC and subsidiaries, and CC VII -- Falcon Systems, included in the
supplemental consolidated financial statements of the Company, as of December
31, 1999, and for the periods from the dates of acquisition through December 31,
1999, which statements on a combined basis reflect total assets and total
revenues of 31 percent and 6 percent, respectively, of the related consolidated
totals of the Company. Those statements were audited by other auditors whose
reports have been furnished to us, and our opinion, insofar as it relates to the
amounts included for those entities, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.
In our opinion, based upon our audit and the reports of other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Charter Communications
Holdings, LLC and subsidiaries as of December 31, 1999 and 1998, and results of
their operations and their cash flows for the year ended December 31, 1999, and
for the period from December 24, 1998, through December 31, 1998, after giving
retroactive effect to the transfer of certain cable systems described in Note 1,
all in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 2, 2000
F-485
<PAGE> 697
REPORT OF INDEPENDENT AUDITORS
Charter Communications VI
Operating Company, LLC
We have audited the consolidated balance sheet of Charter Communications VI
Operating Company, LLC and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, member's equity and cash flows for the
period from inception (November 9, 1999) to December 31, 1999 (not presented
separately herein). These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Charter
Communications VI Operating Company, LLC and subsidiaries at December 31, 1999,
and the consolidated results of its operations and its cash flows for the period
from November 9, 1999 to December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Denver, Colorado
February 11, 2000
F-486
<PAGE> 698
REPORT OF INDEPENDENT AUDITORS
Sole Member
CC VII Holdings, LLC
We have audited the combined balance sheet of the CC VII -- Falcon Systems
as of December 31, 1999, and the related combined statements of operations and
parent's investment and cash flows for the period from November 13, 1999
(commencement date) to December 31, 1999 (not presented separately herein).
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the CC
VII -- Falcon Systems at December 31, 1999 and the results of its operations and
its cash flows for the period from November 13, 1999 (commencement date) to
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 2, 2000
F-487
<PAGE> 699
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT UNIT DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 114,096 $ 9,573
Accounts receivable, net of allowance for doubtful
accounts of $11,471 and $1,728, respectively........... 93,743 15,108
Prepaid expenses and other................................ 34,513 2,519
----------- ----------
Total current assets................................... 242,352 27,200
----------- ----------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment............................. 3,490,573 716,242
Franchises................................................ 14,985,793 3,590,054
----------- ----------
18,476,366 4,306,296
----------- ----------
OTHER ASSETS................................................ 220,759 2,031
----------- ----------
$18,939,477 $4,335,527
=========== ==========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ -- $ 10,450
Accounts payable and accrued expenses..................... 704,734 127,586
Payables to manager of cable systems -- related parties... 6,713 4,334
----------- ----------
Total current liabilities.............................. 711,447 142,370
----------- ----------
LONG-TERM DEBT, less current maturities..................... 8,936,455 1,991,756
----------- ----------
LOANS PAYABLE -- RELATED PARTIES............................ 1,079,163 --
----------- ----------
DEFERRED MANAGEMENT FEES -- RELATED PARTIES................. 21,623 15,561
----------- ----------
OTHER LONG-TERM LIABILITIES................................. 142,836 38,461
----------- ----------
MEMBER'S EQUITY
Member's equity (217,585,246 and 100 units issued and
outstanding at December 31, 1999 and 1998,
respectively).......................................... 8,045,737 2,147,379
Accumulated other comprehensive income.................... 2,216 --
----------- ----------
Total member's equity.................................. 8,047,953 2,147,379
----------- ----------
$18,939,477 $4,335,527
=========== ==========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
statements.
F-488
<PAGE> 700
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
REVENUES.................................................... $1,428,090 $13,713
---------- -------
OPERATING EXPENSES:
Operating, general and administrative..................... 737,957 7,134
Depreciation and amortization............................. 745,315 8,318
Option compensation expense............................... 79,979 845
Corporate expense charges -- related parties.............. 51,428 473
---------- -------
1,614,679 16,770
---------- -------
Loss from operations................................... (186,589) (3,057)
---------- -------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (471,871) (2,353)
Interest income........................................... 18,821 133
Other, net................................................ (245) --
---------- -------
(453,295) (2,220)
Loss before income tax expense......................... (639,884) (5,277)
INCOME TAX EXPENSE.......................................... (1,030) --
---------- -------
Loss before extraordinary item......................... (640,914) (5,277)
EXTRAORDINARY ITEM -- Loss from early extinguishment of
debt...................................................... (7,794) --
---------- -------
Net loss............................................... $ (648,708) $(5,277)
========== =======
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
statements.
F-489
<PAGE> 701
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
MEMBER'S COMPREHENSIVE MEMBER'S
EQUITY INCOME EQUITY
---------- ------------- ----------
<S> <C> <C> <C>
BALANCE, December 24, 1998........................ $2,151,811 $ -- $2,151,811
Option compensation expense..................... 845 -- 845
Net loss........................................ (5,277) -- (5,277)
---------- ------ ----------
BALANCE, December 31, 1998........................ 2,147,379 -- 2,147,379
Capital contributions........................... 6,477,363 -- 6,477,363
Distributions to Charter Investment and
Charter...................................... (10,276) -- (10,276)
Option compensation expense..................... 79,979 -- 79,979
Net loss........................................ (648,708) -- (648,708)
Unrealized gain on marketable securities
available for sale........................... -- 2,216 2,216
---------- ------ ----------
BALANCE, December 31, 1999........................ $8,045,737 $2,216 $8,047,953
========== ====== ==========
</TABLE>
The accompanying notes are an integral part of these supplemental
consolidated statements.
F-490
<PAGE> 702
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (648,708) $ (5,277)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 745,315 8,318
Option compensation expense............................ 79,979 845
Noncash interest expense............................... 98,920 --
Loss from early extinguishment of debt................. 7,794 --
Changes in assets and liabilities, net of effects from
acquisitions --
Accounts receivable.................................... (32,366) (8,753)
Prepaid expenses and other............................. 14,256 (211)
Accounts payable and accrued expenses.................. 175,280 10,227
Receivables from and payables to manager of cable
systems, including deferred management fees.......... 21,183 473
Other operating activities................................ (1,245) 2,022
------------ --------
Net cash provided by operating activities............ 460,408 7,644
------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (741,508) (13,672)
Payments for acquisitions, net of cash acquired........... (7,629,564) --
Loan to Marcus Cable Holdings............................. (1,680,142) --
Other investing activities................................ (22,198) --
------------ --------
Net cash used in investing activities................ (10,073,412) (13,672)
------------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt, including proceeds from
Charter Holdings Notes................................. 10,114,188 14,200
Repayments of long-term debt.............................. (5,694,375) --
Borrowings from related parties........................... 1,079,163 --
Payments for debt issuance costs.......................... (113,481) --
Capital contributions..................................... 4,360,971 --
Distributions to Charter Investment and Charter........... (10,276) --
Other financing activities................................ (18,663) --
------------ --------
Net cash provided by financing activities............ 9,717,527 14,200
------------ --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 104,523 8,172
CASH AND CASH EQUIVALENTS, beginning of period.............. 9,573 1,401
------------ --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 114,096 $ 9,573
============ ========
CASH PAID FOR INTEREST...................................... $ 314,606 $ 5,538
============ ========
NONCASH TRANSACTIONS:
Transfer of operating subsidiaries to the Company......... $ 1,252,370 $ --
Transfer of equity interests to the Company............... 864,022 --
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
statements.
F-491
<PAGE> 703
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION:
General
Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited
liability company, owns and operates cable systems serving approximately 6.1
million (unaudited) customers, including cable systems acquired, in February
2000 (see Note 17). Charter Holdings offers a full range of traditional cable
television services and has begun to offer digital cable television services,
interactive video programming and high-speed Internet access. Charter Holdings
is a subsidiary of Charter Communications Holding Company, LLC (Charter Holdco),
which is a subsidiary of Charter Communications, Inc. (Charter). In November
1999, Charter completed an initial public offering of the sale of 195.5 million
shares of Class A common stock. Proceeds from the offering were used by Charter
to purchase membership units in Charter Holdco, which used the funds received
from Charter for the acquisition of additional cable television systems.
Organization and Basis of Presentation
Charter Holdings was formed in February 1999 as a wholly owned subsidiary
of Charter Investment, Inc. (Charter Investment). Charter Investment, through
its wholly owned subsidiary, Charter Communications Properties Holdings, LLC
(CCPH), commenced operations with the acquisition of a cable system on September
30, 1995.
Effective December 23, 1998, through a series of transactions, Paul G.
Allen acquired approximately 94% of Charter Investment for an aggregate purchase
price of $2.2 billion, excluding $2.0 billion in debt assumed (the "Paul Allen
Transaction"). In conjunction with the Paul Allen Transaction, Charter
Investment acquired, for fair value from unrelated third parties, all of the
interests it did not already own in CharterComm Holdings, LLC (CharterComm
Holdings) and CCA Group (comprised of CCA Holdings Corp., CCT Holdings Corp. and
Charter Communications Long Beach, Inc.), all cable operating companies, for
$2.0 billion, excluding $1.8 billion in debt assumed. Charter Investment
previously managed and owned minority interests in these companies. These
acquisitions were accounted for using the purchase method of accounting, and
accordingly, results of operations of CharterComm Holdings and CCA Group are
included in the supplemental consolidated financial statements from the date of
acquisition. In February 1999, Charter Investment transferred all of its cable
operating subsidiaries to Charter Communications Operating, LLC (Charter
Operating), a wholly owned subsidiary of Charter Holdings. This transfer was
accounted for as a reorganization of entities under common control similar to a
pooling of interests.
As a result of the change in ownership of CCPH, CharterComm Holdings and
CCA Group, Charter Holdings has applied push-down accounting in the preparation
of its supplemental consolidated financial statements. Accordingly, on December
23, 1998, Charter Holdings increased its member's equity by $2.2 billion to
reflect the amounts paid by Mr. Allen and Charter Investment. The purchase price
was allocated to assets acquired and liabilities assumed based on their relative
fair values, including amounts assigned to franchises of $3.6 billion.
On April 23, 1998, Mr. Allen and a company controlled by Mr. Allen,
(collectively, the "Mr. Allen Companies") purchased substantially all of the
outstanding partnership interests in Marcus Cable Company, L.L.C. (Marcus Cable)
for $1.4 billion, excluding $1.8 billion in assumed liabilities. The owner of
the remaining partnership interest retained voting control of Marcus Cable. In
February 1999, Marcus Cable Holdings, LLC (Marcus Holdings) was formed and
F-492
<PAGE> 704
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on
March 15, 1999. On March 31, 1999, Mr. Allen purchased the remaining partnership
interests in Marcus Cable, including voting control. On April 7, 1999, Marcus
Holdings was merged into Charter Holdings and Marcus Cable was transferred to
Charter Holdings. For financial reporting purposes, the merger was accounted for
as an acquisition of Marcus Cable effective March 31, 1999, the date Mr. Allen
obtained voting control of Marcus Cable. Accordingly, the results of operations
of Marcus Cable have been included in the supplemental consolidated financial
statements from April 1, 1999. The assets and liabilities of Marcus Cable have
been recorded in the supplemental consolidated financial statements using
historical carrying values reflected in the accounts of the Mr. Allen Companies.
Total member's equity increased by $1.3 billion as a result of the Marcus Cable
acquisition. Previously, on April 23, 1998, the Mr. Allen Companies recorded the
assets acquired and liabilities assumed of Marcus Cable based on their relative
fair values.
On January 1, 2000, Charter Holdco and Charter Holdings effected a number
of transactions in which cable systems acquired by Charter Holdco in November
1999 were contributed to Charter Holdings (the "Transferred Systems"). As a
result of these transactions, Charter Holdings became the indirect parent of the
CC VI Holdings, LLC ("Fanch"), CC VII Holdings, LLC ("Falcon") and CC V
Holdings, LLC ("Avalon") cable systems. Effective January 1, 2000 the Company
accounted for the contribution of the Transferred Systems to Charter Holdings as
a reorganization of entities under common control in a manner similar to a
pooling of interests. These supplemental consolidated financial statements
present this reorganization. The accounts of the Transferred Systems are
included in these supplemental consolidated financial statements from the date
the Transferred Systems were acquired by Charter Holdco. Although these
supplemental financial statements do not extend through the date of the
transfer, they will become the historical consolidated financial statements of
Charter Holdings after the consolidated financial statements covering the date
of the transfer are issued.
The supplemental consolidated financial statements of Charter Holdings
include the accounts of Charter Operating and CCPH, the accounts of CharterComm
Holdings and CCA Group and their subsidiaries since December 23, 1998 (date
acquired by Charter Investment), the accounts of Marcus Cable since March 31,
1999, and the accounts of the Transferred Systems since November 12, 1999 (the
date acquired by Charter Holdco), and are collectively referred to as the
"Company" herein. All subsidiaries are, directly or indirectly, wholly owned by
Charter Holdings. All material intercompany transactions and balances have been
eliminated.
Pursuant to a membership interests purchase agreement, as amended, Vulcan
Cable III Inc. (Vulcan), a company controlled by Mr. Allen, contributed $500
million in cash in August 1999 to Charter Holdco, contributed an additional
$180.7 million in certain equity interests acquired in connection with Charter
Holdings' acquisition of Rifkin Acquisitions Partners, L.L.L.P. and InterLink
Communications Partners, LLLP (collectively, "Rifkin") in September 1999, and
contributed $644.3 million in cash in September 1999 to Charter Holdco. All
funds and equity interests were contributed by Charter Holdco to Charter
Holdings to finance certain acquisitions. In addition, certain Rifkin sellers
received $133.3 million of the purchase price in the form of preferred equity in
Charter Holdco. Also, certain Falcon sellers received $550.0 million of the
purchase price in the form of membership units of Charter Holdco.
F-493
<PAGE> 705
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. These investments are
carried at cost that approximates market value.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installations. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, while equipment replacement and betterments are
capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems.................................. 3-15 years
Buildings and leasehold improvements........................ 5-15 years
Vehicles and equipment...................................... 3-5 years
</TABLE>
Franchises
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable systems represent management's estimate
of fair value and are generally amortized using the straight-line method over a
period of 15 years. The period of 15 years is management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Company. Accumulated
amortization related to franchises was $650.5 million and $5.3 million, as of
December 31, 1999 and 1998, respectively. Amortization expense related to
franchises for the year ended December 31, 1999, and for the period from
December 24, 1998, through December 31, 1998, was $520.0 million and $5.3
million, respectively.
Deferred Financing Costs
Costs related to borrowings are deferred and amortized to interest expense
using the effective interest method over the terms of the related borrowings. As
of December 31, 1999, other assets include $120.7 million of deferred financing
costs, net of accumulated amortization of $10.3 million.
Impairment of Assets
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted net cash flows
related to the asset over its remaining life, the carrying value of such asset
is reduced to its estimated fair value.
F-494
<PAGE> 706
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable system. As of December 31, 1999 and 1998, no installation revenue has been
deferred, as direct selling costs have exceeded installation revenue.
Local governmental authorities impose franchise fees on the Company ranging
up to a federally mandated maximum of 5.0% of gross revenues. Such fees are
collected on a monthly basis from the Company's customers and are periodically
remitted to local franchise authorities. Franchise fees collected and paid are
reported as revenues and expenses.
Channel Launch Payments
The Company receives upfront payments from certain programmers to launch
and promote new cable television channels. A portion of these payments
represents reimbursement of advertising costs paid by the Company to promote the
new channels. These reimbursements have been immaterial. The remaining portion
is being amortized as an offset to programming expense over the respective terms
of the program agreements, which range from one to 20 years. For the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998, the Company amortized and recorded as a reduction of programming costs
$3.4 million and $12, respectively. As of December 31, 1999, the unamortized
portion of payments received totaled $13.4 million and is included in other
long-term liabilities.
Direct Response Advertising
The Company expenses the production costs of advertising as incurred,
except for direct response advertising, which is deferred and amortized over its
expected period of future benefits. Direct response advertising consists
primarily of direct mailings and radio, newspaper and cross-channel television
advertisements that include a phone number for use in ordering the Company's
products and services. The deferred advertising costs are amortized to
advertising expense over the periods during which the future benefits are
expected to be received. These periods range from two to four years depending on
the type of service the customer subscribes to and represents the period the
customer is expected to remain connected to the cable system. As of December 31,
1999, $700 of deferred advertising costs is included in other assets.
Advertising expense was $30.0 million for the year ended December 31, 1999,
including amortization of deferred advertising costs totaling $87.
Investments and Other Comprehensive Income
Investments in equity securities are accounted for in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. The
Company owns common stock of WorldGate Communications, Inc. (WorldGate) that is
classified as "available for sale" and reported at market value with unrealized
gains and losses recorded as accumulated other comprehensive income. Based on
quoted market prices, the investment was valued at $3.2 million as of December
31, 1999 and is included in other assets. Comprehensive loss for the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998, is $646.5 million and $5.3 million, respectively.
F-495
<PAGE> 707
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest Rate Hedge Agreements
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designated for hedging purposes
and are not held or issued for speculative purposes.
Income Taxes
Certain indirect subsidiaries of Charter Holdings are Corporations and file
separate federal and state income tax returns. Results of operations from these
subsidiaries are not material to the consolidated results of operations of the
Company. Income tax expense for the year ended December 31, 1999, represents
taxes assessed by certain state jurisdictions. Deferred income tax assets and
liabilities are not material.
Segments
In 1998, the Company adopted SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. Segments have been identified based upon
management responsibility. The individual segments have been aggregated into one
segment, cable services.
Use of Estimates
The preparation of supplemental financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the supplemental financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
3. ACQUISITIONS:
During 1999, the Company acquired cable systems in eight separate
transactions for an aggregate purchase price of $3.6 billion, net of cash
acquired, excluding debt assumed of $354.0 million and equity issued of $314.0
million. In connection with the Rifkin acquisition, Charter Holdco issued equity
interests totaling $133.3 million to certain sellers. In addition, Vulcan
purchased $180.7 million of equity interests Rifkin and then contributed the
equity interests to Charter Holdings. The purchase prices were allocated to
assets acquired and liabilities assumed based on their relative fair values,
including amounts assigned to franchises of $3.9 billion. The allocation of the
purchase prices for these acquisitions are based, in part, on preliminary
information, which is subject to adjustment upon obtaining complete valuation
information. Management believes that finalization of the purchase prices and
allocations will not have a material impact on the consolidated financial
position or results of operations of the Company.
F-496
<PAGE> 708
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1999, Charter Holdco acquired the cable systems of Fanch, Falcon and
Avalon and on January 1, 2000, Charter Holdco transferred its equity these cable
systems to Charter Holdings (see Note 1). Charter Holdco acquired these cable
systems for an aggregate purchase price $4.0 billion, net of cash acquired,
excluding debt assumed of $2.2 billion and equity issued by Charter Holdco of
$550 million. The purchase prices were allocated to assets acquired and
liabilities assumed based on their relative fair values, including amounts
assigned to franchises of $5.8 billion.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the supplemental financial statements from the dates of
acquisition, including the Transferred Systems.
Unaudited pro forma operating results as though the acquisitions discussed
above, including the Paul Allen Transaction, the acquisition of Marcus Holdings,
the March 1999 refinancing discussed herein, had occurred on January 1, 1998,
with adjustments to give effect to amortization of franchises, interest expense
and certain other adjustments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Revenues............................................... $ 2,624,394 $ 2,412,252
Loss from operations................................... (355,030) (333,595)
Net Loss............................................... (1,181,635) (1,165,806)
</TABLE>
The unaudited pro forma financial information has been presented for
comparative purposes and does not purport to be indicative of the results of
operations had these transactions been completed as of the assumed date or which
may be obtained in the future.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts is summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE YEAR DECEMBER 24,
ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Balance, beginning of period............................. $ 1,728 $1,702
Acquisitions of cable systems............................ 5,860 --
Charged to expense....................................... 20,872 26
Uncollected balances written off, net of recoveries...... (16,989) --
-------- ------
Balance, end of period................................... $ 11,471 $1,728
======== ======
</TABLE>
F-497
<PAGE> 709
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- --------
<S> <C> <C>
Cable distribution systems................................. $3,523,217 $661,749
Land, buildings and leasehold improvements................. 108,214 26,670
Vehicles and equipment..................................... 176,221 30,590
---------- --------
3,807,652 719,009
Less -- Accumulated depreciation........................... (317,079) (2,767)
---------- --------
$3,490,573 $716,242
========== ========
</TABLE>
For the year ended December 31, 1999, and for the period from December 24,
1998, through December 31, 1998, depreciation expense was $225.0 million and
$2.8 million, respectively.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accounts payable............................................ $112,233 $ 7,439
Liability for pending transfer of cable system.............. 88,200 --
Accrued interest............................................ 99,946 30,809
Capital expenditures........................................ 66,713 15,560
Programming costs........................................... 72,245 11,856
Accrued general and administrative.......................... 39,648 6,688
Franchise fees.............................................. 46,524 12,534
Accrued income taxes........................................ 4,188 15,205
Other accrued liabilities................................... 175,037 27,495
-------- --------
$704,734 $127,586
======== ========
</TABLE>
The liability for pending transfer of cable system represents the fair
value of a cable system to be transferred upon obtaining necessary regulatory
approvals in connection with the transaction with InterMedia Capital Partners IV
L. P., InterMedia Partners and their affiliates. Such approvals were
subsequently obtained and the system assets were transferred subsequent to
December 31, 1999.
F-498
<PAGE> 710
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Charter Holdings:
14.000% Senior Secured Discount Debentures.............. $ -- $ 109,152
11.250% Senior Notes.................................... -- 125,000
8.250% Senior Notes..................................... 600,000 --
8.625% Senior Notes..................................... 1,500,000 --
9.920% Senior Discount Notes............................ 1,475,000 --
Renaissance:
10.000% Senior Discount Notes........................... 114,413 --
Rifkin:
11.125% Senior Subordinated Notes....................... 900 --
Avalon:
9.375% Senior Subordinated Notes........................ 150,000 --
11.875% Senior Discount Notes........................... 196,000 --
7.000% Note payable, due 2003........................... 500 --
CC VII Holdings, LLC (Falcon):
8.375% Senior Debentures................................ 375,000 --
9.285% Senior Discount Debentures....................... 435,250 --
Credit Facilities:
Credit Agreements (including CCPH, CCA Group and
CharterComm Holdings)................................ -- 1,726,500
Charter Operating....................................... 2,906,000 --
CC Michigan, LLC and CC New England, LLC (Avalon)....... 170,000 --
CC VI Operating Company, LLC (Fanch).................... 850,000 --
Falcon Cable Communications, LLC........................ 865,500 --
---------- ----------
9,638,563 1,960,652
Current maturities...................................... -- (10,450)
Unamortized net (discount) premium...................... (702,108) 41,554
---------- ----------
$8,936,455 $1,991,756
========== ==========
</TABLE>
In March 1999, the Company extinguished substantially all existing
long-term debt, excluding borrowings of the Company under its credit agreements,
and refinanced substantially all existing credit agreements at various
subsidiaries with a new credit agreement entered into by Charter Operating (the
"Charter Operating Credit Facilities"). The excess of the amount paid over the
carrying value, net of deferred financing costs, of the Company's long-term debt
of $7.8 million was recovered as an extraordinary item-loss from early
extinguishment of debt in the accompanying supplemental consolidated statements
of operations.
Charter Holdings Notes
In March 1999, Charter Holdings and Charter Communications Holdings Capital
Corporation, a wholly owned subsidiary of Charter Holdings, (collectively, the
"Issuers") issued $600.0 million 8.250% Senior Notes due 2007 (the "8.250%
Senior Notes") for net proceeds of $598.4 million, $1.5 billion 8.625% Senior
Notes due 2009 (the "8.625% Senior Notes") for net proceeds of
F-499
<PAGE> 711
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1,495.4 million, and $1,475.0 million 9.920% Senior Discount Notes due 2011
(the "9.920% Senior Discount Notes") for net proceeds of $905.5 million,
(collectively with the 8.250% Senior Notes and the 8.625% Senior Notes, referred
to as the "Charter Holdings Notes").
The 8.250% Senior Notes are not redeemable prior to maturity. Interest is
payable semi-annually in arrears on April 1 and October 1, beginning October 1,
1999 until maturity.
The 8.625% Senior Notes are redeemable at the option of the Issuers at
amounts decreasing from 104.313% to 100% of par value beginning on April 1,
2004, plus accrued and unpaid interest, to the date of redemption. At any time
prior to April 1, 2002, the Company may redeem up to 35% of the aggregate
principal amount of the 8.625% Senior Notes at a redemption price of 108.625% of
the principal amount under certain conditions. Interest is payable semi-annually
in arrears on April 1 and October 1, beginning October 1, 1999, until maturity.
The 9.920% Senior Discount Notes are redeemable at the option of the
Issuers at amounts decreasing from 104.960% to 100% of accreted value beginning
April 1, 2004. At any time prior to April 1, 2002, the Issuers may redeem up to
35% of the aggregate principal amount of the 9.920% Senior Discount Notes at a
redemption price of 109.920% of the accreted value under certain conditions.
Thereafter, cash interest is payable semi-annually in arrears on April 1 and
October 1 beginning April 1, 2004, until maturity. The discount on the 9.920%
Senior Discount Notes is being accreted using the effective interest method. The
unamortized discount was $497.2 million at December 31, 1999.
The Charter Holdings Notes rank equally with current and future unsecured
and unsubordinated indebtedness (including accounts payables of the Company).
The Issuers are required to make an offer to repurchase all of the Charter
Holdings Notes, at a price equal to 101% of the aggregate principal or 101% of
the accreted value, together with accrued and unpaid interest, upon a change of
control of the Company.
Renaissance Notes
In connection with the acquisition of Renaissance Media Group LLC
(Renaissance) during the second quarter of 1999, the Company assumed $163.2
million principal amount at maturity of senior discount notes due April 2008
(the "Renaissance Notes"). As a result of the change in control of Renaissance,
the Company was required to make an offer to repurchase the Renaissance Notes at
101% of their accreted value. In May 1999, the Company made an offer to
repurchase the Renaissance Notes pursuant to this requirement, and the holders
of the Renaissance Notes tendered an amount representing 30% of the total
outstanding principal amount at maturity for repurchase. These notes were
repurchased using a portion of the proceeds from the Charter Holdings Notes.
As of December 31, 1999, $114.4 million aggregate principal amount at
maturity of Renaissance Notes with an accreted value of $83.0 million remain
outstanding. Interest on the Renaissance Notes shall be paid semi-annually at a
rate of 10% per annum beginning on October 15, 2003.
The Renaissance Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after April 15, 2003, initially at 105% of their
principal amount at maturity, plus accrued and unpaid interest, declining to
100% of the principal amount at maturity, plus accrued and unpaid interest, on
or after April 15, 2006. In addition, at any time prior to April 15, 2001, the
Company may redeem up to 35% of the original principal amount at maturity with
the proceeds of one or more sales of membership units at 110% of their accreted
value, plus accrued and unpaid
F-500
<PAGE> 712
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest on the redemption date, provided that after any such redemption, at
least $106 million aggregate principal amount at maturity remains outstanding.
Rifkin Notes
The Company acquired Rifkin Acquisition Partners L.L.L.P. and InterLink
Communications, Partners, LLLP (collectively, "Rifkin") in September 1999 and
assumed Rifkin's 11.125% senior subordinated notes due 2006 (the "Rifkin Notes")
together with a $3.0 million promissory note payable to Monroe Rifkin. Interest
on the Rifkin Notes is payable semi-annually on January 15 and July 15 of each
year. In September 1999, the Company commenced an offer to repurchase any and
all of the outstanding Rifkin Notes, for cash at a premium over the principal
amounts. In conjunction with this tender offer, the Company sought and obtained
the consent of a majority in principal amount of the note holders of the
outstanding Rifkin Notes to proposed amendments to the indenture governing the
Rifkin Notes, which eliminated substantially all of the restrictive covenants.
In October 1999, the Company repurchased a portion of the Rifkin Notes with a
total outstanding principal amount of $124.1 million for a total of $140.6
million, including a consent fee to the holders who delivered timely consents
amending the indenture, and repurchased the promissory note issued to Monroe
Rifkin for $3.4 million. These notes were paid using borrowings from the Charter
Operating Credit Facilities. At December 31, 1999, $900 aggregate principal of
Rifkin Notes remain outstanding.
Avalon Notes
The Company acquired CC V Holdings, LLC (Avalon) (formerly known as Avalon
Cable LLC) in November 1999 and assumed Avalon's 11.875% Senior Discount Notes
Due 2008 (the "Avalon 11.875% Notes") and 9.375% Subordinated Notes Due 2008
(the "Avalon 9.375% Notes"). As of December 31, 1999, $196.0 million aggregate
principal amount of the Avalon 11.875% Notes with an accreted value of $124.8
million and $150.0 million principal amount of the Avalon 9.375% Notes were
outstanding. After December 1, 2003, cash interest on the Avalon 11.875% Notes
will be payable semi-annually on June 1 and December 1 of each year, commencing
June 1, 2004.
On December 3, 1999, the Company commenced a change of control offer with
respect to the Avalon 9.375% Notes and a change of control offer with respect to
the Avalon 11.875% Notes at purchase prices of 101% of principal amount or
accreted value, as applicable. In January 2000, the Company completed the
repurchase of the Avalon 9.375% Notes with a total outstanding principal amount
of $134.0 million for a total of $137.4 million. In addition to the change of
control repurchase, the Company repurchased the remaining outstanding principal
amount of $16.0 million in the open market for $16.3 million. Also in January
2000, the Company repurchased a portion of the Avalon 11.875% Notes with a total
outstanding principal amount of $16.3 million for a total of $10.5 million. The
repurchase of the Avalon 9.375% Notes and the Avalon 11.875% Notes was funded by
a portion of the cash proceeds from the issuance of additional notes by Charter
Holdings in January 2000 (the "January 2000 Charter Holdings Notes"). Avalon
11.875% Notes with a total principal amount at maturity of $179.8 million and an
accreted value of $116.4 million remain outstanding after the repurchases.
Falcon Debentures
The Company acquired CC VII Holdings, LLC (Falcon) (formerly known as
Falcon Communications, L.P.) in November 1999 and assumed Falcon's 8.375% Senior
Debentures Due 2010 (the "Falcon 8.375% Debentures") and 9.285% Senior Discount
Debentures Due 2010 (the
F-501
<PAGE> 713
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"Falcon 9.285% Debentures", collectively, with the Falcon 8.375% Debentures, the
"Falcon Debentures"). As of December 31, 1999, $375.0 million aggregate
principal amount of the Falcon 8.375% Debentures and $435.3 million aggregate
principal amount of the Falcon 9.285% Debentures, with an accreted value of
$323.0 million were outstanding.
On December 10, 1999, the Company commenced change of control offers and
offered to repurchase the Falcon Debentures at purchase prices of 101% of
principal amount, plus unpaid and accrued interest, or accreted value, as
applicable. In February 2000, the Company completed the repurchase of the Falcon
8.375% Debentures with a total outstanding principal amount of $317.4 million
for a total of $328.6 million. In addition to the change of control repurchase,
the Company repurchased the Falcon 8.375% Debentures with a total outstanding
principal amount of $57.6 million in the open market for $59.4 million. Also, in
February 2000, the Company repurchased the Falcon 9.285% Debentures with an
aggregate principal amount of $230.0 million for a total of $173.8 million. In
addition to the change of control repurchase, the Company repurchased the Falcon
9.285% Debentures with an aggregate principal amount of $205.3 million in the
open market for $154.3 million. The repurchase of all the Falcon Debentures was
funded by a portion of the proceeds from the January 2000 Charter Holdings
Notes.
Helicon Notes
The Company acquired Helicon I, L.P. and affiliates (Helicon) in July 1999
and assumed Helicon's 11% Senior Secured Notes due 2003 (the "Helicon Notes").
On November 1, 1999, the Company redeemed all of the Helicon Notes at a purchase
price equal to 103% of their principal amount, plus accrued interest, for $124.8
million using borrowings from the Charter Operating Credit Facilities.
Charter Operating Credit Facilities
The Charter Operating Credit Facilities provide for two term facilities,
one with a principal amount of $1.0 billion that matures September 2007 (Term
A), and the other with the principal amount of $1.85 billion that matures March
2008 (Term B). The Charter Operating Credit Facilities also provide for a $1.25
billion revolving credit facility with a maturity date of September 2007 and at
the options of the lenders, supplemental credit facilities, in the amount of
$500.0 million available until March 18, 2002. Amounts under the Charter
Operating Credit Facilities bear interest at the Base Rate or the Eurodollar
rate, as defined, plus a margin of up to 2.75% (8.22% to 8.97% as of December
31, 1999). A quarterly commitment fee of between 0.25% and 0.375% per annum is
payable on the unborrowed balance of Term A and the revolving credit facility.
As of December 31, 1999, the unused availability was $1.2 billion. In March
2000, the credit agreement was 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 (the "Incremental Term Loan")
was drawn down. The Incremental Term Loan maturity date is September 18, 2008.
Avalon Credit Facilities
In connection with the Avalon acquisition, the Company entered into a new
credit agreement (the "Avalon Credit Facilities"). The Avalon Credit Facilities
have maximum borrowings of $300.0 million, consisting of a revolving facility in
the amount of $175.0 million that matures May 15, 2008, and a Term B loan in the
amount of $125.0 million that matures on November 15, 2008. The Avalon Credit
Facilities also provide for, at the options of the lenders, supplemental credit
facilities in the amounts of $75 million available until December 31, 2003. All
amounts mature in
F-502
<PAGE> 714
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 2008. Amounts under the Avalon Credit Facilities bear interest at the Base
Rate or the Eurodollar rate, as defined, plus a margin up to 2.75% (7.995% to
8.870% as of December 31, 1999). A quarterly commitment fee of between 0.250%
and 0.375% per annum is payable on the unborrowed balance. The Company borrowed
$170.0 million under the Avalon Credit Facilities to fund a portion of the
Avalon purchase price. As of December 31, 1999, unused availability was $ 130.0
million.
Fanch Credit Facilities
In connection with the acquisition of cable systems of Fanch Cablevision
L.P. and affiliates (Fanch), the Company entered into a new credit agreement
(the "Fanch Credit Facilities"). The Fanch Credit Facilities provide for two
term facilities, one with a principal amount of $450.0 million that matures May
2008 (Term A), and the other with the principal amount of $400.0 million that
matures November 2008 (Term B). The Fanch Credit Facilities also provide for a
$350.0 million revolving credit facility with a maturity date of May 2008 and at
the options of the lenders, supplemental credit facilities, in the amount of
$300.0 million available until December 31, 2004. Amounts under the Fanch Credit
Facilities bear interest at the Base Rate or the Eurodollar rate, as defined,
plus a margin of up to 2.75% (8.12% to 8.87% as of December 31, 1999). A
quarterly commitment fee of between 0.250% and 0.375% per annum is payable on
the unborrowed balance. The Company used $850.0 million of the credit facilities
to fund a portion of the Fanch purchase price. As of December 31, 1999, unused
availability was $ 350.0 million.
Falcon Credit Facilities
In connection with the Falcon acquisition, the existing Falcon credit
agreement (the "Falcon Credit Facilities") was amended to provide for two term
facilities, one with a principal amount of $200.0 million that matures June 2007
(Term B), and the other with the principal amount of $300.0 million that matures
December 2007 (Term C). The Falcon Credit Facilities also provide for a $646.0
million revolving credit facility with a maturity date of December 2006 and at
the options of the lenders, supplemental credit facilities in the amounts of
$700.0 million with a maturity date of December 2007. At December 31, 1999,
$110.0 million was outstanding under the supplemental credit facilities. Amounts
under the Falcon Credit Facilities bear interest at the Base Rate or the
Eurodollar rate, as defined, plus a margin of up to 2.5% (7.57% to 8.73% as of
December 31, 1999). A quarterly commitment fee of between 0.25% and 0.375% per
annum is payable on the unborrowed balance. As of December 31, 1999, unused
availability was $390.5 million. However, debt covenants limit the amount that
can be borrowed to $342.0 million at December 31, 1999.
The indentures governing the debt agreements require issuers of the debt
and/or its subsidiaries to comply with various financial and other covenants,
including the maintenance of certain operating and financial ratios. These debt
instruments also contain substantial limitations on, or prohibitions of
distributions, additional indebtedness, liens, asset sales and certain other
items. As a result of limitations and prohibitions of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, Charter Holdco and Charter.
Based upon outstanding indebtedness at December 31, 1999, the amortization
of term loans, scheduled reductions in available borrowings of the revolving
credit facilities, and the maturity
F-503
<PAGE> 715
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dates for all senior and subordinated notes and debentures, aggregate future
principal payments on the total borrowings under all debt agreements at December
31, 1999, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
- - - ---- ----------
<S> <C>
2000........................................................ $ --
2001........................................................ 5,000
2002........................................................ 93,875
2003........................................................ 284,229
2004........................................................ 261,423
Thereafter.................................................. 8,994,036
----------
$9,638,563
==========
</TABLE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1999, is as follows:
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
DEBT VALUE AMOUNT VALUE
- - - ---- ---------- -------- ----------
<S> <C> <C> <C>
Charter Holdings:
8.250% Senior Notes.......................... $ 598,557 $-- $ 558,000
8.625% Senior Notes.......................... 1,495,787 -- 1,395,000
9.920% Senior Discount Notes................. 977,807 -- 881,313
Renaissance:
10.000% Senior Discount Notes................ 86,507 -- 79,517
Rifkin:
11.125% Senior Subordinated Notes............ 954 -- 990
Avalon:
9.375% Senior Subordinated Notes............. 151,500 -- 151,500
11.875% Senior Discount Notes................ 129,212 -- 129,212
7.000% Note payable, due 2003................ 500 -- 500
CC VII Holdings, LLC (Falcon):
8.375% Senior Debentures..................... 378,750 -- 378,750
9.285% Senior Discount Debentures............ 325,381 -- 325,381
Credit Facilities:
Charter Operating............................ 2,906,000 -- 2,906,000
CC Michigan LLC and CC New England LLC
(Avalon).................................. 170,000 -- 170,000
CC VI Operating, LLC (Fanch)................. 850,000 -- 850,000
Falcon Cable Communications, LLC............. 865,500 -- 865,500
Loans payable -- related parties............. 1,079,163 1,079,163
</TABLE>
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
INTEREST RATE HEDGE AGREEMENTS VALUE AMOUNT VALUE
- - - ------------------------------ -------- ---------- --------
<S> <C> <C> <C>
Swaps........................................... $(6,827) $4,542,713 $(47,220)
Caps............................................ -- 15,000 16
Collars......................................... 1,361 240,000 (199)
</TABLE>
F-504
<PAGE> 716
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of debt and the related interest rate hedge agreements at
December 31, 1998, is as follows:
<TABLE>
<CAPTION>
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
---------- ---------- ----------
<S> <C> <C> <C>
DEBT
Credit Agreements (including CCPH, CCA
Group and CharterComm Holdings).......... $1,726,500 $ -- $1,726,500
14.000% Senior Secured Discount
Debentures............................... 138,102 -- 138,102
11.250% Senior Notes....................... 137,604 -- 137,604
INTEREST RATE HEDGE AGREEMENTS
Swaps...................................... $ 23,216 $1,105,000 $ 23,216
Caps....................................... -- 15,000 --
Collars.................................... 4,174 310,000 4,174
</TABLE>
As the long-term debt under the credit agreements bears interest at current
market rates, their carrying amount approximates market value at December 31,
1999 and 1998. The fair values of the notes and the debentures are based on
quoted market prices.
The weighted average interest pay rate for the Company's interest rate swap
agreements was 8.06% and 7.66% at December 31, 1999 and 1998, respectively. The
weighted average interest rate for the Company's interest rate cap agreements
was 9.0% and 8.55% at December 31, 1999 and 1998, respectively. The weighted
average interest rate for the Company's interest rate collar agreements were
9.13% and 7.74% for the cap and floor components, respectively, at December 31,
1999, and 8.61% and 7.31%, respectively, at December 31, 1998.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would (receive) or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's credit facilities, thereby reducing the exposure to
credit loss. The Company has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the Company's
consolidated financial position or results of operations.
F-505
<PAGE> 717
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. REVENUES:
Revenues consist of the following:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Basic.................................................... $1,002,954 $ 9,347
Premium.................................................. 124,788 1,415
Pay-per-view............................................. 27,537 260
Digital video............................................ 8,299 10
Advertising sales........................................ 71,997 493
Cable modem.............................................. 10,107 55
Other.................................................... 182,408 2,133
---------- -------
$1,428,090 $13,713
========== =======
</TABLE>
10. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES:
Operating, general and administrative expenses consist of the following:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Programming.............................................. $330,754 $3,137
General and administrative............................... 237,480 2,377
Service.................................................. 99,486 847
Advertising.............................................. 31,281 344
Marketing................................................ 23,447 225
Other.................................................... 15,509 204
-------- ------
$737,957 $7,134
======== ======
</TABLE>
11. RELATED PARTY TRANSACTIONS:
Charter Investment and Charter provide management services to the Company
including centralized customer billing services, data processing and related
support, benefits administration and coordination of insurance coverage and
self-insurance programs for medical, dental and workers' compensation claims.
Certain costs for services are billed and charged directly to the Company's
operating subsidiaries and are included in operating costs. These billings are
allocated based on the number of basic customers. Such costs totaled $16.5
million and $128 for the year ended December 31, 1999, and for the period from
December 24, 1998, through December 31, 1998, respectively. All other costs
incurred by Charter Investment and Charter on behalf of the Company are recorded
as expenses in the accompanying supplemental consolidated financial statements
and are included in corporate expense charges -- related parties. Management
believes that costs incurred by Charter Investment and Charter on the Company's
behalf and included in the accompanying supplemental financial statements are
not materially different than costs the Company would have incurred as a
stand-alone entity.
F-506
<PAGE> 718
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company pays certain costs on behalf of Charter Investment and Charter.
These costs are reimbursed by Charter Investment and Charter and are recorded as
receivables from manager of cable systems-related parties in the accompanying
supplemental consolidated financial statements.
Charter Investment utilizes a combination of excess insurance coverage and
self-insurance programs for its medical, dental and workers' compensation
claims. Charges are made to the Company as determined by independent actuaries
at the present value of the actuarially computed present and future liabilities
for such benefits. Medical coverage provides for $1.0 million aggregate stop
loss protection and a loss limitation of $100 per person per year. Workers'
compensation coverage provides for $1.0 million aggregate stop loss protection
and a loss limitation of $250 per person per year.
The Company is charged a management fee as stipulated in the management
agreements between Charter Investment, Charter and the Company. As of December
31, 1999 and 1998, management fees currently payable of $9.2 million and $473,
respectively, are included in payables to manager of cable television
systems-related parties. To the extent management fees charged to the Company
are greater (less) than the corporate expenses incurred by Charter Investment
and Charter, the Company will record distributions to (capital contributions
from) Charter Investment and Charter. For the year ended December 31, 1999, the
Company recorded distributions of $10.3 million. For the period from December
24, 1998, through December 31, 1998, the management fee charged to the Company
approximated the corporate expenses incurred by Charter Investment and Charter
on behalf of the Company. The Charter Operating Credit Facilities and notes
outstanding prohibit payments of management fees in excess of 3.5% of revenues
until repayment of the outstanding indebtedness. Any amount in excess of 3.5% of
revenues owed to Charter Investment or Charter based on the management agreement
is recorded as deferred management fees -- related parties.
Charter, Mr. Allen and certain affiliates of Mr. Allen own equity interests
or warrants to purchase equity interests in various entities that provide
services or programming to the Company, including High Speed Access Corp. (High
Speed Access), WorldGate, Wink Communications, Inc. (Wink), ZDTV, LLC (ZDTV),
USA Networks, Inc. (USA Networks) and Oxygen Media Inc. (Oxygen Media). In
addition, certain officers of the Company or directors of Charter also serve as
directors of High Speed Access and USA Networks. The Company and its affiliates
do not hold controlling interests in any of these companies.
Certain of the Company's cable customers receive cable modem-based Internet
access through High Speed Access and TV-based Internet access through WorldGate.
For the year ended December 31, 1999, and for the period from December 24, 1998,
through December 31, 1998, revenues attributable to these services were less
than 1% of total revenues.
The Company receives or will receive programming and certain interactive
features embedded into the programming for broadcast via its cable systems from
Wink, ZDTV, USA Networks and Oxygen Media. The Company pays a fee for the
programming service generally based on the number of subscribers receiving the
service. Such fees for the year ended December 31, 1999, and for the period from
December 24, 1998, through December 31, 1998, were approximately 1% of total
operating costs. In addition, the Company receives commissions from USA Networks
for home shopping sales generated by its customers. Such revenues for the year
ended December 31, 1999, and for the period from December 24, 1998, through
December 31, 1998, were less than 1% of total revenues.
F-507
<PAGE> 719
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the second quarter of 1999, Charter Holdings loaned $50 million to
Charter Holdco. The promissory note bears interest at 7.5% compounded annually.
For the year ended December 31, 1999, Charter Holdings recognized $1.2 million
of interest income pertaining to this promissory note. This note was repaid in
November 1999.
In connection with the issuance of the Charter Holdings Notes in March
1999, the Company extinguished substantially all existing long-term debt
including debt at Marcus Cable. Prior to the merger with Marcus Cable in March
1999, the Company loaned Marcus Cable $1.7 billion. In April 1999, the loan was
repaid.
During November 1999, the Company received $1.1 billion from Charter and
Charter Holdco that was used to pay down the Credit Facilities. The Company
recorded the funds as loans payable-related parties. The loans will be repaid
with additional long-term borrowings made in connection with the Bresnan
acquisition (see Note 17) and accordingly, the loans have been classified as
long-term. The loans carry interest rates from 7.82% to 7.91%. Interest expense
on the loans totaled $10.4 million for the year ended December 31, 1999.
12. OPTION PLAN:
In accordance with an employment agreement between Charter Investment and
the President and Chief Executive Officer of Charter and a related option
agreement with the President and Chief Executive Officer, an option to purchase
7,044,127 Charter Holdco membership interests, was issued to the President and
Chief Executive Officer. The option vests over a four year period from the date
of grant and expires ten years from the date of grant.
In February 1999, Charter Holdings adopted an option plan providing for the
grant of options. The plan was assumed by Charter Holdco. The option plan
provides for grants of options to employees, officers and directors of Charter
Holdco and its affiliates and consultants who provide services to Charter
Holdco. Options granted vest over five years from the grant date, commencing 15
months after the date of grant. Options not exercised accumulate and are
exercisable, in whole or in part, in any subsequent period, but not later than
ten years from the date of grant.
Membership units received upon exercise of the options are automatically
exchanged for shares of Class A common stock of Charter on a one-for-one basis.
F-508
<PAGE> 720
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the activity for the Company's option plan for the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Options outstanding, beginning of period..... 7,044,127 $20.00 -- $ --
Granted:
December 23, 1998.......................... -- -- 7,044,127 20.00
February 9, 1999........................... 9,111,681 20.00 -- --
April 5, 1999.............................. 473,000 20.73 -- --
November 8, 1999........................... 4,741,400 19.00 -- --
Cancelled.................................... (612,600) 19.95 -- --
----------- ------ ----------- ------
Options outstanding, end of period........... 20,757,608 $19.79 7,044,127 $20.00
=========== ====== =========== ======
Weighted Average Remaining Contractual Life.. 9.2 years 10.0 years
=========== ===========
Options Exercisable, end of period........... 2,091,032 $19.90 1,761,032 $20.00
=========== ====== =========== ======
Weighted average fair value of options
granted.................................... $ 12.59 $ 12.50
=========== ===========
</TABLE>
In February 2000, the Company granted 5.7 million options at $19.47 per
share.
The Company uses the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to
account for the option plans. Option compensation expense of $80.0 million and
$845 for the year ended December 31, 1999, and for the period from December 24,
1998, to December 31, 1998, respectively, has been recorded in the supplemental
consolidated financial statements since the exercise prices were less than the
estimated fair values of the underlying membership interests on the date of
grant. Estimated fair values were determined by the Company using the valuation
inherent in the Paul Allen Transaction and valuations of public companies in the
cable television industry adjusted for factors specific to the Company.
Compensation expense is being recorded over the vesting period of each grant
that varies from four to five years. As of December 31, 1999, deferred
compensation remaining to be recognized in future periods totaled $79.4 million.
No option compensation expense was recorded for the options granted on November
8, 1999, since the exercise price is equal to the estimated fair value of the
underlying membership interests on the date of grant. Since the membership units
are exchangeable into Class A common stock of Charter on a one-for-one basis,
the estimated fair value was equal to the initial offering price of Class A
common stock.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), requires pro forma disclosure of the impact
on earnings as if the compensation costs for these plans had been determined
consistent with the fair value
F-509
<PAGE> 721
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
methodology of this statement. The Company's net loss would have been increased
to the following unaudited pro forma amounts under SFAS 123:
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Net loss:
As reported............................................ $(648,708) $(5,277)
Pro forma (unaudited).................................. (673,042) (5,495)
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants during the year ended December 31, 1999, and
for the period from December 24, 1998, through December 31, 1998, respectively:
risk-free interest rates of 5.5% and 4.8%; expected volatility of 43.8% and
43.7%; and expected lives of 10 years. The valuations assume no dividends are
paid.
13. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense for the year ended
December 31, 1999, and for the period from December 24, 1998, through December
31, 1998, were $11.2 million and $70, respectively. As of December 31, 1999,
future minimum lease payments are as follows:
<TABLE>
<S> <C>
2000........................................................ $9,036
2001........................................................ 7,141
2002........................................................ 4,645
2003........................................................ 3,153
2004........................................................ 2,588
Thereafter.................................................. 8,845
</TABLE>
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
year ended December 31, 1999, and for the period from December 24, 1998, through
December 31, 1998, was $14.3 million and $137, respectively.
Litigation
The Company is a party to lawsuits and claims that arose in the ordinary
course of conducting its business. In the opinion of management, after
consulting with legal counsel, the outcome of these lawsuits and claims will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has
F-510
<PAGE> 722
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principal responsibility for implementing the policies of the Cable Acts. Many
aspects of such regulation are currently the subject of judicial proceedings and
administrative or legislative proposals. Legislation and regulations continue to
change, and the Company cannot predict the impact of future developments on the
cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. During 1999, the
amounts refunded by the Company have been insignificant. The Company may be
required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. As of
December 31, 1999, approximately 18% of the Company's local franchising
authorities are certified to regulate basic tier rates. The Company is unable to
estimate at this time the amount of refunds, if any, that may be payable by the
Company in the event certain of its rates are successfully challenged by
franchising authorities or found to be unreasonable by the FCC. The Company does
not believe that the amount of any such refunds would have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulated rates on the cable
programming service tier (CPST). The FCC has taken the position that it will
still adjudicate pending CPST complaints but will strictly limit its review, and
possible refund orders, to the time period predating the sunset date, March 31,
1999. The Company does not believe any adjudications regarding their pre-sunset
complaints will have a material adverse effect on the Company's consolidated
financial position or results of operations.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
14. EMPLOYEE BENEFIT PLANS:
The Company's employees may participate in 401(k) plans (the "401(k)
Plans"). Employees that qualify for participation can contribute up to 15% of
their salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matches 50% of the first
5% of participant contributions. The Company made contributions to the 401(k)
Plans totaling $2.9 million and $20 for the year ended December 31, 1999, and
for the period from December 24, 1998, through December 31, 1998, respectively.
F-511
<PAGE> 723
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
The Company is required to adopt Statement of Financial Accounting
Standards Board No. 133, Accounting for Derivative Instruments and Hedging
Activities(SFAS No. 133) on January 1, 2001. SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value and
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The Company has not yet quantified the impact of
adopting SFAS No. 133 on the supplemental consolidated financial statements nor
has the Company determined the timing of the adoption of SFAS No. 133. However,
SFAS No. 133 could increase the volatility in earnings (losses).
16. PARENT COMPANY ONLY SUPPLEMENTAL FINANCIAL STATEMENTS:
As the result of limitations on and prohibition of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, the parent company. The
following parent company only supplemental financial statements of Charter
Holdings account for the investment in Charter Operating, Fanch, Falcon and
Avalon under the equity method of accounting. The supplemental financial
statements should be read in conjunction with the supplemental consolidated
financial statements of the Company and notes thereto.
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
SUPPLEMENTAL CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................... $ 9,762 $ --
Investment in subsidiaries.............................. 11,090,874 2,147,379
Other assets............................................ 69,793 --
----------- ----------
$11,170,429 $2,147,379
=========== ==========
LIABILITIES AND MEMBER'S EQUITY
Current liabilities..................................... $ 47,365 $ --
Payables to manager of cable systems -- related
parties............................................... 2,960 --
Long-term debt.......................................... 3,072,151 --
Member's equity......................................... 8,047,953 2,147,379
----------- ----------
$11,170,429 $2,147,379
=========== ==========
</TABLE>
F-512
<PAGE> 724
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
SUPPLEMENTAL CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1998 1998
------------ -------------
<S> <C> <C>
Interest expense......................................... $(221,925) $ --
Interest income.......................................... 11,833 --
Equity in loss of subsidiaries........................... (438,616) (5,277)
--------- -------
Net loss............................................... $(648,708) $(5,277)
========= =======
</TABLE>
CHARTER COMMUNICATIONS HOLDINGS, LLC (PARENT COMPANY ONLY)
SUPPLEMENTAL CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 24,
YEAR ENDED 1998, THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (648,708) $(5,277)
Noncash interest expense.................................. 78,473 --
Equity in losses of subsidiaries.......................... 438,616 5,277
Changes in assets and liabilities......................... 48,825 --
----------- -------
Net cash used in operating activities.................. (82,794) --
----------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Charter Operating........................... (1,730,466) --
Loans to Marcus Cable Holdings, LLC....................... (1,680,142)
Repayment of debt on behalf of Charter Operating.......... (663,259)
Distributions received from Charter Operating............. 96,748 --
----------- -------
Net cash used in investing activities.................. (3,977,119) --
----------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from debt offering........................... 2,999,385 --
Payments for debt issuance costs.......................... (74,000) --
Capital contributions..................................... 1,144,290 --
----------- -------
Net cash used in financing activities.................. 4,069,675 --
----------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 9,762 --
CASH AND CASH EQUIVALENTS, beginning of period.............. -- --
----------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 9,762 $ --
=========== =======
</TABLE>
F-513
<PAGE> 725
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. SUBSEQUENT EVENTS:
On January 6, 2000, Charter Holdings 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 the acquisitions of Fanch, Falcon and Avalon, and the Bresnan
acquisition (as defined below).
On February 14, 2000, Charter Holdco and Charter Holdings completed the
acquisition of Bresnan Communications Company Limited Partnership (Bresnan).
Prior to the acquisition, Charter Holdco assigned a portion of its rights to
purchase Bresnan to Charter Holdings. Charter Holdco and Charter Holdings
purchased 52% of Bresnan from certain sellers for cash and certain sellers
contributed 18% of Bresnan to Charter Holdco for 14.8 million Class C common
membership units of Charter Holdco, an approximate 2.6% equity interest in
Charter Holdco. Charter Holdco then transferred its ownership interest to
Charter Holdings. Thereafter, Charter Holdings and certain sellers contributed
all of the outstanding interests in Bresnan to CC VIII, LLC (CC VIII), a
subsidiary of Charter Holdings and Bresnan was dissolved. In exchange for the
contribution of their interests in Bresnan, the sellers received approximately
24.2 million Class A preferred membership units in CC VIII representing 30% of
the equity of CC VIII and are entitled to a 2% annual return on their preferred
membership units. The purchase price for Bresnan was approximately $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, respectively, and
approximately $1.0 billion in assumed debt. All the membership units received by
the sellers are exchangeable on a one-for-one basis for Class A common stock of
Charter. The Bresnan cable systems acquired are located in Michigan, Minnesota,
Wisconsin and Nebraska, and serve approximately 686,000 (unaudited) customers.
Subsequent to the completion of the Bresnan acquisition, Charter
repurchased all of the outstanding Bresnan 9.25% Senior Discount Notes Due 2009
with an accreted value of $192.1 million and Bresnan 8.00% Senior Notes Due 2009
with a principal amount of $170.0 million for a total of $369.7 million. The
notes were repurchased using a portion of the proceeds of the January 2000
Charter Holdings Notes.
F-514
<PAGE> 726
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION UNDER THE LIMITED LIABILITY COMPANY AGREEMENT OF CHARTER
HOLDINGS.
The limited liability company agreement of Charter Holdings, entered into
as of February 9, 1999, by Charter Investment, as the initial member, provides
that the members, the manager, the directors, their affiliates or any person who
at any time serves or has served as a director, officer, employee or other agent
of any member or any such affiliate, and who, in such capacity, engages or has
engaged in activities on behalf of Charter Holdings, shall be indemnified and
held harmless by Charter Holdings to the fullest extent permitted by law from
and against any losses, damages, expenses, including attorneys' fees, judgments
and amounts paid in settlement actually and reasonably incurred by or in
connection with any claim, action, suit or proceeding arising out of or
incidental to such indemnifiable person's conduct or activities on behalf of
Charter Holdings. Notwithstanding the foregoing, no indemnification is available
under the limited liability company agreement in respect of any such claim
adjudged to be primarily the result of bad faith, willful misconduct or fraud of
an indemnifiable person. Payment of these indemnification obligations shall be
made from the assets of Charter Holdings and the members shall not be personally
liable to an indemnifiable person for payment of indemnification.
INDEMNIFICATION UNDER THE DELAWARE LIMITED LIABILITY COMPANY ACT.
Section 18-108 of the Delaware Limited Liability Company Act authorizes a
limited liability company to indemnify and hold harmless any member or manager
or other person from and against any and all claims and demands whatsoever,
subject to such standards and restrictions, if any, as are set forth in its
limited liability company agreement.
INDEMNIFICATION UNDER THE BY-LAWS OF CHARTER CAPITAL.
The by-laws of Charter Capital provide that Charter Capital, to the
broadest and maximum extent permitted by applicable law, will indemnify each
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director or officer of Charter Capital, or is or was serving
at the request of Charter Capital as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding. To the extent that a director, officer,
employee or agent of Charter Capital has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in the
preceding paragraph, or in defense of any claim, issue or matter, such person
will be indemnified against expenses, including attorneys' fees, actually and
reasonably incurred by such person. Expenses, including attorneys' fees,
incurred by a director or officer in defending any civil or criminal action,
suit or proceeding may be paid by Charter Capital in advance of the final
disposition of such action, suit or proceeding, as authorized by the board of
directors of Charter Capital, upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it shall ultimately be
determined that such director or officer was not entitled to be indemnified by
Charter Capital as authorized in the by-laws of Charter Capital. The
indemnification and advancement of expenses provided by, or granted pursuant to,
the by-laws of Charter Capital will not be deemed exclusive and are declared
expressly to be non-exclusive of any other rights to which those seeking
indemnification or advancements of expenses may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors
II-1
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or otherwise, both as to action in such person's official capacity and as to
action in another capacity while holding an office, and, unless otherwise
provided when authorized or ratified, will continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such person.
INDEMNIFICATION UNDER THE DELAWARE GENERAL CORPORATION LAW.
Section 145 of the Delaware General Corporation Law, authorizes a
corporation to indemnify any person who was or is a party, or is threatened to
be made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that the person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the person in connection with such action, suit or proceeding, if the person
acted in good faith and in a manner the person reasonably believed to be in, or
not opposed to, the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful. In addition, the Delaware General Corporation Law does not
permit indemnification in any threatened, pending or completed action or suit by
or in the right of the corporation in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation,
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses, which such court
shall deem proper. To the extent that a present or former director or officer of
a corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above, or in defense of any claim, issue
or matter, such person shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred by such person. Indemnity is
mandatory to the extent a claim, issue or matter has been successfully defended.
The Delaware General Corporation Law also allows a corporation to provide for
the elimination or limit of the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director
(i) for any breach of the director's duty of loyalty to the corporation or
its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock purchases or
redemptions, or
(iv) for any transaction from which the director derived an improper
personal benefit. These provisions will not limit the liability of
directors or officers under the federal securities laws of the United
States.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS
<TABLE>
<S> <C>
1.1 Purchase Agreement, dated as of January 6, 2000 by and among
Charter Communications Holdings, LLC, Charter Communications
Capital Corporation and Goldman, Sachs & Co., Chase
Securities Inc., FleetBoston Robertson Stephens Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. Incorporated, Morgan Stanley & Co.
Incorporated, TD Securities (USA) Inc., First Union
Securities, Inc., PNC Capital Markets, Inc. and SunTrust
Equitable Securities Corporation*
</TABLE>
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<PAGE> 728
<TABLE>
<S> <C>
2.1 Merger Agreement, dated March 31, 1999, by and between
Charter Communications Holdings, LLC and Marcus Cable
Holdings, LLC(1)
2.2(a) Membership Purchase Agreement, dated as of January 1, 1999,
by and between ACEC Holding Company, LLC and Charter
Communications, Inc. (now called Charter Investment,
Inc.)(2)
2.2(b) Assignment of Membership Purchase Agreement, dated as of
February 23, 1999, by and between Charter Communications,
Inc. (now called Charter Investment, Inc.) and Charter
Communications Entertainment II, LLC(2)
2.3(a) Asset Purchase Agreement, dated as of February 17, 1999,
among Greater Media, Inc., Greater Media Cablevision, Inc.
and Charter Communications, Inc. (now called Charter
Investment, Inc.)(2)
2.3(b) Assignment of Asset Purchase Agreement, dated as of February
23, 1999, by and between Charter Communications, Inc. (now
called Charter Investment, Inc.) and Charter Communications
Entertainment I, LLC(2)
2.4 Purchase Agreement, dated as of February 23, 1999, by and
among Charter Communications, Inc. (now called Charter
Investment, Inc.), Charter Communications, LLC, Renaissance
Media Holdings LLC and Renaissance Media Group LLC(2)
2.5 Purchase Agreement, dated as of March 22, 1999, among
Charter Communications, Inc. (now called Charter Investment,
Inc.), Charter Communications, LLC, Charter Helicon, LLC,
Helicon Partners I, L.P., Baum Investments, Inc. and the
limited partners of Helicon Partners I, L.P.(2)
2.6(a) Asset and Stock Purchase Agreement, dated April 20, 1999,
between InterMedia Partners of West Tennessee, L.P. and
Charter Communications, LLC(1)
2.6(b) Stock Purchase Agreement, dated April 20, 1999, between TCID
1P-V, Inc. and Charter Communications, LLC(1)
2.6(c) RMG Purchase Agreement, dated as of April 20, 1999, between
Robin Media Group, Inc., InterMedia Partners of West
Tennessee, L.P. and Charter RMG, LLC(1)
2.6(d) Asset Exchange Agreement, dated April 20, 1999, among
InterMedia Partners Southeast, Charter Communications, LLC,
Charter Communications Properties, LLC, and Marcus Cable
Associates, L.L.C.(1)
2.6(d)(i) Amendment to Asset Exchange Agreement, made as of October 1,
1999, by and among InterMedia Partners Southeast and Charter
Communications, LLC, Charter Communications Properties, LLC
and Marcus Cable Associates, L.L.C.(6)
2.6(e) Asset Exchange Agreement, dated April 20, 1999, among
InterMedia Partners, a California Limited Partnership,
Brenmor Cable Partners, L.P. and Robin Media Group, Inc.(1)
2.6(f) Common Agreement, dated April 20, 1999, between InterMedia
Partners, InterMedia Partners Southeast, InterMedia Partners
of West Tennessee, L.P., InterMedia Capital Partners IV,
L.P., InterMedia Partners IV, L.P., Brenmor Cable Partners,
L.P., TCID IP-V, Inc., Charter Communications, LLC, Charter
Communications Properties, LLC, Marcus Cable Associates,
L.L.C. and Charter RMG, LLC(4)+
2.7(a) Purchase and Sale Agreement, dated as of April 26, 1999, by
and among InterLink Communications Partners, LLLP, the
sellers listed therein and Charter Communications, Inc. (now
called Charter Investment, Inc.)(1)
2.7(b) Purchase and Sale Agreement, dated as of April 26, 1999, by
and among Rifkin Acquisition Partners, L.L.L.P., the sellers
listed therein and Charter Communications, Inc. (now called
Charter Investment, Inc.)(2)
2.7(c) RAP Indemnity Agreement, dated April 26, 1999, by and among
the sellers listed therein and Charter Communications, Inc.
(now called Charter Investment, Inc.)(2)
</TABLE>
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<PAGE> 729
<TABLE>
<S> <C>
2.7(d) Assignment of Purchase Agreement with InterLink
Communications Partners, LLLP, dated as of June 30, 1999, by
and between Charter Communications, Inc. (now called Charter
Investment, Inc.) and Charter Communications Operating,
LLC(2)
2.7(e) Assignment of Purchase Agreement with Rifkin Acquisition
Partners L.L.L.P., dated as of June 30, 1999, by and between
Charter Communications, Inc. (now called Charter Investment,
Inc.) and Charter Communications Operating, LLC(2)
2.7(f) Assignment of RAP Indemnity Agreement, dated as of June 30,
1999, by and between Charter Communications, Inc. (now
called Charter Investment, Inc.) and Charter Communications
Operating, LLC(2)
2.7(g) Amendment to the Purchase Agreement with InterLink
Communications Partners, LLLP, dated June 29, 1999(5)
2.7(h) Contribution Agreement, dated as of September 14, 1999, by
and among Charter Communications Operating, LLC, Charter
Communications Holding Company, LLC, Charter Communications,
Inc., Paul G. Allen and the certain other individuals and
entities listed on the signature pages thereto(6)
2.7(i) Form of First Amendment to the Contribution Agreement dated
as of September 14, 1999, by and among Charter
Communications Operating, LLC, Charter Communications
Holding Company, LLC, Charter Communications, Inc. and Paul
G. Allen(7)
2.8 Contribution and Sale Agreement dated as of December 30,
1999, by and among Charter Communications Holding Company,
LLC, CC VII Holdings, LLC and Charter Communications VII,
LLC(8)
2.9 Contribution and Sale Agreement dated as of December 30,
1999, by and among Charter Communications Holding Company,
LLC and Charter Communications Holdings, LLC(8)
2.10(a) Securities Purchase Agreement, dated May 13, 1999, by and
between Avalon Cable Holdings LLC, Avalon Investors, L.L.C.,
Avalon Cable of Michigan Holdings, Inc. and Avalon Cable LLC
and Charter Communications Holdings LLC and Charter
Communications, Inc. (now called Charter Investment,
Inc.)(9)
2.10(b) Assignment and Contribution Agreement, entered into as of
October 11, 1999 by and between Charter Communications
Holding Company, LLC and Charter Communications, Inc.(6)
2.10(c) Assignment Agreement effective as of June 16, 1999, by and
among Charter Communications, Inc., Charter Communications
Holdings LLC, Charter Communications Holding Company, LLC,
Avalon Cable Holdings LLC, Avalon Investors, L.L.C., Avalon
Cable of Michigan Holdings, Inc. and Avalon Cable LLC(6)
2.11(a) Purchase and Contribution Agreement, dated as of May 26,
1999, by and among Falcon Communications, L.P., Falcon
Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable
Trust, Falcon Holding Group, Inc. and DHN Inc. and Charter
Communications, Inc. (now called Charter Investment,
Inc.)(10)
2.11(b) First Amendment to Purchase and Contribution Agreement,
dated as of June 22, 1999, by and among Charter
Communications, Inc., Charter Communications Holding
Company, LLC, Falcon Communications, L.P., Falcon Holding
Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust,
Falcon Holding Group, Inc. and DHN Inc.(11)
2.11(c) Form of Second Amendment to Purchase And Contribution
Agreement, dated as of October 27, 1999, by and among
Charter Investment, Inc., Charter Communications Holding
Company, LLC, Falcon Communications, L.P., Falcon Holding
Group, L.P., TCI Falcon Holdings, LLC, Falcon Holding Group,
Inc. and DHN Inc.(7)
2.11(d) Third Amendment to Purchase and Contribution Agreement dated
as of November 12, 1999, by and among Charter
Communications, Inc., Falcon Communications L.P., Falcon
Holdings Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable
Trust, Falcon Holding Group, Inc. and DHN Inc. (12)
</TABLE>
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<PAGE> 730
<TABLE>
<S> <C>
2.12(a) Purchase Agreement, dated as of May 21, 1999, among
Blackstone TWF Capital Partners, L.P., Blackstone TWF
Capital Partners A L.P., Blackstone TWF Capital Partners B
L.P., Blackstone TWF Family Investment Partnership, L.P.,
RCF Carry, LLC, Fanch Management Partners, Inc., PBW Carried
Interest, Inc., RCF Indiana Management Corp, The Robert C.
Fanch Revocable Trust, A. Dean Windry, Thomas Binning, Jack
Pottle, SDG/Michigan Communications Joint Venture, Fanch-JV2
Master Limited Partnership, Cooney Cable Associates of Ohio,
Limited Partnership, North Texas Cablevision, LTD., Post
Cablevision of Texas, Limited Partnership, Spring Green
Communications, L.P., Fanch-Narragansett CSI Limited
Partnership, and Fanch Cablevision of Kansas General
Partnership and Charter Communications, Inc. (now called
Charter Investment, Inc.)(10)
2.12(b) Assignment of Purchase Agreement by and between Charter
Investment, Inc. and Charter Communications Holding Company,
LLC, effective as of September 21, 1999(6)
2.13 Purchase and Contribution Agreement, entered into as of June
1999, by and among BCI (USA), LLC, William Bresnan,
Blackstone BC Capital Partners L.P., Blackstone BC Offshore
Capital Partners L.P., Blackstone Family Investment
Partnership III L.P., TCID of Michigan, Inc. and TCI Bresnan
LLC and Charter Communications Holding Company, LLC (now
called Charter Investment, Inc.)(10)
3.1 Certificate of Formation of Charter Communications Holdings,
LLC(1)
3.2 Limited Liability Company Agreement of Charter
Communications Holdings, LLC(1)
3.3 Certificate of Incorporation of Charter Communications
Holdings Capital Corporation(1)
3.4 By-Laws of Charter Communications Holdings Capital
Corporation(1)
4.1(a) Indenture relating to the 10.00% Senior notes due 2009,
dated as of January 12, 2000 between Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank*
4.1(b) Form of 10.00% Senior Note due 2010 (included in Exhibit No.
4.1(a))*
4.1(c) Exchange and Registration Rights Agreement, dated January
12, 2000, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., FleetBoston
Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated,
Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc.,
First Union Securities, Inc., PNC Capital Markets, Inc. and
SunTrust Equitable Securities Corporation, relating to the
10.00% Senior Notes due 2009*
4.2(a) Indenture relating to the 10.25% Senior Notes due 2010,
dated as of January 12, 2000, among Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank*
4.2(b) Form of 10.25% Senior Note due 2010 (included in Exhibit No.
4.2(a))*
4.2(c) Exchange and Registration Rights Agreement, dated January
12, 2000, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., FleetBoston
Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated,
Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc.,
First Union Securities, Inc., PNC Capital Markets, Inc. and
SunTrust Equitable Securities Corporation, relating to the
10.25% Senior Notes due 2010*
4.3(a) Indenture relating to the 11.75% Senior Discount Notes due
2010, dated as of January 12, 2000, among Charter
Communications Holdings, LLC, Charter Communications
Holdings Capital Corporation and Harris Trust and Savings
Bank*
4.3(b) Form of 11.75% Senior Discount Note due 2010 (included in
Exhibit No. 4.3(a))*
</TABLE>
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<PAGE> 731
<TABLE>
<S> <C>
4.3(c) Exchange and Registration Rights Agreement, dated January 12, 2000, by and among Charter
Communications Holdings, LLC, Charter Communications Holdings Capital Corporation, Goldman, Sachs &
Co., Chase Securities Inc., FleetBoston Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc., First Union
Securities, Inc., PNC Capital Markets, Inc. and SunTrust Equitable Securities Corporation, relating
to the 11.75% Senior Discount Notes due 2010*
4.4(a) Indenture relating to the 8.250% Senior Notes due 2007, dated as of March 17, 1999, between Charter
Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust
and Savings Bank(1)
4.4(b) Indenture relating to the 8.625% Senior Notes due 2009, dated as of March 17, 1999, among Charter
Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust
and Savings Bank(1)
4.4(c) Indenture relating to the 9.920% Senior Discount Notes due 2011, dated as of March 17, 1999, among
Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris
Trust and Savings Bank(1)
4.4(d) Indenture, dated as of April 9, 1998, by and among Renaissance Media (Louisiana) LLC, Renaissance
Media (Tennessee) LLC, Renaissance Media Capital Corporation, Renaissance Media Group LLC and United
States Trust Company of New York, as trustee(14)
4.4(e) Indenture, dated January 15, 1996, by and among Rifkin Acquisition Partners, L.L.L.P., Rifkin
Acquisition Capital Corp., as issuers, Cable Equities of Colorado Management Corp., FNI Management
Corp., Cable Equities of Colorado, Ltd., Cable Equities, Inc. and Rifkin/ Tennessee, Ltd., as
Subsidiary Guarantors, and Marine Midland Bank, as trustee(15)
4.5(a) Indenture, dated as of December 10, 1998 by and among Avalon Cable of Michigan Holdings, Inc., Avalon
Cable LLC and Avalon Cable Holdings Finance, Inc., as issuers and The Bank of New York, as trustee
for the Notes(19)
4.5(b) Supplemental Indenture, dated as of March 26, 1999 by and among Avalon Cable of Michigan Holdings,
Inc., Avalon Cable LLC and Avalon Cable Holdings Finance, Inc., as issuers, Avalon Cable of Michigan,
Inc., as guarantor, and The Bank of New York, as trustee for the Notes(18)
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding legality*
8.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding tax matters*
10.1 Credit Agreement, dated as of March 18, 1999, between Charter Communications Operating, LLC, and
certain lenders and agents named therein(1)
10.1(a) First Amendment to Credit Agreement dated as of June 28, 1999 between Charter Communications
Operating, LLC, Charter Communications Holdings LLC and certain lenders and agents named therein*
10.1(b) Second Amendment to Credit Agreement dated as of December 14, 1999 between Charter Communications
Operating, LLC, Charter Communications Holdings LLC and certain lenders and agents named therein*
10.2(a)(1) Form of Second Amended Management Agreement, dated as of November 8, 1999, by and among Charter
Investment, Inc., Charter Communications, Inc. and Charter Communications Operating, LLC(6)
10.2(a)(2) Amended and Restated Management Agreement, dated March 17, 1999 between Charter Communications
Operating, LLC and Charter Communications, Inc.(2)
10.2(b) Form of Mutual Services Agreement, dated as of November 9, 1999, by and between Charter
Communications, Inc. and Charter Investment, Inc.(10)
10.2(c) Form of Management Agreement, dated as of November 9, 1999, by and between Charter Communications
Holding Company, LLC and Charter Communications, Inc.(6)
</TABLE>
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<PAGE> 732
<TABLE>
<CAPTION>
10.2(d) Management Agreement, dated as of November 12, 1999, by and between CC VI Operating
Company, LLC and Charter Communications, Inc.
<S> <C>
10.2(e) Management Agreement, dated as of November 12, 1999 by and between Falcon Cable
Communications, LLC and Charter Communications, Inc.
10.3 Consulting Agreement, dated as of March 10, 1999, by and between Vulcan Northwest
Inc., Charter Communications, Inc. (now called Charter Investment, Inc.) and
Charter Communications Holdings, LLC(2)
10.4 Charter Communications Holdings, LLC 1999 Option Plan(2)
10.4(a) Assumption Agreement regarding option plan, dated as of May 25, 1999, by and
between Charter Communications Holdings, LLC and Charter Communications Holding
Company, LLC(5)
10.4(b) Form of Amendment No. 1 to the Charter Communications Holdings, LLC 1999 Option
Plan(3)
10.4(c) Amendment No. 2 to the Charter Communications Holdings, LLC 1999 Option Plan(21)
10.5 Membership Interests Purchase Agreement, dated July 22, 1999, by and between
Charter Communications Holding Company, LLC and Paul G. Allen(5)
10.6 Employment Agreement, dated as of August 28, 1998, between Jerald L. Kent and Paul
G. Allen(13)
10.7 Assignment of Employment Agreements, dated as of December 23, 1998, between Paul G.
Allen and Charter Communications, Inc. (now called Charter Investment, Inc.)(5)
10.8(a) Option Agreement, dated as of February 9, 1999, between Jerald L. Kent and Charter
Communications Holdings, LLC(5)
10.8(b) Amendment to the Option Agreement, dated as of August 23, 1999, between Jerald L.
Kent and Charter Communications Holding Company, LLC(5)
10.8(c) Form of Amendment to the Option Agreement, dated as of November 8, 1999, by and
among Jerald L. Kent, Charter Communications Holding Company, LLC and Charter
Communications, Inc.(3)
10.9 Letter Agreement, dated as of July 22, 1999 between Charter Communications Holding
Company, LLC and Charter Communications Holdings, LLC(12)
10.10 Amendment to Membership Interests Purchase Agreement, dated as of August 10, 1999,
by and among Charter Communications Holding Company, LLC, Vulcan Cable III Inc. and
Paul G. Allen(5)
10.11 Form of Assignment and Assumption Agreement, dated as of November 4, 1999, by and
between Charter Investment, Inc. and Charter Communications, Inc.(10)
10.12 Form of Registration Rights Agreement, dated as of November 12, 1999, by and among
Charter Communications, Inc., Charter Investment, Inc., Vulcan Cable III Inc., Mr.
Paul G. Allen, Mr. Jerald L. Kent, Mr. Howard L. Wood and Mr. Barry L. Babcock(6)
10.13 Form of Consulting Agreement, dated as of October 18, 1999, by and between Barry L.
Babcock and Charter Communications, Inc.(3)
10.14 Form of Termination of Employment Agreement, dated as of October 18, 1999, by and
between Barry L. Babcock and Charter Investment, Inc., Charter Communications, Inc.
and Charter Communications Holding Company, LLC(3)
10.15 Form of Consulting Agreement, dated as of November 1, 1999, by and between Howard
L. Wood and Charter Communications, Inc.(3)
10.16 Form of Termination of Employment Agreement, dated as of November 1, 1999, by and
between Howard L. Wood and Charter Investment, Inc., Communications, Inc. and
Charter Communications Holding Company, LLC(3)
</TABLE>
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<PAGE> 733
<TABLE>
<S> <C>
10.17 Letter Agreement, dated September 21, 1999, by and among Charter Communications, Inc., Charter
Investment, Inc., Charter Communications Holding Company, Inc. and Vulcan Ventures Inc.(6)
10.18 Loan Agreement dated as of February 2, 1999 among Bresnan Telecommunications Company LLC (now called
CC VIII Operating LLC), as borrower and several financial institutions named therein(16)
10.18(a) Amended and Restated Credit Agreement dated as of February 14, 2000 by and among CC VIII Operating,
LLC, as borrower, CC VIII Holdings, LLC, as guarantor, and several financial institutions or entities
named therein(21)
10.19 Credit Agreement, dated as of November 15, 1999, among Avalon Cable LLC, CC Michigan, LLC, CC New
England, LLC, and several financial institutions or entities named therein(17)
10.19(a) First Amendment to Credit Agreement, dated December 21, 1999, by and among CC Michigan, LLC and CC
New England, LLC as borrowers, CC V Holdings, LLC as guarantor and several banks and other financial
institutions or entities named therein*
10.20 Form of Credit Agreement, dated as of June 30, 1998, as Amended and Restated as of November 12, 1999,
among Falcon Cable Communications, LLC, certain guarantors and several financial institutions or
entities named therein(6)
10.21 Credit Agreement, dated as of November 12, 1999, among CC VI Holdings, LLC, CC VI Operating Company,
LLC and several financial institutions or entities named therein.(17)
10.22 Amended and Restated Limited Liability Company Agreement for Charter Communications Holding Company,
LLC, dated February 14, 2000(20)
10.23 Letter Agreement, dated May 25, 1999, between Charter Communications, Inc. and Marc Nathanson*
10.24 Exchange Agreement, dated as of February 14, 2000, by and among Charter Communications, Inc., BCI
(USA), LLC, William J. Bresnan, Blackstone BC Capital Partners L.P., Blackstone BC Offshore Capital
Partners L.P., Blackstone Family Media, III L.P. (as assignee of Blackstone Family Investment III
L.P.), TCID of Michigan, Inc., and TCI Bresnan LLC(20)
10.25 Form of Exchange Agreement, dated as of November 12, 1999 by and among Charter Investments, Inc.,
Charter Communications, Inc., Vulcan Cable III Inc. and Paul G. Allen(6)
10.26 Commitment Letter dated April 14, 2000 from Morgan Stanley Senior Funding, Inc.
12.1 Predecessor of Charter Communications Holdings, LLC and Charter Communications Holdings, LLC Ratio of
Earnings to Fixed Charges Calculation
21.1 Subsidiaries of Charter Communications Holdings, LLC and Charter Communications Capital
Corporation(22)
23.1 Consent of Paul, Hastings, Janofsky & Walker LLP (contained in Exhibit No. 5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of KPMG LLP
23.4 Consent of Ernst & Young LLP
23.5 Consent of Ernst & Young LLP
23.6 Consent of KPMG LLP
23.7 Consent of PricewaterhouseCoopers LLP
23.8 Consent of PricewaterhouseCoopers LLP
23.9 Consent of Ernst & Young LLP
23.10 Consent of PricewaterhouseCoopers LLP
</TABLE>
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<PAGE> 734
<TABLE>
<S> <C>
23.11 Consent of PricewaterhouseCoopers LLP
23.12 Consent of Greenfield, Altman, Brown, Berger & Katz, P.C.
23.13 Consent of PricewaterhouseCoopers LLP
23.14 Consent of Ernst & Young LLP
23.15 Consent of KPMG LLP
23.16 Consent of KPMG LLP
23.17 Consent of Ernst & Young LLP
23.18 Consent of Ernst & Young LLP
23.19 Consent of Ernst & Young LLP
23.20 Consent of Shields & Co.
24.1 Power of Attorney (included in Part II to the Registration Statement on the signature page)*
25.1 Statement of Eligibility of and Qualification (Form T-1) of Harris Trust and Savings Bank*
27.1 Financial Data Schedule(22)
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
</TABLE>
- - - ---------------
* Previously filed.
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(1) Incorporated by reference to Amendment No. 2 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on June 22, 1999 (File
No. 333-77499).
(2) Incorporated by reference to Amendment No. 4 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on July 22, 1999 (File
No. 333-77499).
(3) Incorporated by reference to Amendment No. 4 to the registration statement
on Form S-1 of Charter Communications, Inc. filed on November 1, 1999 (File
No. 333-83887).
(4) Incorporated by reference to Amendment No. 3 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on July 2, 1999 (File No.
333-77499).
(5) Incorporated by reference to Amendment No. 6 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on August 27, 1999 (File
No. 333-77499).
(6) Incorporated by reference to Amendment No. 3 to the registration statement
on Form S-1 of Charter Communications, Inc. filed on October 18, 1999 (File
No. 333-83887).
(7) Incorporated by reference to Amendment No. 5 to the registration Statement
on Form S-1 of Charter Communications, Inc. filed on November 4, 1999 (File
No. 333-83887).
(8) Incorporated by reference to the report on Form 8-K of Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on January 18, 2000 (File No. 333-77499).
(9) Incorporated by reference to Amendment No. 1 to the registration statement
on Form S-4 of Avalon Cable of Michigan LLC, Avalon Cable of Michigan Inc.,
Avalon Cable of New England LLC and Avalon Cable Finance Inc. filed on May
28, 1999 (File No. 333-75453).
(10) Incorporated by reference to Amendment No. 2 to the registration statement
on Form S-1 of Charter Communications, Inc. filed on September 28, 1999
(File No. 333-83887).
II-9
<PAGE> 735
(11) Incorporated by reference to the quarterly report on Form 10-Q filed by
Falcon Communications, L.P. and Falcon Funding Corporation on August 13,
1999 (File Nos. 333-60776 and 333-55755).
(12) Incorporated by reference to the report on Form 8-K of CC VII Holdings, LLC
and Falcon Funding Corporation filed on November 26, 1999 (File No.
033-60776).
(13) Incorporated by reference to Amendment No. 5 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on August 10, 1999 (File
No. 333-77499).
(14) Incorporated by reference to the registration statement on Forms S-4 and
S-1 of Renaissance Media Group LLC, Renaissance Media (Tennessee) LLC,
Renaissance Media (Louisiana) LLC and Renaissance Media Capital Corporation
filed on June 12, 1998 (File No. 333-56679).
(15) Incorporated by reference to the registration statement on Form S-1 of
Rifkin Acquisition Capital Corp. and Rifkin Acquisition Partners, L.L.P.
filed on April 2, 1996 (File No. 333-3084).
(16) Incorporated by reference to the registration statement on Form S-4 of
Bresnan Communications Group LLC and Bresnan Capital Corporation filed on
May 3, 1999 (File No. 333-77637).
(17) Incorporated by reference to the report on Form 8-K of Charter
Communications, Inc. filed on November 29, 1999 (File No. 333-83887).
(18) Incorporated by reference to Amendment No. 1 to the registration statement
on Form S-4 of Avalon Cable LLC, Avalon Cable Holdings Finance, Inc.,
Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of Michigan, Inc.
filed on May 28, 1999 (File No. 333-75415).
(19) Incorporated by reference to the registration statement on Form S-4 of
Falcon Holding Group, L.P. filed on April 18, 1993 (File No. 33-60776).
(20) Incorporated by reference to the current report on Form 8-K of Charter
Communications, Inc. filed on February 29, 2000 (File No. 333-83887).
(21) Incorporated by reference to the annual report on Form 10-K filed by
Charter Communications, Inc. on March 30, 2000 (File No. 333-83887).
(22) Incorporated by reference to the Annual Report on Form 10-K filed by
Charter Communications Holdings, LLC and Charter Communications Holdings
Capital Corporation on March 30, 2000 (File No. 333-77499).
FINANCIAL STATEMENT SCHEDULES
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information required by
such omitted schedules is set forth in the financial statements or the notes
thereto.
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake that:
(1) Prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to the reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
(2) Every prospectus: (i) that is filed pursuant to the immediately
preceding paragraph or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is
II-10
<PAGE> 736
used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each such post-
effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by the registrants of expenses
incurred or paid by a director, officer or controlling person of the registrants
in the successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by them is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-11
<PAGE> 737
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Charter
Communications Holdings, LLC has duly caused this Amendment No. 1 to
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of St. Louis, State of
Missouri on the 18th day of April 2000.
CHARTER COMMUNICATIONS HOLDINGS, LLC:
a registrant
By: CHARTER COMMUNICATIONS HOLDING
COMPANY, LLC, its sole member
By: CHARTER COMMUNICATIONS, INC., its member
and manager, and the manager of Charter
Communications Holdings, LLC
By: /s/ CURTIS S. SHAW
------------------------------------------
Name: Curtis S. Shaw
Title: Senior Vice President, General
Counsel
and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
CAPACITY WITH CHARTER COMMUNICATIONS, INC.,
THE MANAGER OF
CHARTER COMMUNICATIONS HOLDINGS, LLC
AND THE MANAGER OF
CHARTER COMMUNICATIONS
HOLDING COMPANY, LLC,
THE SOLE MEMBER OF
SIGNATURE CHARTER COMMUNICATIONS HOLDINGS, LLC DATE
--------- ------------------------------------------- ----
<S> <C> <C>
* Director April 18, 2000
- - - ------------------------------------------
William D. Savoy
* President, Chief Executive Officer and Director April 18, 2000
- - - ------------------------------------------ (Principal Executive Officer)
Jerald L. Kent
* Director April 18, 2000
- - - ------------------------------------------
Nancy B. Peretsman
* Director April 18, 2000
- - - ------------------------------------------
Marc B. Nathanson
* Director April 18, 2000
- - - ------------------------------------------
Ronald L. Nelson
* Director April 18, 2000
- - - ------------------------------------------
Howard L. Wood
* Senior Vice President and Chief Financial Officer April 18, 2000
- - - ------------------------------------------ (Principal Financial Officer and Principal
Kent D. Kalkwarf Accounting Officer)
</TABLE>
*By: /s/ CURTIS S. SHAW
--------------------------
Attorney-in-Fact
II-12
<PAGE> 738
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Charter
Communications Holdings Capital Corporation has duly caused this Amendment No. 1
to Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of St. Louis, State of
Missouri on the 18th day of April 2000.
CHARTER COMMUNICATIONS HOLDINGS CAPITAL
CORPORATION, a registrant
By: /s/ CURTIS S. SHAW
---------------------------------------
Name: Curtis S. Shaw
Title: Senior Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
* President, Chief Executive Officer and Director April 18, 2000
- - - ------------------------------------ (Principal Executive Officer)
Jerald L. Kent
* Senior Vice President and Chief Financial April 18, 2000
- - - ------------------------------------ Officer (Principal Financial Officer and
Kent D. Kalkwarf Principal Accounting Officer)
</TABLE>
*By: /s/ CURTIS S.
SHAW
----------------------
Attorney-in-Fact
II-13
<PAGE> 739
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
1.1 Purchase Agreement, dated as of January 6, 2000 by and among
Charter Communications Holdings, LLC, Charter Communications
Capital Corporation and Goldman, Sachs & Co., Chase
Securities Inc., FleetBoston Robertson Stephens Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. Incorporated, Morgan Stanley & Co.
Incorporated, TD Securities (USA) Inc., First Union
Securities, Inc., PNC Capital Markets, Inc. and SunTrust
Equitable Securities Corporation*
2.1 Merger Agreement, dated March 31, 1999, by and between
Charter Communications Holdings, LLC and Marcus Cable
Holdings, LLC(1)
2.2(a) Membership Purchase Agreement, dated as of January 1, 1999,
by and between ACEC Holding Company, LLC and Charter
Communications, Inc. (now called Charter Investment,
Inc.)(2)
2.2(b) Assignment of Membership Purchase Agreement, dated as of
February 23, 1999, by and between Charter Communications,
Inc. (now called Charter Investment, Inc.) and Charter
Communications Entertainment II, LLC(2)
2.3(a) Asset Purchase Agreement, dated as of February 17, 1999,
among Greater Media, Inc., Greater Media Cablevision, Inc.
and Charter Communications, Inc. (now called Charter
Investment, Inc.)(2)
2.3(b) Assignment of Asset Purchase Agreement, dated as of February
23, 1999, by and between Charter Communications, Inc. (now
called Charter Investment, Inc.) and Charter Communications
Entertainment I, LLC(2)
2.4 Purchase Agreement, dated as of February 23, 1999, by and
among Charter Communications, Inc. (now called Charter
Investment, Inc.), Charter Communications, LLC, Renaissance
Media Holdings LLC and Renaissance Media Group LLC(2)
2.5 Purchase Agreement, dated as of March 22, 1999, among
Charter Communications, Inc. (now called Charter Investment,
Inc.), Charter Communications, LLC, Charter Helicon, LLC,
Helicon Partners I, L.P., Baum Investments, Inc. and the
limited partners of Helicon Partners I, L.P.(2)
2.6(a) Asset and Stock Purchase Agreement, dated April 20, 1999,
between InterMedia Partners of West Tennessee, L.P. and
Charter Communications, LLC(1)
2.6(b) Stock Purchase Agreement, dated April 20, 1999, between TCID
1P-V, Inc. and Charter Communications, LLC(1)
2.6(c) RMG Purchase Agreement, dated as of April 20, 1999, between
Robin Media Group, Inc., InterMedia Partners of West
Tennessee, L.P. and Charter RMG, LLC(1)
2.6(d) Asset Exchange Agreement, dated April 20, 1999, among
InterMedia Partners Southeast, Charter Communications, LLC,
Charter Communications Properties, LLC, and Marcus Cable
Associates, L.L.C.(1)
2.6(d)(i) Amendment to Asset Exchange Agreement, made as of October 1,
1999, by and among InterMedia Partners Southeast and Charter
Communications, LLC, Charter Communications Properties, LLC
and Marcus Cable Associates, L.L.C.(6)
2.6(e) Asset Exchange Agreement, dated April 20, 1999, among
InterMedia Partners, a California Limited Partnership,
Brenmor Cable Partners, L.P. and Robin Media Group, Inc.(1)
2.6(f) Common Agreement, dated April 20, 1999, between InterMedia
Partners, InterMedia Partners Southeast, InterMedia Partners
of West Tennessee, L.P., InterMedia Capital Partners IV,
L.P., InterMedia Partners IV, L.P., Brenmor Cable Partners,
L.P., TCID IP-V, Inc., Charter Communications, LLC, Charter
Communications Properties, LLC, Marcus Cable Associates,
L.L.C. and Charter RMG, LLC(4)+
2.7(a) Purchase and Sale Agreement, dated as of April 26, 1999, by
and among InterLink Communications Partners, LLLP, the
sellers listed therein and Charter Communications, Inc. (now
called Charter Investment, Inc.)(1)
</TABLE>
<PAGE> 740
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
2.7(b) Purchase and Sale Agreement, dated as of April 26, 1999, by
and among Rifkin Acquisition Partners, L.L.L.P., the sellers
listed therein and Charter Communications, Inc. (now called
Charter Investment, Inc.)(2)
2.7(c) RAP Indemnity Agreement, dated April 26, 1999, by and among
the sellers listed therein and Charter Communications, Inc.
(now called Charter Investment, Inc.)(2)
2.7(d) Assignment of Purchase Agreement with InterLink
Communications Partners, LLLP, dated as of June 30, 1999, by
and between Charter Communications, Inc. (now called Charter
Investment, Inc.) and Charter Communications Operating,
LLC(2)
2.7(e) Assignment of Purchase Agreement with Rifkin Acquisition
Partners L.L.L.P., dated as of June 30, 1999, by and between
Charter Communications, Inc. (now called Charter Investment,
Inc.) and Charter Communications Operating, LLC(2)
2.7(f) Assignment of RAP Indemnity Agreement, dated as of June 30,
1999, by and between Charter Communications, Inc. (now
called Charter Investment, Inc.) and Charter Communications
Operating, LLC(2)
2.7(g) Amendment to the Purchase Agreement with InterLink
Communications Partners, LLLP, dated June 29, 1999(5)
2.7(h) Contribution Agreement, dated as of September 14, 1999, by
and among Charter Communications Operating, LLC, Charter
Communications Holding Company, LLC, Charter Communications,
Inc., Paul G. Allen and the certain other individuals and
entities listed on the signature pages thereto(6)
2.7(i) Form of First Amendment to the Contribution Agreement dated
as of September 14, 1999, by and among Charter
Communications Operating, LLC, Charter Communications
Holding Company, LLC, Charter Communications, Inc. and Paul
G. Allen(7)
2.8 Contribution and Sale Agreement dated as of December 30,
1999, by and among Charter Communications Holding Company,
LLC, CC VII Holdings, LLC and Charter Communications VII,
LLC(8)
2.9 Contribution and Sale Agreement dated as of December 30,
1999, by and among Charter Communications Holding Company,
LLC and Charter Communications Holdings, LLC(8)
2.10(a) Securities Purchase Agreement, dated May 13, 1999, by and
between Avalon Cable Holdings LLC, Avalon Investors, L.L.C.,
Avalon Cable of Michigan Holdings, Inc. and Avalon Cable LLC
and Charter Communications Holdings LLC and Charter
Communications, Inc. (now called Charter Investment,
Inc.)(9)
2.10(b) Assignment and Contribution Agreement, entered into as of
October 11, 1999 by and between Charter Communications
Holding Company, LLC and Charter Communications, Inc.(6)
2.10(c) Assignment Agreement effective as of June 16, 1999, by and
among Charter Communications, Inc., Charter Communications
Holdings LLC, Charter Communications Holding Company, LLC,
Avalon Cable Holdings LLC, Avalon Investors, L.L.C., Avalon
Cable of Michigan Holdings, Inc. and Avalon Cable LLC(6)
2.11(a) Purchase and Contribution Agreement, dated as of May 26,
1999, by and among Falcon Communications, L.P., Falcon
Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable
Trust, Falcon Holding Group, Inc. and DHN Inc. and Charter
Communications, Inc. (now called Charter Investment,
Inc.)(10)
2.11(b) First Amendment to Purchase and Contribution Agreement,
dated as of June 22, 1999, by and among Charter
Communications, Inc., Charter Communications Holding
Company, LLC, Falcon Communications, L.P., Falcon Holding
Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust,
Falcon Holding Group, Inc. and DHN Inc.(11)
2.11(c) Form of Second Amendment to Purchase And Contribution
Agreement, dated as of October 27, 1999, by and among
Charter Investment, Inc., Charter Communications Holding
Company, LLC, Falcon Communications, L.P., Falcon Holding
Group, L.P., TCI Falcon Holdings, LLC, Falcon Holding Group,
Inc. and DHN Inc.(7)
</TABLE>
<PAGE> 741
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
2.11(d) Third Amendment to Purchase and Contribution Agreement dated
as of November 12, 1999, by and among Charter
Communications, Inc., Falcon Communications L.P., Falcon
Holdings Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable
Trust, Falcon Holding Group, Inc. and DHN Inc. (12)
2.12(a) Purchase Agreement, dated as of May 21, 1999, among
Blackstone TWF Capital Partners, L.P., Blackstone TWF
Capital Partners A L.P., Blackstone TWF Capital Partners B
L.P., Blackstone TWF Family Investment Partnership, L.P.,
RCF Carry, LLC, Fanch Management Partners, Inc., PBW Carried
Interest, Inc., RCF Indiana Management Corp, The Robert C.
Fanch Revocable Trust, A. Dean Windry, Thomas Binning, Jack
Pottle, SDG/Michigan Communications Joint Venture, Fanch-JV2
Master Limited Partnership, Cooney Cable Associates of Ohio,
Limited Partnership, North Texas Cablevision, LTD., Post
Cablevision of Texas, Limited Partnership, Spring Green
Communications, L.P., Fanch-Narragansett CSI Limited
Partnership, and Fanch Cablevision of Kansas General
Partnership and Charter Communications, Inc. (now called
Charter Investment, Inc.)(10)
2.12(b) Assignment of Purchase Agreement by and between Charter
Investment, Inc. and Charter Communications Holding Company,
LLC, effective as of September 21, 1999(6)
2.13 Purchase and Contribution Agreement, entered into as of June
1999, by and among BCI (USA), LLC, William Bresnan,
Blackstone BC Capital Partners L.P., Blackstone BC Offshore
Capital Partners L.P., Blackstone Family Investment
Partnership III L.P., TCID of Michigan, Inc. and TCI Bresnan
LLC and Charter Communications Holding Company, LLC (now
called Charter Investment, Inc.)(10)
3.1 Certificate of Formation of Charter Communications Holdings,
LLC(1)
3.2 Limited Liability Company Agreement of Charter
Communications Holdings, LLC(1)
3.3 Certificate of Incorporation of Charter Communications
Holdings Capital Corporation(1)
3.4 By-Laws of Charter Communications Holdings Capital
Corporation(1)
4.1(a) Indenture relating to the 10.00% Senior notes due 2009,
dated as of January 12, 2000 between Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank*
4.1(b) Form of 10.00% Senior Note due 2010 (included in Exhibit No.
4.1(a))*
4.1(c) Exchange and Registration Rights Agreement, dated January
12, 2000, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., FleetBoston
Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated,
Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc.,
First Union Securities, Inc., PNC Capital Markets, Inc. and
SunTrust Equitable Securities Corporation, relating to the
10.00% Senior Notes due 2009*
4.2(a) Indenture relating to the 10.25% Senior Notes due 2010,
dated as of January 12, 2000, among Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank*
4.2(b) Form of 10.25% Senior Note due 2010 (included in Exhibit No.
4.2(a))*
4.2(c) Exchange and Registration Rights Agreement, dated January
12, 2000, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., FleetBoston
Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated,
Morgan Stanley & Co. Incorporated, TD Securities (USA) Inc.,
First Union Securities, Inc., PNC Capital Markets, Inc. and
SunTrust Equitable Securities Corporation, relating to the
10.25% Senior Notes due 2010*
4.3(a) Indenture relating to the 11.75% Senior Discount Notes due
2010, dated as of January 12, 2000, among Charter
Communications Holdings, LLC, Charter Communications
Holdings Capital Corporation and Harris Trust and Savings
Bank*
4.3(b) Form of 11.75% Senior Discount Note due 2010 (included in
Exhibit No. 4.3(a))*
</TABLE>
<PAGE> 742
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
4.3(c) Exchange and Registration Rights Agreement, dated January
12, 2000, by and among Charter Communications Holdings, LLC,
Charter Communications Holdings Capital Corporation,
Goldman, Sachs & Co., Chase Securities Inc., FleetBoston
Robertson Stephens Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated, TD
Securities (USA) Inc., First Union Securities, Inc., PNC
Capital Markets, Inc. and SunTrust Equitable Securities
Corporation, relating to the 11.75% Senior Discount Notes
due 2010*
4.4(a) Indenture relating to the 8.250% Senior Notes due 2007,
dated as of March 17, 1999, between Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank(1)
4.4(b) Indenture relating to the 8.625% Senior Notes due 2009,
dated as of March 17, 1999, among Charter Communications
Holdings, LLC, Charter Communications Holdings Capital
Corporation and Harris Trust and Savings Bank(1)
4.4(c) Indenture relating to the 9.920% Senior Discount Notes due
2011, dated as of March 17, 1999, among Charter
Communications Holdings, LLC, Charter Communications
Holdings Capital Corporation and Harris Trust and Savings
Bank(1)
4.4(d) Indenture, dated as of April 9, 1998, by and among
Renaissance Media (Louisiana) LLC, Renaissance Media
(Tennessee) LLC, Renaissance Media Capital Corporation,
Renaissance Media Group LLC and United States Trust Company
of New York, as trustee(14)
4.4(e) Indenture, dated January 15, 1996, by and among Rifkin
Acquisition Partners, L.L.L.P., Rifkin Acquisition Capital
Corp., as issuers, Cable Equities of Colorado Management
Corp., FNI Management Corp., Cable Equities of Colorado,
Ltd., Cable Equities, Inc. and Rifkin/ Tennessee, Ltd., as
Subsidiary Guarantors, and Marine Midland Bank, as
trustee(15)
4.5(a) Indenture, dated as of December 10, 1998 by and among Avalon
Cable of Michigan Holdings, Inc., Avalon Cable LLC and
Avalon Cable Holdings Finance, Inc., as issuers and The Bank
of New York, as trustee for the Notes(19)
4.5(b) Supplemental Indenture, dated as of March 26, 1999 by and
among Avalon Cable of Michigan Holdings, Inc., Avalon Cable
LLC and Avalon Cable Holdings Finance, Inc., as issuers,
Avalon Cable of Michigan, Inc., as guarantor, and The Bank
of New York, as trustee for the Notes(18)
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding
legality*
8.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding
tax matters*
10.1 Credit Agreement, dated as of March 18, 1999, between
Charter Communications Operating, LLC, and certain lenders
and agents named therein(1)
10.1(a) First Amendment to Credit Agreement dated as of June 28,
1999 between Charter Communications Operating, LLC, Charter
Communications Holdings LLC and certain lenders and agents
named therein*
10.1(b) Second Amendment to Credit Agreement dated as of December
14, 1999 between Charter Communications Operating, LLC,
Charter Communications Holdings LLC and certain lenders and
agents named therein*
10.2(a)(1) Form of Second Amended Management Agreement, dated as of
November 8, 1999, by and among Charter Investment, Inc.,
Charter Communications, Inc. and Charter Communications
Operating, LLC(6)
10.2(a)(2) Amended and Restated Management Agreement, dated March 17,
1999 between Charter Communications Operating, LLC and
Charter Communications, Inc.(2)
10.2(b) Form of Mutual Services Agreement, dated as of November 9,
1999, by and between Charter Communications, Inc. and
Charter Investment, Inc.(10)
10.2(c) Form of Management Agreement, dated as of November 9, 1999,
by and between Charter Communications Holding Company, LLC
and Charter Communications, Inc.(6)
</TABLE>
<PAGE> 743
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.2(d) Management Agreement, dated as of November 12, 1999, by and
between CC VI Operating Company, LLC and Charter
Communications, Inc.
10.2(e) Management Agreement, dated as of November 12, 1999 by and
between Falcon Cable Communications, LLC and Charter
Communications, Inc.
10.3 Consulting Agreement, dated as of March 10, 1999, by and
between Vulcan Northwest Inc., Charter Communications, Inc.
(now called Charter Investment, Inc.) and Charter
Communications Holdings, LLC(2)
10.4 Charter Communications Holdings, LLC 1999 Option Plan(2)
10.4(a) Assumption Agreement regarding option plan, dated as of May
25, 1999, by and between Charter Communications Holdings,
LLC and Charter Communications Holding Company, LLC(5)
10.4(b) Form of Amendment No. 1 to the Charter Communications
Holdings, LLC 1999 Option Plan(3)
10.4(c) Amendment No. 2 to the Charter Communications Holdings, LLC
1999 Option Plan(21)
10.5 Membership Interests Purchase Agreement, dated July 22,
1999, by and between Charter Communications Holding Company,
LLC and Paul G. Allen(5)
10.6 Employment Agreement, dated as of August 28, 1998, between
Jerald L. Kent and Paul G. Allen(13)
10.7 Assignment of Employment Agreements, dated as of December
23, 1998, between Paul G. Allen and Charter Communications,
Inc. (now called Charter Investment, Inc.)(5)
10.8(a) Option Agreement, dated as of February 9, 1999, between
Jerald L. Kent and Charter Communications Holdings, LLC(5)
10.8(b) Amendment to the Option Agreement, dated as of August 23,
1999, between Jerald L. Kent and Charter Communications
Holding Company, LLC(5)
10.8(c) Form of Amendment to the Option Agreement, dated as of
November 8, 1999, by and among Jerald L. Kent, Charter
Communications Holding Company, LLC and Charter
Communications, Inc.(3)
10.9 Letter Agreement, dated as of July 22, 1999 between Charter
Communications Holding Company, LLC and Charter
Communications Holdings, LLC(12)
10.10 Amendment to Membership Interests Purchase Agreement, dated
as of August 10, 1999, by and among Charter Communications
Holding Company, LLC, Vulcan Cable III Inc. and Paul G.
Allen(5)
10.11 Form of Assignment and Assumption Agreement, dated as of
November 4, 1999, by and between Charter Investment, Inc.
and Charter Communications, Inc.(10)
10.12 Form of Registration Rights Agreement, dated as of November
12, 1999, by and among Charter Communications, Inc., Charter
Investment, Inc., Vulcan Cable III Inc., Mr. Paul G. Allen,
Mr. Jerald L. Kent, Mr. Howard L. Wood and Mr. Barry L.
Babcock(6)
10.13 Form of Consulting Agreement, dated as of October 18, 1999,
by and between Barry L. Babcock and Charter Communications,
Inc.(3)
10.14 Form of Termination of Employment Agreement, dated as of
October 18, 1999, by and between Barry L. Babcock and
Charter Investment, Inc., Charter Communications, Inc. and
Charter Communications Holding Company, LLC(3)
10.15 Form of Consulting Agreement, dated as of November 1, 1999,
by and between Howard L. Wood and Charter Communications,
Inc.(3)
10.16 Form of Termination of Employment Agreement, dated as of
November 1, 1999, by and between Howard L. Wood and Charter
Investment, Inc., Communications, Inc. and Charter
Communications Holding Company, LLC(3)
10.17 Letter Agreement, dated September 21, 1999, by and among
Charter Communications, Inc., Charter Investment, Inc.,
Charter Communications Holding Company, Inc. and Vulcan
Ventures Inc.(6)
</TABLE>
<PAGE> 744
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
10.18 Loan Agreement dated as of February 2, 1999 among Bresnan
Telecommunications Company LLC (now called CC VIII Operating
LLC), as borrower and several financial institutions named
therein(16)
10.18(a) Amended and Restated Credit Agreement dated as of February
14, 2000 by and among CC VIII Operating, LLC, as borrower,
CC VIII Holdings, LLC, as guarantor, and several financial
institutions or entities named therein(21)
10.19 Credit Agreement, dated as of November 15, 1999, among
Avalon Cable LLC, CC Michigan, LLC, CC New England, LLC, and
several financial institutions or entities named therein(17)
10.19(a) First Amendment to Credit Agreement, dated December 21,
1999, by and among CC Michigan, LLC and CC New England, LLC
as borrowers, CC V Holdings, LLC as guarantor and several
banks and other financial institutions or entities named
therein*
10.20 Form of Credit Agreement, dated as of June 30, 1998, as
Amended and Restated as of November 12, 1999, among Falcon
Cable Communications, LLC, certain guarantors and several
financial institutions or entities named therein(6)
10.21 Credit Agreement, dated as of November 12, 1999, among CC VI
Holdings, LLC, CC VI Operating Company, LLC and several
financial institutions or entities named therein.(17)
10.22 Amended and Restated Limited Liability Company Agreement for
Charter Communications Holding Company, LLC, dated February
14, 2000(20)
10.23 Letter Agreement, dated May 25, 1999, between Charter
Communications, Inc. and Marc Nathanson*
10.24 Exchange Agreement, dated as of February 14, 2000, by and
among Charter Communications, Inc., BCI (USA), LLC, William
J. Bresnan, Blackstone BC Capital Partners L.P., Blackstone
BC Offshore Capital Partners L.P., Blackstone Family Media,
III L.P. (as assignee of Blackstone Family Investment III
L.P.), TCID of Michigan, Inc., and TCI Bresnan LLC(20)
10.25 Form of Exchange Agreement, dated as of November 12, 1999 by
and among Charter Investments, Inc., Charter Communications,
Inc., Vulcan Cable III Inc. and Paul G. Allen(6)
10.26 Commitment Letter dated April 14, 2000 from Morgan Stanley
Senior Funding, Inc.
12.1 Predecessor of Charter Communications Holdings, LLC and
Charter Communications Holdings, LLC Ratio of Earnings to
Fixed Charges Calculation
21.1 Subsidiaries of Charter Communications Holdings, LLC and
Charter Communications Capital Corporation(22)
23.1 Consent of Paul, Hastings, Janofsky & Walker LLP (contained
in Exhibit No. 5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of KPMG LLP
23.4 Consent of Ernst & Young LLP
23.5 Consent of Ernst & Young LLP
23.6 Consent of KPMG LLP
23.7 Consent of PricewaterhouseCoopers LLP
23.8 Consent of PricewaterhouseCoopers LLP
23.9 Consent of Ernst & Young LLP
23.10 Consent of PricewaterhouseCoopers LLP
23.11 Consent of PricewaterhouseCoopers LLP
23.12 Consent of Greenfield, Altman, Brown, Berger & Katz, P.C.
23.13 Consent of PricewaterhouseCoopers LLP
23.14 Consent of Ernst & Young LLP
23.15 Consent of KPMG LLP
23.16 Consent of KPMG LLP
23.17 Consent of Ernst & Young LLP
</TABLE>
<PAGE> 745
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
23.18 Consent of Ernst & Young LLP
23.19 Consent of Ernst & Young LLP
23.20 Consent of Shields & Co.
24.1 Power of Attorney (included in Part II to the Registration
Statement on the signature page)*
25.1 Statement of Eligibility of and Qualification (Form T-1) of
Harris Trust and Savings Bank*
27.1 Financial Data Schedule(22)
99.1 Form of Letter of Transmittal*
99.2 Form of Notice of Guaranteed Delivery*
</TABLE>
- - - ---------------
* Previously filed.
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
(1) Incorporated by reference to Amendment No. 2 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on June 22, 1999 (File
No. 333-77499).
(2) Incorporated by reference to Amendment No. 4 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on July 22, 1999 (File
No. 333-77499).
(3) Incorporated by reference to Amendment No. 4 to the registration statement
on Form S-1 of Charter Communications, Inc. filed on November 1, 1999 (File
No. 333-83887).
(4) Incorporated by reference to Amendment No. 3 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on July 2, 1999 (File No.
333-77499).
(5) Incorporated by reference to Amendment No. 6 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on August 27, 1999 (File
No. 333-77499).
(6) Incorporated by reference to Amendment No. 3 to the registration statement
on Form S-1 of Charter Communications, Inc. filed on October 18, 1999 (File
No. 333-83887).
(7) Incorporated by reference to Amendment No. 5 to the registration Statement
on Form S-1 of Charter Communications, Inc. filed on November 4, 1999 (File
No. 333-83887).
(8) Incorporated by reference to the report on Form 8-K of Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation filed on January 18, 2000 (File No. 333-77499).
(9) Incorporated by reference to Amendment No. 1 to the registration statement
on Form S-4 of Avalon Cable of Michigan LLC, Avalon Cable of Michigan Inc.,
Avalon Cable of New England LLC and Avalon Cable Finance Inc. filed on May
28, 1999 (File No. 333-75453).
(10) Incorporated by reference to Amendment No. 2 to the registration statement
on Form S-1 of Charter Communications, Inc. filed on September 28, 1999
(File No. 333-83887).
(11) Incorporated by reference to the quarterly report on Form 10-Q filed by
Falcon Communications, L.P. and Falcon Funding Corporation on August 13,
1999 (File Nos. 333-60776 and 333-55755).
(12) Incorporated by reference to the report on Form 8-K of CC VII Holdings, LLC
and Falcon Funding Corporation filed on November 26, 1999 (File No.
033-60776).
<PAGE> 746
(13) Incorporated by reference to Amendment No. 5 to the registration statement
on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation filed on August 10, 1999 (File
No. 333-77499).
(14) Incorporated by reference to the registration statement on Forms S-4 and
S-1 of Renaissance Media Group LLC, Renaissance Media (Tennessee) LLC,
Renaissance Media (Louisiana) LLC and Renaissance Media Capital Corporation
filed on June 12, 1998 (File No. 333-56679).
(15) Incorporated by reference to the registration statement on Form S-1 of
Rifkin Acquisition Capital Corp. and Rifkin Acquisition Partners, L.L.L.P.
filed on April 2, 1996 (File No. 333-3084).
(16) Incorporated by reference to the registration statement on Form S-4 of
Bresnan Communications Group LLC and Bresnan Capital Corporation filed on
May 3, 1999 (File No. 333-77637).
(17) Incorporated by reference to the report on Form 8-K of Charter
Communications, Inc. filed on November 29, 1999 (File No. 333-83887).
(18) Incorporated by reference to Amendment No. 1 to the registration statement
on Form S-4 of Avalon Cable LLC, Avalon Cable Holdings Finance, Inc.,
Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of Michigan, Inc.
filed on May 28, 1999 (File No. 333-75415).
(19) Incorporated by reference to the registration statement on Form S-4 of
Falcon Holding Group, L.P. filed on April 18, 1993 (File No. 33-60776).
(20) Incorporated by reference to the current report on Form 8-K of Charter
Communications, Inc. filed on February 29, 2000 (File No. 333-83887).
(21) Incorporated by reference to the annual report on Form 10-K filed by
Charter Communications, Inc. on March 30, 2000 (File No. 333-83887).
(22) Incorporated by reference to the annual report on Form 10-K filed by
Charter Communications Holdings, LLC and Charter Communications Holdings
Capital Corporation on March 30, 2000 (file No. 333-77499).
<PAGE> 1
EXHIBIT 10.2(d)
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement") is made as of the 12th day of
November, 1999, by and between CC VI Operating Company, LLC, a Delaware limited
liability company (the "Company"), and Charter Communications, Inc., a Delaware
corporation (the "Manager").
A. The Company desires to retain the Manager to manage and operate the cable
television systems owned by the Company and its subsidiaries and any cable
television systems subsequently acquired by the Company and its
subsidiaries (the "Cable Systems").
B. The Manager has agreed to manage and operate the Cable Systems, all upon
the terms and conditions hereinafter set forth.
In consideration of the mutual covenants and agreements contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Retention of the Manager. The Company hereby appoints the Manager as a
manager for the Cable Systems, and the Manager hereby agrees to serve the
Company as a manager for the Cable Systems, pursuant to the terms and conditions
hereinafter set forth.
2. Authority and Duties of the Manager.
(a) The Company agrees to seek the advice of the Manager regarding the
business, properties and activities of the Cable Systems during the term hereof,
and subject to the direction, control and general supervision of the Company,
the Manager agrees to provide such advice. The Manager shall give such advice in
a businesslike, efficient, lawful and professional manner in accordance with
this Agreement.
(b) Without limiting the generality of the foregoing, the Manager
shall provide all management services with respect to the operation of the Cable
Systems, including, but not limited to the following:
(i) advice concerning the hiring, termination, performance and
training of personnel;
(ii) review, consultation and advice concerning personnel,
operations, engineering and other management and operating policies and
procedures;
<PAGE> 2
(iii) review, consultation and advice concerning maintenance
standards for plant and equipment of the Cable Systems, advice as to the Cable
Systems' normal repairs, replacements, maintenance and plant upgrades, and
provide for periodic inspections;
(iv) recommendations on all necessary action to keep the
operation of the Cable Systems in compliance, in all material respects, with the
conditions of the Company's franchises and all applicable rules, regulations and
orders of any federal, state, county or municipal authority having jurisdiction
over the Cable Systems;
(v) assistance in the negotiation, or directly negotiate, on
behalf of the Company, of operating agreements (including, but not limited to,
pole attachment agreements, office and headend leases, easements and
right-of-way agreements), contracts for the purchase, lease, license or use of
properties, equipment and rights as may be necessary or desirable in connection
with the operation or maintenance of the Cable Systems and such other agreements
on behalf of the Company as are necessary or advisable for the Cable Systems and
assistance in the procuring, or directly procuring, on behalf of the Company,
such programming, billing and other services and equipment deemed necessary and
advisable for the Cable Systems;
(vi) development of recommendations for, and negotiate the
acquisition and maintenance of, such insurance coverage with respect to the
Cable Systems as the Company may determine upon advice and consultation of the
Manager;
(vii) guidance on all marketing, sales promotions and advertising
for the Cable Systems;
(viii) assistance in the financial budgeting process and the
implementation of appropriate accounting, financial, administrative and
managerial controls for the Cable Systems;
(ix) preparation for use by the Company of financial reports and
maintenance of books of accounts and other records reflecting the results of
operation of each Cable System and/or subsidiary; and
(x) advice and consultation with the Company in connection with
any and all aspects of the Cable Systems and the day to day operation thereof
and consultation with the Company with respect to the selection of attorneys,
consultants and accountants.
3. Management Expenses.
(a) The Manager shall charge to, or be reimbursed by the Company for,
all expenses, costs, losses, liabilities or damages incurred by the Manager
attributable to the ownership or operation of the Cable Systems, including,
where applicable, pro rata allocation for services and purchases made by the
Manager on behalf of the Cable Systems and other companies and cable systems
managed by the Manager, subject to the limitations set forth in
2
<PAGE> 3
Section 6 (the "Company Expenses"). In addition to reimbursement for Company
Expenses, the Manager shall be reimbursed for all other expenses, costs, losses,
liabilities or damages incurred by the Manager in connection with the
performance of its duties hereunder, including, without limitation, the
Manager's costs for overhead, administration and salaries (collectively, the
"Management Fee"), provided that the Management Fee shall not include expenses
incurred by Manager that are in the nature of the "Company Expenses" and are
paid to the Manager by another company or cable system managed by Manager.
Notwithstanding the foregoing, and subject to the payment priority provisions of
the following paragraph, in no event may the Management Fee portion of Company
Expenses be reimbursable in any year in an amount in excess five percent (5.0%)
of the Gross Revenue of the Company, payable monthly in arrears or as otherwise
agreed upon. "Gross Revenue" will include all revenues from the operation of the
Cable Systems including, without limitation, subscriber payments, advertising
revenues and revenues from other services provided by the Cable Systems, but not
including interest income or income from investments unrelated to the Cable
Systems. Management Fees shall only be paid to the Manager by the Company to the
extent permitted by the Credit Agreement (as defined below) and any other
material agreement and applicable charter document of the Company and the
Manager.
Notwithstanding the foregoing, the Management Fees (but not other
Company Expenses) due and payable as provided in the preceding paragraph of this
Section 3 shall be subordinated and junior in right of payment to the prior
payment in full in cash of all of the Senior Debt (as defined below) and shall
not be paid except to the extent allowed under the Credit Agreement (as defined
below). In the event of any bankruptcy or similar proceeding relative to the
Company (a "Reorganization"), then all of the Senior Debt shall first be paid in
full in cash before any payment of the Management Fees is made, and in any
Reorganization any amount payable in respect of the Management Fees shall be
paid directly to the Funding Agent referred to below, unless all the Senior Debt
has been paid in full in cash. The Manager hereby irrevocably authorizes the
Funding Agent, as attorney-in-fact for the Manager, to vote, file or prove any
claim or proof of claim in any Reorganization in respect of the Management Fees
and to demand, sue for, collect and receive any such payment. The Manager shall
take any actions requested by the Funding Agent in order to accomplish any of
the foregoing. If the Manager receives any payment hereunder in violation of the
terms hereof or in connection with any Reorganization (prior to the payment in
full in cash of the Senior Debt), the Manager shall hold such payment in trust
for the benefit of the holders of the Senior Debt and forthwith pay it over to
the Funding Agent. Amounts payable to the Manager in accordance with this
Section 3 which remain unpaid by reason of the foregoing shall be accrued as a
liability of the Company and shall be payable as soon as the conditions to
payment are fulfilled. The deferred portion of the Management Fees will bear
interest at the rate of ten percent (10%) per annum, compounded annually, from
the date otherwise due and payable until the payment thereof.
As used herein, (i) "Credit Agreement" means the Credit Agreement,
dated as of November 12, 1999, among CC VI Operating Company, LLC, certain of
its affiliates, the Lenders parties thereto, Toronto Dominion (Texas), Inc., as
Administrative Agent (the "Funding Agent"), and various Syndication and other
Agents named therein, as amended, restated, supplemented or otherwise modified
from time to time, and (ii) "Senior Debt" means the
3
<PAGE> 4
principal amount of all loans and guarantee obligations from time to time
outstanding or owing under the Credit Agreement and the other loan documents
executed and delivered by the Company pursuant thereto, together with interest
thereon (including any interest subsequent to any filing for Reorganization,
whether or not such interest would constitute an allowed claim, calculated at
the rate set forth for overdue loans in the Credit Agreement) and all other
obligations of the Company under the Credit Agreement and such other loan
documents.
(b) Notwithstanding any termination of this Agreement pursuant to
Section 4, the Manager shall, subject to the limitations set forth in the
preceding paragraphs above, remain entitled (i) to receive the Management Fees
set forth in Section 3(a) incurred prior to the date of termination which have
not been paid to the Company; and (ii) to receive payment of the deferred
Management Fees at the time of such termination if, and to the extent that,
payment thereof is otherwise permitted under Section 3(a).
4. Effective Date. This Agreement shall become effective only upon the
closing (the "Effective Date") of the initial public offering of the Manager as
contemplated by its Registration Statement on Form S-1 filed with the Securities
and Exchange Commission.
5. Term of Agreement. The term of this Agreement shall be ten years
commencing on the Effective Date, unless sooner terminated pursuant to the terms
of this Agreement. This Agreement may be terminated as follows: (a) by the
Company immediately upon written notice to the manager for Cause (as defined
below) or (b) automatically on the consummation of the sale of all or
substantially all of the Company's assets. For purposes hereof, "Cause" shall
exist if the Manager has engaged in gross negligence or willful misconduct in
the performance of its duties hereunder which could have a material adverse
effect on the Company.
6. Liability. The Company shall bear any and all expenses, liabilities,
losses or damages resulting from the operation of the Cable Systems, and the
Manager, its partners, officers, directors and employees shall not, under any
circumstances, be held liable therefor, except that the Manager shall be liable
for any loss or damage which results from its own gross negligence or willful
misconduct. Neither the Manager nor any of its partners, members, officers,
directors and employees shall be held to have incurred any liability to the
Company, the Cable Systems or any third party by virtue of any action not
constituting gross negligence or willful misconduct taken in good faith by it in
discharge of its duties hereunder, and the Company agrees to indemnify the
manager and its shareholders, partners, directors, officers and employees and
hold the Manager and its partners, directors, officers and employees harmless
with respect of the foregoing, including, but not limited to, reasonable
attorneys' fees.
7. Notices. All notices, demands, requests or other communications which
may be or are required to be given, served or sent by a party pursuant to this
Agreement shall be in writing and shall be deemed given upon receipt if
personally delivered (including by messenger or recognized delivery or courier
service) or on the date of receipt on the return receipt if mailed by registered
or certified mail, return receipt requested, postage prepaid, delivered or
addressed
4
<PAGE> 5
as set forth below. Rejection or other refusal to accept or the inability to
deliver because of changed address of which no notice was given shall be deemed
receipt of the notice:
(a) If to the Company:
CC VI Operating Company, LLC
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131
Attention: Jerald L. Kent
(b) If to the Manager:
Charter Communications, Inc.
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131
Attention: Jerald L. Kent
8. Governing Law. This Agreement and the rights and obligations of the
parties hereunder and the persons subject hereto shall be governed by, and
construed and interpreted in accordance with, the laws of the State of New York,
without giving effect to the choice of law principles thereof.
9. Miscellaneous. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by and against the parties hereto and their
respective successors and assigns. This Agreement embodies the entire agreement
and understanding among the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to the
subject matter hereof. The headings in this Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof. This
Agreement may be executed in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one instrument. This
Agreement is not transferable or assignable by any of the parties hereto except
as may be expressly provided herein. This Agreement may not be amended,
supplemented or otherwise modified except in accordance with the Credit
Agreement.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written and effective as of the
Effective Date.
CC VI OPERATING COMPANY, LLC
a Delaware limited liability company
/s/ Marcy Lifton
By:______________________________________________
Name:
Title:
CHARTER COMMUNICATIONS, INC.,
a Delaware corporation
/s/ Curtis S. Shaw
By:______________________________________________
Name:
Title:
6
<PAGE> 1
EXHIBIT 10.2(e)
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement") is made as of the 12th day of
November, 1999, by and between Falcon Cable Communications, LLC, a Delaware
limited liability company (the "Company"), and Charter Communications, Inc., a
Delaware corporation (the "Manager").
A. The Company desires to retain the Manager to manage and operate the
cable television systems owned by the Company and its subsidiaries and
any cable television systems subsequently acquired by the Company and
its subsidiaries (the "Cable Systems").
B. The Manager has agreed to manage and operate the Cable Systems, all
upon the terms and conditions hereinafter set forth.
In consideration of the mutual covenants and agreements contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Retention of the Manager. The Company hereby appoints the Manager as a
manager for the Cable Systems, and the Manager hereby agrees to serve the
Company as a manager for the Cable Systems, pursuant to the terms and conditions
hereinafter set forth.
2. Authority and Duties of the Manager.
(a) The Company agrees to seek the advice of the Manager regarding the
business, properties and activities of the Cable Systems during the term hereof,
and subject to the direction, control and general supervision of the Company,
the Manager agrees to provide such advice. The Manager shall give such advice in
a businesslike, efficient, lawful and professional manner in accordance with
this Agreement.
(b) Without limiting the generality of the foregoing, the Manager
shall provide all management services with respect to the operation of the Cable
Systems, including, but not limited to the following:
(i) advice concerning the hiring, termination, performance and
training of personnel;
(ii) review, consultation and advice concerning personnel,
operations, engineering and other management and operating policies and
procedures;
<PAGE> 2
(iii) review, consultation and advice concerning maintenance
standards for plant and equipment of the Cable Systems, advice as to the Cable
Systems' normal repairs, replacements, maintenance and plant upgrades, and
provide for periodic inspections;
(iv) recommendations on all necessary action to keep the
operation of the Cable Systems in compliance, in all material respects, with the
conditions of the Company's franchises and all applicable rules, regulations and
orders of any federal, state, county or municipal authority having jurisdiction
over the Cable Systems;
(v) assistance in the negotiation, or directly negotiate, on
behalf of the Company, of operating agreements (including, but not limited to,
pole attachment agreements, office and headend leases, easements and
right-of-way agreements), contracts for the purchase, lease, license or use of
properties, equipment and rights as may be necessary or desirable in connection
with the operation or maintenance of the Cable Systems and such other agreements
on behalf of the Company as are necessary or advisable for the Cable Systems and
assistance in the procuring, or directly procuring, on behalf of the Company,
such programming, billing and other services and equipment deemed necessary and
advisable for the Cable Systems;
(vi) development of recommendations for, and negotiate the
acquisition and maintenance of, such insurance coverage with respect to the
Cable Systems as the Company may determine upon advice and consultation of the
Manager;
(vii) guidance on all marketing, sales promotions and advertising
for the Cable Systems;
(viii) assistance in the financial budgeting process and the
implementation of appropriate accounting, financial, administrative and
managerial controls for the Cable Systems;
(ix) preparation for use by the Company of financial reports and
maintenance of books of accounts and other records reflecting the results of
operation of each Cable System and/or subsidiary; and
(x) advice and consultation with the Company in connection with
any and all aspects of the Cable Systems and the day to day operation thereof
and consultation with the Company with respect to the selection of attorneys,
consultants and accountants.
3. Management Expenses.
The Manager shall charge to, or be reimbursed by the Company for, all
expenses, costs, losses, liabilities or damages incurred by the Manager
attributable to the ownership or operation of the Cable Systems, including,
where applicable, pro rata allocation for services and purchases made by the
Manager on behalf of the Cable Systems and other companies and cable systems
managed by the Manager, subject to the limitations set forth in
2
<PAGE> 3
Section 6 (the "Company Expenses"). In addition to reimbursement for Company
Expenses, the Manager shall be reimbursed for all other expenses, costs, losses,
liabilities or damages incurred by the Manager in connection with the
performance of its duties hereunder, including, without limitation, the
Manager's costs for overhead, administration and salaries (collectively, the
"Management Fee"), provided that the Management Fee shall not include expenses
incurred by Manager that are in the nature of the "Company Expenses" and are
paid to the Manager by another company or cable system managed by Manager.
Notwithstanding the foregoing, and subject to the payment priority provisions of
the following paragraph, in no event may the Management Fee portion of Company
Expenses be reimbursable in any year in an amount in excess five percent (5.0%)
of the Gross Revenue of the Company, payable monthly in arrears or as otherwise
agreed upon. "Gross Revenue" will include all revenues from the operation of the
Cable Systems including, without limitation, subscriber payments, advertising
revenues and revenues from other services provided by the Cable Systems, but not
including interest income or income from investments unrelated to the Cable
Systems. Management Fees shall only be paid to the Manager by the Company to the
extent permitted by the Credit Agreement (as defined below) and any other
material agreement and applicable charter document of the Company and the
Manager.
Notwithstanding the foregoing, the Management Fees (but not other
Company Expenses) due and payable as provided in the preceding paragraph of this
Section 3 shall be subordinated and junior in right of payment to the prior
payment in full in cash of all of the Senior Debt (as defined below) and shall
not be paid except to the extent allowed under the Credit Agreement (as defined
below). In the event of any bankruptcy or similar proceeding relative to the
Company (a "Reorganization"), then all of the Senior Debt shall first be paid in
full in cash before any payment of the Management Fees is made, and in any
Reorganization any amount payable in respect of the Management Fees shall be
paid directly to the Funding Agent referred to below, unless all the Senior Debt
has been paid in full in cash. The Manager hereby irrevocably authorizes the
Funding Agent, as attorney-in-fact for the Manager, to vote, file or prove any
claim or proof of claim in any Reorganization in respect of the Management Fees
and to demand, sue for, collect and receive any such payment. The Manager shall
take any actions requested by the Funding Agent in order to accomplish any of
the foregoing. If the Manager receives any payment hereunder in violation of the
terms hereof or in connection with any Reorganization (prior to the payment in
full in cash of the Senior Debt), the Manager shall hold such payment in trust
for the benefit of the holders of the Senior Debt and forthwith pay it over to
the Funding Agent. Amounts payable to the Manager in accordance with this
Section 3 which remain unpaid by reason of the foregoing shall be accrued as a
liability of the Company and shall be payable as soon as the conditions to
payment are fulfilled. The deferred portion of the Management Fees will bear
interest at the rate of ten percent (10%) per annum, compounded annually, from
the date otherwise due and payable until the payment thereof.
As used herein, (i) "Credit Agreement" means the Credit Agreement,
dated as of November 12, 1999, among Falcon Cable Communications, LLC, certain
of its affiliates, the Lenders parties thereto, Toronto Dominion (Texas), Inc.,
as Administrative Agent (the "Funding Agent"), and various Syndication and other
Agents named therein, as amended, restated, supplemented or otherwise modified
from time to time, and (ii) "Senior Debt" means the
3
<PAGE> 4
principal amount of all loans and guarantee obligations from time to time
outstanding or owing under the Credit Agreement and the other loan documents
executed and delivered by the Company pursuant thereto, together with interest
thereon (including any interest subsequent to any filing for Reorganization,
whether or not such interest would constitute an allowed claim, calculated at
the rate set forth for overdue loans in the Credit Agreement) and all other
obligations of the Company under the Credit Agreement and such other loan
documents.
(b) Notwithstanding any termination of this Agreement pursuant to
Section 4, the Manager shall, subject to the limitations set forth in the
preceding paragraphs above, remain entitled (i) to receive the Management Fees
set forth in Section 3(a) incurred prior to the date of termination which have
not been paid to the Company; and (ii) to receive payment of the deferred
Management Fees at the time of such termination if, and to the extent that,
payment thereof is otherwise permitted under Section 3(a).
4. Effective Date. This Agreement shall become effective only upon the
closing (the "Effective Date") of the initial public offering of the Manager as
contemplated by its Registration Statement on Form S-1 filed with the Securities
and Exchange Commission.
5. Term of Agreement. The term of this Agreement shall be ten years
commencing on the Effective Date, unless sooner terminated pursuant to the terms
of this Agreement. This Agreement may be terminated as follows: (a) by the
Company immediately upon written notice to the manager for Cause (as defined
below) or (b) automatically on the consummation of the sale of all or
substantially all of the Company's assets. For purposes hereof, "Cause" shall
exist if the Manager has engaged in gross negligence or willful misconduct in
the performance of its duties hereunder which could have a material adverse
effect on the Company.
6. Liability. The Company shall bear any and all expenses, liabilities,
losses or damages resulting from the operation of the Cable Systems, and the
Manager, its partners, officers, directors and employees shall not, under any
circumstances, be held liable therefor, except that the Manager shall be liable
for any loss or damage which results from its own gross negligence or willful
misconduct. Neither the Manager nor any of its partners, members, officers,
directors and employees shall be held to have incurred any liability to the
Company, the Cable Systems or any third party by virtue of any action not
constituting gross negligence or willful misconduct taken in good faith by it in
discharge of its duties hereunder, and the Company agrees to indemnify the
manager and its shareholders, partners, directors, officers and employees and
hold the Manager and its partners, directors, officers and employees harmless
with respect of the foregoing, including, but not limited to, reasonable
attorneys' fees.
7. Notices. All notices, demands, requests or other communications which
may be or are required to be given, served or sent by a party pursuant to this
Agreement shall be in writing and shall be deemed given upon receipt if
personally delivered (including by messenger or recognized delivery or courier
service) or on the date of receipt on the return receipt if mailed by registered
or certified mail, return receipt requested, postage prepaid, delivered or
addressed
4
<PAGE> 5
as set forth below. Rejection or other refusal to accept or the inability to
deliver because of changed address of which no notice was given shall be deemed
receipt of the notice:
(a) If to the Company:
Falcon Cable Communications, LLC
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131
Attention: Jerald L. Kent
(b) If to the Manager:
Charter Communications, Inc.
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131
Attention: Jerald L. Kent
8. Governing Law. This Agreement and the rights and obligations of the
parties hereunder and the persons subject hereto shall be governed by, and
construed and interpreted in accordance with, the laws of the State of New York,
without giving effect to the choice of law principles thereof.
9. Miscellaneous. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by and against the parties hereto and their
respective successors and assigns. This Agreement embodies the entire agreement
and understanding among the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to the
subject matter hereof. The headings in this Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof. This
Agreement may be executed in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one instrument. This
Agreement is not transferable or assignable by any of the parties hereto except
as may be expressly provided herein. This Agreement may not be amended,
supplemented or otherwise modified except in accordance with the Credit
Agreement.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written and effective as of the
Effective Date.
FALCON CABLE COMMUNICATIONS, LLC,
a Delaware limited liability company
/s/ Marcy Lifton
By:______________________________________________
Name:
Title:
CHARTER COMMUNICATIONS, INC.,
a Delaware corporation
/s/ Curtis S. Shaw
By:______________________________________________
Name:
Title:
6
<PAGE> 1
Exhibit 10.26
MORGAN STANLEY SENIOR FUNDING, INC.
1585 BROADWAY
NEW YORK, NEW YORK 10036
COMMITMENT LETTER
PERSONAL AND CONFIDENTIAL
April 14, 2000
Mr. Kent Kalkwarf
Chief Financial Officer
Charter Communications Holdings, LLC
Charter Communications Holdings Capital Corporation
12444 Powerscourt Drive
St. Louis, Missouri 63131
Ladies and Gentlemen:
We are pleased to confirm the arrangements under which Morgan
Stanley Senior Funding, Inc. ("MSSF" or the "ADMINISTRATIVE AGENT") is
exclusively authorized by Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation (collectively, "CHARTER") to act as
the sole lead arranger and sole bookrunner in connection with the bridge loans
described herein, and, together with any other entities that become lenders in
accordance with the syndication arrangements set forth below (collectively with
the Administrative Agent, the "LENDERS"), commits, severally and not jointly, to
provide the bridge loans described herein, in each case on the terms and subject
to the conditions set forth in this letter and the attached Annex A (together,
the "COMMITMENT LETTER") and the Fee Letter (as defined below). The term
"Initial Lenders" means MSSF and any other Lender identified by Charter who
agrees in writing prior to the date 14 days after the date hereof to assume a
portion of MSSF's commitment to make Bridge Loans under this Commitment Letter,
provided Charter agrees in writing to release MSSF from the portion of its
commitment assumed by such Lender on or prior to the date 14 days after the date
hereof.
We understand that Charter may require funds on an interim
basis, in the form of bridge loans, to fund its accelerated capital expenditure
plan.
1. Commitment. MSSF is pleased to confirm its commitment (the
"COMMITMENT") to provide Charter with Senior Increasing Rate Bridge Loans in an
aggregate principal amount of up to $1.0 billion (the "BRIDGE LOANS"), or such
lesser amount as Charter may specify, having the terms set forth on Annex A, on
the terms and subject to the conditions contained in this Commitment Letter.
MSSF's Commitment is subject to the conditions set forth
<PAGE> 2
in this Commitment Letter, including, without limitation, the conditions
precedent set forth in Annex A hereto, and to the negotiation, execution and
delivery of definitive documentation, including, without limitation, a bridge
loan agreement (the "BRIDGE LOAN AGREEMENT"), consistent with the terms of Annex
A hereto and satisfactory to each of Charter, the Lenders and their counsel and
the satisfaction of the terms, conditions and covenants contained therein. The
terms of this Commitment Letter are intended as an outline of certain of the
material terms of the Bridge Loans, but do not include all of the terms,
conditions, covenants, representations, warranties, default clauses and other
provisions that will be contained in the Bridge Loan Agreement.
2. Fees and Expenses. The fees for these services are set
forth in a separate fee letter (the "FEE LETTER"), entered into by MSSF and
Charter. In addition, pursuant to an engagement letter (the "ENGAGEMENT
LETTER"), dated as of the date hereof, between Charter and Morgan Stanley & Co.
Incorporated ("MORGAN STANLEY"), Charter has agreed to offer Morgan Stanley and
the Initial Lenders or their affiliates the right to act as the exclusive
initial purchasers, underwriters or placement agents in connection with the sale
of Debt Securities (as defined in the Engagement Letter) and to offer Morgan
Stanley the right to act as sole bookrunner, in each case, pursuant to the terms
of the Engagement Letter.
3. Syndication. Charter shall have the right to have
additional lenders become Initial Lenders. Following the syndication to the
Initial Lenders, the Administrative Agent intends and reserves the right to
further syndicate the Commitments and/or the Bridge Loans to other Lenders after
the date that is 14 days after the date hereof (the "Syndication"). The
Administrative Agent will lead the Syndication, including determining the timing
of all offers to potential Lenders and the acceptance of commitments, any title
of agent or similar designations awarded to Lenders, the amounts offered and the
compensation provided to each Lender from the amounts to be paid to the
Administrative Agent pursuant to the terms of this Commitment Letter and the Fee
Letter. The Administrative Agent will determine the identity of any entities
that become Lenders (other than Initial Lenders) after the date hereof and the
final commitment allocations subject to the consent of Charter, which will not
be unreasonably withheld, and will notify Charter of such determinations.
Pursuant to the syndication process described herein, the rights and obligations
of each Lender, including the right and obligation to make any Bridge Loan, may
(with the consent of the Administrative Agent, in its sole discretion, and
subject to the consent of Charter in the case of transfers to non-affiliates,
which consent will not be unreasonably withheld) be assigned by such Lender, in
whole or in part, to any other bank, financial institution or other investor and
upon such assignment, the assignee shall become a Lender hereunder and the
assigning Lender will be relieved from all obligations with respect to any
Commitment assigned. To ensure an orderly and effective Syndication of the
Bridge Loans, you agree that until the later of the termination of the
Syndication as determined by the Administrative Agent and 90 days following the
date of initial funding under the Bridge Loans, Charter will not and will not
permit any of its subsidiaries to syndicate or issue, attempt to syndicate or
issue, announce or authorize the announcement of the syndication or issuance of,
or engage in discussions concerning the syndication or issuance of, any debt
facility or debt or preferred equity security (other than the Bridge Loans),
including any renewals or refinancings of any existing debt facility or debt or
preferred equity security, without the prior written consent of
<PAGE> 3
the Administrative Agent (which consent will not be unreasonably withheld).
Notwithstanding the foregoing, Charter may syndicate the $590 million permitted
to be incurred under the greenshoe for the Falcon credit facility at any time.
The Lenders acknowledge that Charter has no obligation to utilize the financing
offered hereby and can terminate this Commitment Letter at any time.
4. Cooperation. Charter agrees to cooperate, and to cause its
affiliates to cooperate, with the Administrative Agent in connection with (i)
the preparation of an information package regarding the business, operations and
prospects of Charter including, without limitation, the delivery of all
information relating to the transactions contemplated hereunder and all other
information deemed reasonably necessary by the Administrative Agent to complete
the syndication of the Commitment and/or Bridge Loans and (ii) the presentation
of such information package in lender meetings and other communications with
prospective Lenders in connection with the syndication of the Bridge Loans.
Charter agrees to make its representatives and senior management reasonably
available to meet with the Lenders and prospective Lenders and rating agencies
and to make customary "road show" presentations at such locations as the
Administrative Agent may reasonably suggest. Charter shall be solely responsible
for the contents of any such information package and presentation (other than
information concerning the Lenders and the syndication process) and acknowledges
that the Lenders will be using and relying upon the information contained in
such information package and presentation without independent verification
thereof. In addition, Charter represents and covenants that all information
provided by Charter or its agents to the Administrative Agent or the other
Lenders in connection with the transactions contemplated hereunder is and will
be complete and correct in all material respects and does not and will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading. Charter agrees to
supplement such information from time to time until the Closing Date (as defined
in Annex A) and, if requested by the Administrative Agent in writing, for a
reasonable period thereafter (not to exceed six months) necessary to complete
the syndication of the Bridge Loans, so that the representations and covenants
contained in the preceding sentence remain correct.
5. Indemnification and Contribution. In partial consideration
for our commitment hereunder, Charter hereby agrees to indemnify and hold
harmless MSSF and each other Lender, each of the members or shareholders or
other investors or holders of interests in, or other transferees of MSSF or
another Lender (collectively, "ADDITIONAL INVESTORS"), any affiliates of MSSF,
the other Lenders and the Additional Investors, and each other person, if any,
controlling MSSF, the other Lenders or any Additional Investors and any of their
respective affiliates, and any of the directors, officers, agents and employees
of any of the foregoing (each, an "INDEMNIFIED PERSON") from and against any
losses, claims, damages or liabilities related to, arising out of or in
connection with the matters which are the subject of the commitment made
hereunder (including, without limitation, any use made or proposed to be made by
Charter of the proceeds from the transactions referred to above) (collectively,
the "SUBJECT MATTER"), and will reimburse any Indemnified Person for all
expenses (including fees and expenses of counsel) as they are incurred in
connection with investigating, preparing, pursuing or defending any action,
claim, suit, investigation or proceeding related to, arising out of or in
connection with the Subject
<PAGE> 4
Matter, whether or not pending or threatened and whether or not such action,
claim, suit or proceeding is brought by you, your subsidiaries, creditors or any
Indemnified Person, or any Indemnified Person is otherwise a party thereto.
Charter will not, however, be responsible for any losses, claims, damages or
liabilities (or expenses relating thereto) that are judicially determined to
have resulted from the bad faith or gross negligence of any Indemnified Person.
Charter also agrees that no Indemnified Person shall have any liability (whether
direct or indirect, in contract or tort or otherwise) to Charter for or in
connection with the Subject Matter, except for any such liability for losses,
claims, damages or liabilities incurred by you that are judicially determined to
have resulted from the bad faith or gross negligence of such Indemnified Person.
None of MSSF nor any other Lender shall be liable or responsible for any
consequential damages that may be alleged as a result of any failure to fund the
Bridge Loans.
Charter will not, without the prior written consent of MSSF,
settle, compromise, consent to the entry of any judgment in or otherwise seek to
terminate any action, claim, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any Indemnified Person
is a party thereto) unless such settlement, compromise, consent or termination
includes a full and unconditional release of each Indemnified Person from any
liabilities arising out of such action, claim, suit or proceeding.
If the indemnification provided for in the second preceding
paragraph of this Commitment Letter is judicially determined to be unavailable
(other than in accordance with the terms hereof) to an Indemnified Person in
respect of any losses, claims, damages or liabilities referred to herein, then,
in lieu of indemnifying such Indemnified Person hereunder, Charter agrees to
contribute to the amount paid or payable by such Indemnified Person as a result
of such losses, claims, damages or liabilities (and expenses relating thereto)
(i) in such proportion as is appropriate to reflect the relative benefits to
Charter on the one hand, and MSSF and the other Lenders, on the other hand, of
the financing or (ii) if the allocation provided by clause (i) is not available,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in such clause (i) but also the relative fault of Charter on the one
hand, and MSSF and the other Lenders, on the other hand, as well as any other
relevant equitable considerations; provided that in no event shall MSSF's or any
other Lender's contribution to the amount paid or payable exceed the aggregate
amount of fees actually received by such entity under the Fee Letter.
6. Confidentiality. Please note that this Commitment Letter,
the Fee Letter, the Engagement Letter and any written or oral advice provided by
the Lenders in connection with this arrangement is exclusively for the
information of the Board of Directors of Charter and may not be disclosed to any
other party or circulated or referred to publicly without the Administrative
Agent's prior written consent, except, after providing written notice to the
Administrative Agent, pursuant to law or a subpoena or order issued by a court
of competent jurisdiction or by a judicial, administrative or legislative body
or committee. In addition, we hereby consent to your disclosure of such advice
to your officers, directors, agents and advisors who are directly involved in
the consideration of the Bridge Loans to the extent such persons are obligated
to hold such advice in confidence and to the filing of this Commitment Letter
with the SEC, if required, and the description of this Commitment Letter in any
SEC filing, to the extent required. Notwithstanding the foregoing, Charter may
disclose the contents of this Commitment
<PAGE> 5
Letter to potential lenders and their affiliates and advisors solely for the
purpose of their consideration of becoming an Initial Lender provided that such
persons agree to keep such information confidential.
7. Additional Matters. You may not assign any of your rights
or be relieved of any of your obligations hereunder without the prior written
consent of each of the Lenders. As you know, each of the Lenders is a full
service securities firm and as such may from time to time effect transactions,
for its own account or the account of customers, and hold positions in
securities or options on securities of Charter and its subsidiaries and other
companies that may be the subject of this arrangement. In addition, the
Administrative Agent may employ the services of its affiliates in providing
certain services hereunder and may exchange with such affiliates information
concerning Charter and its subsidiaries and other companies that may be the
subject of this arrangement.
The Lenders' commitment hereunder shall terminate on October
14, 2000 unless the closing of the Bridge Loans, on the terms and subject to the
conditions contained herein, shall have been consummated.
<PAGE> 6
Please confirm that the foregoing is in accordance with your
understanding by signing and returning to MSSF the enclosed copies of this
Commitment Letter, together, if not previously executed and delivered, with the
Fee Letter and the Engagement Letter on or before the close of business, on
April 14, 2000, whereupon this Commitment Letter, the Fee Letter and the
Engagement Letter shall become binding agreements between us. If not signed and
returned as described in the preceding sentence by such date, this offer will
terminate on such date. We look forward to working with you on this transaction.
Very truly yours,
MORGAN STANLEY SENIOR FUNDING, INC.
By: /s/ R. Brian Smith
Authorized Signatory
Confirmed as of the date above:
CHARTER COMMUNICATIONS HOLDINGS,
LLC
By: /s/ Curtis S. Shaw
Name: Curtis S. Shaw
Title: Senior Vice President General
and Secretary
CHARTER COMMUNICATIONS HOLDINGS
CAPITAL CORPORATION
By: /s/ Curtis S. Shaw
Name: Curtis S. Shaw
Title: Senior Vice President General
Counsel and Secretary
<PAGE> 7
ANNEX A
SUMMARY OF TERMS AND CONDITIONS OF BRIDGE LOANS
This Summary of Terms and Conditions outlines certain terms of the
Bridge Loans and the Bridge Loan Agreement referred to in the Commitment Letter,
of which this Annex A is a part. Certain capitalized terms used herein are
defined in the Commitment Letter.
BORROWERS Charter Communications Holdings, LLC and
Charter Communications Holdings Capital
Corporation (collectively, "CHARTER"),
jointly and severally liable.
LOANS Senior Increasing Rate Bridge Loans in a
principal amount of up to $1.0 billion (the
"BRIDGE LOANS").
NUMBER OF PERMITTED DRAWS Two (the first such draw, "DRAW 1 BRIDGE
LOAN" and the second such draw, "DRAW 2
BRIDGE LOAN") on or prior to October 14,
2000.
MINIMUM DRAW AMOUNT $400 million.
NOTICE Charter must provide written notice to
the Administrative Agent three business days
prior to any requested funding date.
MATURITY The Bridge Loans mature one year from
the date of the making of Draw 1 Bridge Loan
(the "MATURITY DATE"). If, upon the Maturity
Date, the Bridge Loans have not been
previously repaid in full, and provided no
Conversion Default (as defined below) has
occurred and is continuing, the outstanding
Bridge Loans shall be automatically
converted into Senior Term Loans (each a
"TERM LOAN") due on the nine-year
anniversary of the Maturity Date. At any
time on or after the Maturity Date, at the
option of the applicable Lender, the Senior
Term Loans may be exchanged in whole or in
part for Senior Exchange Notes due on the
nine-year anniversary of the Maturity Date
(the "EXCHANGE NOTES") having an equal
principal amount. The initial date of
funding of the Draw 1 Bridge Loan is
hereinafter referred to as the "CLOSING
DATE."
"CONVERSION DEFAULT" shall mean any material
default under the Bridge Loan Agreement, any
payment default under any material
indebtedness, a
<PAGE> 8
bankruptcy default (as defined) or any
default under the Engagement Letter or the
Fee Letter.
The Senior Term Loans will be governed by
the provisions of the Bridge Loan Agreement
and will have the same terms as the Bridge
Loans, except as expressly set forth on
Exhibit 1 to this Annex A. The Exchange
Notes will be issued pursuant to an
Indenture that will have the terms set forth
on Exhibit 1 to this Annex A.
INTEREST The Draw 1 Bridge Loan will initially
bear interest at a rate per annum equal to
(a) the bid-side yield, as of the Closing
Date, on the 10.25% Senior Notes due 2010 of
Charter less (b) 25 basis points. If the
Draw 1 Bridge Loan is not repaid in whole
within 90 days following the Closing Date,
the interest rate on such outstanding Bridge
Loan will increase by 125 basis points at
the end of such 90-day period and will
increase by an additional 50 basis points at
the end of each 90-day period thereafter.
The last day of each such period being a
"STEP-UP DATE."
The Draw 2 Bridge Loan will initially
bear interest at a rate per annum equal
to the greater of (a) the interest rate
on the Draw 1 Bridge Loan on the date of
funding of the Draw 2 Bridge Loan or (b)
the bid- side yield, as of the date of
funding of the Draw 2 Bridge Loan, on
the 10.25% Senior Notes due 2010 of
Charter. If the Draw 2 Bridge Loan is
not repaid in whole by any Step-Up Date
following the funding of the Draw 2
Bridge Loan, the interest rate on such
outstanding Bridge Loan will increase on
such Step-Up Date by an amount equal to
the increase in interest rate on Draw 1
Bridge Loan on such Step-Up Date.
Notwithstanding the foregoing, except in
the case of default interest described
below, at no time will the interest rate
in effect on the Bridge Loans be less
than 9% per annum or exceed 15% per
annum.
Interest will be payable quarterly in
arrears and on the date of any
prepayment of the Bridge Loans.
<PAGE> 9
Notwithstanding the foregoing, after the
occurrence and during the continuance of
an Event of Default (to be defined in
the Bridge Loan Agreement), interest
will accrue on the Bridge Loans at the
then applicable rate plus 200 basis
points per annum.
USE OF PROCEEDS To fund Charter's accelerated capital
expenditure plan.
MANDATORY
REPAYMENT The net cash proceeds received by
Charter or any of its affiliates from (i)
any direct or indirect public offering or
private placement of any debt or equity
securities by Charter or any subsidiary of
Charter, (ii) any future bank borrowings
(other than under any of the existing credit
facilities of Charter and its Subsidiaries
(the "Credit Facilities") as in effect on
the Closing Date and an additional $590
million permitted to be incurred under the
greenshoe for the Falcon credit facility;
provided that the aggregate amount under the
Credit Facilities, including the Falcon
credit facility, does not exceed $9 billion)
and (iii) any future asset sales (subject to
certain ordinary course exceptions and other
exceptions to be agreed) by Charter or any
subsidiary of Charter will be used to redeem
the Bridge Loans in each case at 100% of the
principal amount of the Bridge Loans
redeemed plus accrued interest to the date
of the redemption subject, in the case of
clauses (ii) and (iii) only, to the terms of
the existing Credit Facilities or indentures
requiring prepayment of any amounts
outstanding thereunder.
CHANGE OF
CONTROL Each holder of Bridge Loans will be
entitled to require Charter, and Charter
must offer, to repay the Bridge Loans held
by such holder at a price of 100% of
principal amount, plus accrued interest,
upon the occurrence of a Change of Control
(to be defined in the Bridge Loan Agreement)
of Charter, subject to the optional
redemption provisions described below.
OPTIONAL
REPAYMENT The Bridge Loans may be prepaid, in
whole or in
<PAGE> 10
part, at the option of Charter at any time
upon three business days' written notice at
a price equal to 100% of the principal
amount thereof plus accrued interest to the
date of repayment.
PAYMENTS Payments by Charter will be made by wire
transfer of immediately available funds.
TRANSFERABILITY AND
PARTICIPATIONS Each of the Lenders will be free (with
the consent of the Administrative Agent, in
its sole discretion) to sell or transfer all
or any part of or any participation in any
of the Bridge Loans to any third party and
to pledge any or all of the Bridge Loans to
any commercial bank or other institutional
lender or the Federal Reserve Bank, to the
extent permitted by law.
MODIFICATION OF
THE BRIDGE LOANS Modification of the Bridge Loans may be
made with the consent of Lenders holding
greater than 50% of the Bridge Loans then
outstanding, except that no modification or
change may extend the maturity of the Bridge
Loans or time of payment of interest of the
Bridge Loans, reduce the rate of interest or
the principal amount of the Bridge Loans,
alter the redemption provisions of the
Bridge Loans or reduce the percentage of
holders necessary to modify or change the
Bridge Loans without the consent of Lenders
holding 100% of the Bridge Loans affected
thereby.
COST AND
YIELD PROTECTION The Lenders will receive cost and yield
protection customary for facilities and
transactions of this type, including, but
not limited to taxes (including but not
limited to gross-up provisions for
withholding taxes imposed by the United
States or any State thereof as a result of a
change in law, and income taxes associated
with all gross-up payments), changes in
capital requirements, guidelines or policies
or their interpretation or application,
illegality, change in circumstances,
reserves and other provisions deemed
necessary by the Lenders to provide
customary protection for U.S. and non-U.S.
financial institutions.
CONDITIONS
<PAGE> 11
PRECEDENT The several obligations of the Lenders
to make, or cause one of their respective
affiliates to make, the Bridge Loans will be
subject to closing conditions deemed
appropriate by the Lenders for financings of
this kind generally and for this transaction
in particular, including, without
limitation, the following closing
conditions:
1. Defaults Under Financing Agreements.
There shall not exist any default or
event of default under any of the
Credit Facilities, the Bridge Loans,
the Bridge Loan Agreement or any of
the other documents to be executed
in connection therewith (the "LOAN
DOCUMENTS"), or under other material
indebtedness of Charter or its
subsidiaries.
2. Due Diligence. Each of the Lenders
shall have conducted a due diligence
review in form, scope and substance
satisfactory to such Lender and
shall be satisfied with the results
thereof. Such review may include but
may not be limited to an examination
of (i) the capitalization, corporate
and ownership structure of Charter
and its subsidiaries, (ii)
accounting, legal, regulatory, tax,
labor, insurance, pension and
environmental liabilities, actual or
contingent (which, at the request of
the Lenders, shall include an
environmental audit satisfactory to
the Lenders and their counsel),
(iii) material contracts, leases and
debt agreements and (iv) the general
business, operations, financial
condition, management, prospects and
value of Charter and its
subsidiaries.
The Lenders shall not have become
aware of any information relating to
conditions or events not previously
described to the Lenders or
constituting new information or
additional developments concerning
conditions or events previously
disclosed to the Lenders which they,
in their judgment, believe may have
a material adverse effect on the
condition (financial or otherwise),
assets, liabilities (contingent or
<PAGE> 12
otherwise), properties, solvency,
business, management or prospects of
Charter.
3. Absence of Certain Changes. No
material change in the capital
stock, liabilities or long- term
debt of Charter and its subsidiaries
(other than increases in liabilities
and long-term debt contemplated by
and set forth in the supplemental
unaudited pro forma data in
Charter's Form 10-K for the fiscal
year ended December 31, 1999 and
those incurred in the ordinary
course of business consistent with
past practice) or any material
adverse change, or any development
involving a prospective material
adverse change, in or affecting the
general affairs, management,
financial position, stockholders'
equity, results of operations or
prospects of Charter, shall have
occurred since December 31, 1999
(the date of the most recent
financial statements that have been
delivered to the Lenders as of the
date hereof) and no material
inaccuracy in such financial
statements shall exist. No Change of
Control shall have occurred. On or
after the date hereof (i) no
downgrading (other than a
downgrading resulting from the
execution of the Commitment Letter
or funding of the Bridge Loans)
shall have occurred in the rating
accorded Charter's debt securities
by any "nationally recognized
statistical rating organization," as
that term is defined by the
Securities and Exchange Commission
for purposes of Rule 436(g)(2) under
the Act, and (ii) no such
organization shall have publicly
announced that it has under
surveillance or review, with
possible negative implications, its
rating of any of Charter's debt
securities, excluding any such
surveillance or review caused by the
execution of the Commitment Letter
or funding of the Bridge Loans.
4. Documentation, Legal Matters, etc.
The Bridge Loan Agreement and the
other definitive documentation
evidencing the Bridge Loans
<PAGE> 13
shall be prepared by counsel to the
Administrative Agent and shall be in
form and substance reasonably
satisfactory to the Administrative
Agent and Charter. All other matters
relating to the Bridge Loan
Agreement shall be reasonably
satisfactory to Charter and the
Administrative Agent in all respects
and the Lenders shall have received
such additional certificates, legal
and other opinions, in form and
substance reasonably satisfactory to
the Administrative Agent and its
counsel, and such other
documentation as it shall request.
5. Market Disruption. There shall not
have occurred any disruption or
adverse change, as determined by
MSSF in its sole discretion, in the
financial or capital markets
generally, or in the markets for
bridge loan syndication, high yield
debt or equity securities in
particular or affecting the
syndication or funding of bridge
loans (or the refinancing thereof)
that may have a material adverse
impact on the ability to sell or
place Debt Securities or to
syndicate the Bridge Loans.
6. Approvals and Consents. All
governmental, shareholder and
third-party approvals and consents
necessary or, in the reasonable
opinion of the Administrative Agent,
desirable in connection with the
Bridge Loans shall have been
received and shall be in full force
and effect.
7. Litigation, etc. There shall not
exist any action, suit,
investigation, litigation or
proceeding pending or threatened in
any court or before any arbitrator
or governmental authority that, in
the reasonable opinion of the
Administrative Agent, affects any of
the transactions contemplated
hereby, or that could have a
material adverse effect on Charter
and its subsidiaries.
8. Availability Under Credit
Facilities. Charter shall have
adequate availability under the
Credit
<PAGE> 14
Facilities, in the sole reasonable
judgment of the Administrative
Agent.
9. Payment of Fees and Expenses. All
fees and expenses due to the
Lenders, MSSF, Morgan Stanley or the
Administrative Agent on or before
the closing date pursuant to the
Commitment Letter, the Fee Letter,
the Engagement Letter or otherwise
shall have been paid in full.
COVENANTS The Bridge Loan Agreement will contain
such covenants by Charter (with respect to
Charter and its subsidiaries) as are usual
and customary for financings of this kind or
as otherwise deemed appropriate by the
Administrative Agent for this transaction in
particular (in its sole discretion), based
upon the covenants in the Credit Facilities.
EVENTS OF
DEFAULT The Bridge Loan Agreement will include
such events of default (and, as appropriate,
grace periods) as are usual and customary
for financings of this kind or as otherwise
deemed appropriate by the Administrative
Agent for this transaction in particular (in
its sole discretion), based upon the events
of default in the Credit Facilities.
REPRESENTATIONS
AND WARRANTIES The Bridge Loan Agreement will contain
such representations and warranties by
Charter (with respect to Charter and its
subsidiaries) as are usual and customary for
financings of this kind or as are otherwise
deemed appropriate by the Administrative
Agent for this transaction in particular (in
its sole discretion), based upon the
representations and warranties in the Credit
Facilities.
TAXES, RESERVE
REQUIREMENTS AND
INDEMNITIES The Bridge Loan Agreement will provide
that all payments will be made free and
clear of any taxes (other than franchise
taxes and taxes on overall net income),
imposts, assessments, withholdings or other
<PAGE> 15
deductions whatsoever assessed by the United
States or any State thereof and resulting
from a change in law. Foreign Lenders will
be required to furnish to the Administrative
Agent appropriate certificates or other
evidence of exemption from U.S. federal tax
withholding.
Charter will indemnify the Lenders
against all increased costs of capital
resulting from reserve requirements or
otherwise imposed, in each case subject
to customary increased costs and capital
adequacy.
INDEMNITY The Bridge Loan Agreement will contain
customary and appropriate provisions
relating to indemnity and related matters in
a form reasonably satisfactory to the
Administrative Agent and the Lenders and
acceptable to Charter.
GOVERNING LAW AND
JURISDICTION The Bridge Loan Agreement will provide
that Charter will submit to the
non-exclusive jurisdiction and venue of the
federal and state courts of the State of New
York and will waive any right to trial by
jury. New York law will govern the Loan
Documents.
The foregoing is intended to summarize certain basic terms of the
Bridge Loans. It is not intended to be a definitive list of all of the
requirements of the Lenders in connection with the Bridge Loans.
<PAGE> 16
EXHIBIT 1 TO ANNEX A
SUMMARY OF TERMS AND CONDITIONS OF SENIOR TERM LOANS AND EXCHANGE NOTES
Capitalized terms used herein have the meanings assigned to them in the
Summary of Terms and Conditions of Bridge Loans to which this Exhibit 1 is
attached.
SENIOR TERM LOANS
On the Maturity Date, so long as no Conversion Default has occurred and
is continuing, the outstanding Bridge Loans will be automatically converted into
Senior Term Loans. The Senior Term Loans will be governed by the provisions of
the Bridge Loan Agreement and, except as expressly set forth below, the Senior
Term Loans will have the same terms as the Bridge Loans.
MATURITY The Senior Term Loans will mature on the
ninth anniversary of the Maturity Date.
INTEREST RATE The Senior Term Loans will initially
bear interest at a rate per annum equal to
the sum of (i) greater of (a) the interest
rate applicable to the Draw 1 Bridge Loan on
the Maturity Date (after giving effect to
any applicable step-up) and (b) the interest
rate applicable to the Draw 2 Bridge Loan on
the Maturity Date (after giving effect to
any applicable step-up) plus (ii) 50 bps. If
the Senior Term Loans are not repaid within
90 days following the Maturity Date, the
interest rate on the Senior Term Loans will
increase by 50 basis points at the end of
such 90-day period and will increase by an
additional 50 basis points at the end of
each 90-day period thereafter.
Notwithstanding the foregoing, except in the
case of default interest described below, at
no time will the interest rate in effect on
the Senior Term Loans be less than 9% per
annum or exceed 15% per annum.
Interest on the Senior Term Loans will
be payable quarterly in arrears and on
the date of any prepayment of such
Senior Term Loans.
Notwithstanding the foregoing, after the
occurrence and during the continuance of
an Event of Default, interest will
accrue on the Senior Term Loans at the
then applicable rate plus 200 basis
points per
<PAGE> 17
annum.
<PAGE> 18
SENIOR EXCHANGE NOTES
At any time on or after the Maturity Date, upon five or more business
days prior notice, Senior Term Loans may, at the option of a Lender, be
exchanged for a principal amount of Exchange Notes equal to 100% of the
aggregate principal amount of the Senior Term Loans so exchanged in connection
with a transfer of Exchange Notes to an unaffiliated third party. No Exchange
Notes will be issued until Charter receives requests to issue at least $25.0
million in aggregate principal amount of Exchange Notes. Charter will issue
Exchange Notes under an indenture which complies with the Trust Indenture Act of
1939, as amended (the "INDENTURE"). Charter will appoint a trustee reasonably
acceptable to the holders of the Bridge Loans. The Indenture will be fully
executed and delivered on the Closing Date and the Exchange Notes will be fully
executed and deposited into escrow on the Closing Date.
MATURITY The Exchange Notes will mature on the
ninth anniversary of the Maturity Date.
INTEREST RATE Each Exchange Note will bear interest at
a fixed rate equal to the greater of (x) the
interest rate on the Senior Term Loans on
the date of issuance of such Exchange Notes
or (y) the bid side yield on Charter's
currently outstanding 10.25% Senior Notes
due 2010, on the date prior to the date of
issuance of the Exchange Notes; provided
that in no event will the interest rate in
effect on the Exchange Notes be less than 9%
or exceed 15% per annum.
OPTIONAL
REDEMPTION Exchange Notes will be non-callable
until the fifth anniversary of the Closing
Date. Thereafter, each Exchange Note will be
callable at par plus accrued interest plus a
premium equal to one half of the coupon on
such Exchange Note, which premium shall
decline ratably on each yearly anniversary
to zero on the date that is two years prior
to the maturity of the Exchange Notes.
DEFEASANCE
PROVISIONS OF
EXCHANGE NOTES Customary.
MODIFICATION Customary.
REGISTRATION
RIGHTS Charter will file within 300 days after
the Closing Date and will use all
commercially reasonable efforts to cause to
become effective as soon thereafter as
practicable, a shelf registration statement
with respect to the Exchange Notes (a "SHELF
REGISTRATION STATEMENT"). If a Shelf
Registration Statement is filed and becomes
effective, Charter will use commercially
reasonable efforts to keep such registration
statement effective and available (subject
to customary exceptions) until it is no
longer needed to permit unrestricted resales
of the Exchange Notes. If within 90 days
from the Maturity Date (the
<PAGE> 19
"EFFECTIVENESS DATE") a Shelf Registration
Statement for the Exchange Notes has not
been declared effective because Charter has
failed to use commercially reasonable
efforts to have it become effective, then
Charter will pay liquidated damages in the
form of increased interest of 50 basis
points per annum on the principal amount of
Exchange Notes and Senior Term Loans
outstanding to holders of such Exchange
Notes and Senior Term Loans who are unable
freely to transfer Exchange Notes from and
including the 9lst day after the Maturity
Date to but excluding the effective date of
such Shelf Registration Statement. On the
90th day after the Effectiveness Date, if a
Shelf Registration Statement for the
Exchange Notes has not been declared
effective because Charter has failed to use
commercially reasonable efforts to have it
become effective, the liquidated damages
shall increase by 50 basis points per annum,
and on each 90 day anniversary of the
Effectiveness Date thereafter, if a Shelf
Registration Statement for the Exchange
Notes has not been declared effective
because Charter has failed to use
commercially reasonable efforts to have it
become effective, shall increase by 50 basis
points per annum, to a maximum increase in
interest of 100 basis points. Charter will
also pay such liquidated damages for any
period of time (subject to customary
exceptions) following the effectiveness of a
Shelf Registration Statement that such Shelf
Registration Statement is not available for
sales thereunder. All accrued liquidated
damages will be paid on each interest
payment date.
COVENANTS The indenture relating to the Exchange
Notes will include covenants that are
substantially similar to those contained in
the indenture governing Charter's 10.25%
Senior Notes due 2010, but more restrictive
in certain limited respects.
EVENTS OF DEFAULT The indenture relating to the Exchange
Notes will provide for Events of Default
similar to those contained in the indenture
governing Charter's 10.25% Senior Notes due
2010.
COUNSEL FOR
THE LENDERS Shearman & Sterling.
The foregoing is intended to summarize certain basic terms of the
Senior Term Loans and Exchange Notes. It is not intended to be a definitive list
of all of the requirements of the Lenders in connection with the Senior Term
Loans and Exchange Notes.
<PAGE> 1
EXHIBIT 12.1
CHARTER COMMUNICATIONS HOLDINGS, LLC
RATIO OF EARNINGS TO FIXED CHARGES CALCULATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
Charter Communications Properties Holdings, LLC Charter Communications Holdings, LLC
1/1/98 through 12/24/98 through
1996 1997 12/23/98 12/31/98 1999
---- ---- -------- -------- ----
<S> <C> <C> <C> <C> <C>
EARNINGS
Loss from Continuing Operations
before Extraordinary Item $ (2,723) $ (4,623) $ (17,222) $ (5,277) $(578,130)
Fixed Charges 4,442 5,283 17,614 (2,332) 490,359
--------- --------- --------- --------- ---------
Earnings $ 1,719 $ 660 $ 392 $ (7,609) $ (87,771)
========= ========= ========= ========= =========
FIXED CHARGES
Interest Expense $ 4,415 $ 5,120 $ 17,277 $ (2,353) $ 477,799
Amortization of Debt Costs -- 123 267 -- 10,200
Interest Element of Rentals 27 40 70 21 2,360
Total Fixed Charges $ 4,442 $ 5,283 $ 17,614 $ (2,332) $ 490,359
========= ========= ========= ========= =========
Ratio of Earnings to Fixed Charges (1) -- -- -- -- --
========= ========= ========= ========= =========
</TABLE>
(1) Earnings for the years ended December 31, 1996 and 1997, for the periods
from January 1, 1998 through December 23, 1998, and from December 24, 1998
through December 31, 1998, and for the year ended December 31, 1999, were
insufficient to cover fixed charges by $2,723, $4,623, $17,222, $5,277 and
$578,130, respectively. As a result of such deficiencies, the ratios are not
presented above.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
covering the audited financial statements of Charter Communications Holdings,
LLC and subsidiaries, CCA Group, CharterComm Holdings, L.P. and subsidiaries,
Long Beach Acquisition Corp., Sonic Communications Cable Television Systems,
Greater Media Cablevision Systems, Marcus Cable Holdings, LLC and subsidiaries
for the three months ended March 31, 1999, Helicon Partners I, L.P. and
affiliates for the seven months ended July 30, 1999, and CC V Holdings, LLC and
subsidiaries, and the audited supplemental financial statements of Charter
Communications Holdings, LLC and subsidiaries, (and to all references to our
Firm) included in or made a part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri
April 13, 2000
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Charter Communications, Inc.:
We consent to the inclusion in Amendment No. 1 to the registration statement on
Form S-4 of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report on the consolidated balance sheets of
Marcus Cable Holdings, LLC and subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of operations, members' equity/partners'
capital and cash flows for each of the years in the three-year period ended
December 31, 1998 included herein and to the reference to our firm under the
heading "Experts" in the registration statement.
/s/ KPMG LLP
Dallas, Texas
April 13, 2000
<PAGE> 1
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 22, 1999 (except for Note 11, as to which
the date is February 24, 1999), with respect to the consolidated financial
statements of Renaissance Media Group LLC included in Amendment No. 1 to the
Registration Statement on Form S-4 (No. 333-77499) and related Prospectus of
Charter Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation for the registration of $1,532,000,000 Senior Notes and Senior
Discount Notes.
/s/ ERNST & YOUNG LLP
New York, New York
April 17, 2000
<PAGE> 1
Exhibit 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 22, 1999, with respect to the combined
financial statements of the Picayune MS, Lafourche LA, St. Tammany LA, St.
Landry LA, Pointe Coupee LA and Jackson TN cable television systems included in
Amendment No. 1 to the Registration Statement on Form S-4 (No. 333-77499) and
related Prospectus of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation for the registration of
$1,532,000,000 Senior Notes and Senior Discount Notes.
/s/ ERNST & YOUNG LLP
New York, New York
April 17, 2000
<PAGE> 1
Exhibit 23.6
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Charter Communications, Inc.:
We consent to the inclusion in Amendment No. 1 to the registration statement on
Form S-4 of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report relating to the combined balance
sheets of Helicon Partners I, L.P. and affiliates as of December 31, 1997 and
1998 and the related combined statements of operations, changes in partners'
deficit, and cash flows for each of the years in the three-year period ended
December 31, 1998 included herein and to the reference to our firm under the
heading "Experts" in the registration statement.
/s/ KPMG LLP
New York, New York
April 13, 2000
<PAGE> 1
Exhibit 23.7
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 1 to the Registration
Statement on Form S-4 of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation of our report dated January 6, 2000,
relating to the combined financial statements of InterMedia Cable Systems, which
appears in such Amendment No. 1 to the Registration Statement. We also consent
to the reference to us under the heading "Experts" in such Amendment No. 1 to
the Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
April 13, 2000
<PAGE> 1
Exhibit 23.8
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Charter Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation of:
* Our reports dated March 19, 1999, relating to the financial statements
of Rifkin Acquisition Partners, L.L.L.P., and Rifkin Cable Income
Partners LP for the year ended December 31, 1998, which appear in such
Registration Statement; and
* Our reports dated February 15, 2000, relating to the financial
statements of Rifkin Acquisition Partners, L.L.L.P., Rifkin Cable Income
Partners LP, Indiana Cable Associates, Ltd and R/N South Florida Cable
Management Limited Partnership for the period ended September 13, 1999,
which appear in such Registration Statement.
We also consent to the references to us under the headings "Experts" in
such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
Denver, Colorado
April 17, 2000
<PAGE> 1
Exhibit 23.9
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 19, 1999, with respect to the consolidated
financial statements of R/N South Florida Cable Management Limited Partnership
and Indiana Cable Associates, Ltd. included in Amendment No. 1 to the
Registration Statement on Form S-4 and related Prospectus of Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation for the registration of $1,532,000,000 Senior Notes and Senior
Discount Notes.
/s/ ERNST & YOUNG LLP
Denver, Colorado
April 13, 2000
<PAGE> 1
Exhibit 23.10
Consent Of Independent Accountants
We hereby consent to the use in this Registration Statement on Amendment No. 1
to Form S-4 for Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation (i) of our report dated March 30, 1999, except as
to the agreement with Charter Communications, Inc. under which Charter
Communications, Inc. agreed to purchase Avalon Cable LLC's cable television
systems and assume some of their debt described in Note 12 which is as of May
13, 1999, relating to the financial statements of Avalon Cable LLC as of
December 31, 1998 and 1997 and for the year ended December 31, 1998 and for the
period from September 4, 1997 (inception) through December 31, 1997; (ii) of our
report dated March 30, 1999, except as to the agreement with Charter
Communications, Inc. under which Charter Communications, Inc. agreed to purchase
Avalon Cable LLC's cable television systems and assume some of their debt
described in Note 13 which is as of May 13, 1999, relating to the financial
statements of Avalon Cable of Michigan Holdings, Inc., as of December 31, 1998
and 1997 and for the year ended December 31, 1998 and for the period from
September 4, 1997 (inception) through December 31, 1997; and (iii) of our report
dated March 30, 1999 relating to the consolidated financial statements of Cable
Michigan, Inc. and Subsidiaries as of December 31, 1997 and November 5, 1998 and
for each of the two years in the period ended December 31, 1997 and for the
period from January 1, 1998 through November 5, 1998 which appear in such
Registration Statement. We also consent to the references to us under the
headings "Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
April 17, 2000
<PAGE> 1
Exhibit 23.11
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Amendment No. 1
to Form S-4 of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report dated March 30, 1999 relating to the
combined financial statements of the Combined Operations of Pegasus Cable
Television of Connecticut, Inc. and the Massachusetts Operations of Pegasus
Cable Television, Inc. as of December 31, 1996, and 1997 and June 30, 1998 and
for each of the three years in the period ended December 31, 1997 and the period
from January 1, 1998 through June 30, 1998 which appear in such Registration
Statement. We also consent to the references to us under the headings "Experts"
in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
April 17, 2000
<PAGE> 1
Exhibit 23.12
Consent Of Independent Accountants
We hereby consent to the use in this Registration Statement on Amendment No. 1
to Form S-4 for Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report dated February 13, 1998, relating to
the financial statements of Amrac Clear View, a Limited Partnership, as of
December 31, 1997 and 1996 and for the three years in the period ended December
31, 1997 which appear in such Registration Statement. We also consent to the
references to us under the headings "Experts" in such Registration Statement.
/s/ Greenfield, Altman, Brown, Berger & Katz, P.C.
Canton, Massachusetts
April 17, 2000
<PAGE> 1
Exhibit 23.13
Consent Of Independent Accountants
We hereby consent to the use in this Registration Statement on Amendment No. 1
to Form S-4 for Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report dated September 11, 1998, relating to
the financial statements of Amrac Clear View, a Limited Partnership, as of May
28, 1998 and for the period January 1, 1998 through May 28, 1998 which appear in
such Registration Statement. We also consent to the references to us under the
headings "Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 17, 2000
<PAGE> 1
Exhibit 23.14
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 2, 2000, with respect to the consolidated
financial statements of Falcon Communications, L.P. included in Amendment No. 1
to the Registration Statement on Form S-4 (No. 333-77499) and related Prospectus
of Charter Communications Holdings, LLC and Charter Communications Holdings
Capital Corporation for the registration of $1,532,000,000 of Senior Notes and
Senior Discount Notes.
We also consent to the use of our report dated March 2, 2000, with respect
to the combined financial statements of CC VII Holdings, LLC - Falcon Systems
not separately included in Amendment No. 1 to the Registration Statement on
Form S-4 (No. 333-77499) and related Prospectus of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital Corporation for the
registration of $1,532,000,000 of Senior Notes and Senior Discount Notes.
/s/ ERNST & YOUNG LLP
Los Angeles, California
April 14, 2000
<PAGE> 1
Exhibit 23.15
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Tele-Communications, Inc.:
We consent to the inclusion in Amendment No. 1 to the registration statement on
Form S-4 of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report on the combined balance sheets of the
TCI Falcon Systems (as defined in Note 1 to the combined financial statements)
as of September 30, 1998 and December 31, 1997, and the related combined
statements of operations and parent's investment, and cash flows for the
nine-month period ended September 30, 1998 and for each of the years in the
two-year period ended December 31, 1997 included herein and to the reference to
our firm under the heading "Experts" in the registration statement.
/s/ KPMG LLP
Denver, Colorado
April 13, 2000
<PAGE> 1
Exhibit 23.16
CONSENT OF INDEPENDENT ACCOUNTANTS
The Common Member and Manager
Bresnan Communications Group LLC:
We consent to the inclusion in Amendment No. 1 to the registration statement on
Form S-4 of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation of our report on the consolidated balance sheets of
Bresnan Communications Group LLC and its subsidiaries as of December 31, 1998
and 1999 and the related consolidated statements of operations and members'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1999 included herein and to the reference to our firm under
the heading "Experts" in the registration statement.
/s/ KPMG LLP
Denver, Colorado
April 13, 2000
<PAGE> 1
Exhibit 23.17
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 28, 2000, with respect to the combined
financial statements of Fanch Cable Systems Sold to Charter Communications, Inc.
(comprised of Components of TWFanch-one Co., Components of TWFanch-two Co., Mark
Twain Cablevision, North Texas Cablevision LTD., Post Cablevision of Texas L.P.,
Spring Green Communications L.P., Fanch Narragansett CSI L.P., Cable Systems
Inc., ARH, and Tioga) included in Amendment No. 1 to the Registration Statement
on Form S-4 (No. 333-77499) and related Prospectus of Charter Communications
Holdings, LLC and Charter Communications Holdings Capital Corporation for the
registration of $1,532,000,000 Senior Notes and Senior Discount Notes.
We also consent to the use of our report dated February 11, 2000, with
respect to the consolidated financial statements of Charter Communications VI
Operating Company, LLC and subsidiaries not separately included in Amendment No.
1 to the Registration Statement on Form S-4 (No. 333-77499) and related
Prospectus of Charter Communications Holdings, LLC and Charter Communications
Holdings Capital Corporation for the registration of $1,532,000,000 of Senior
Notes and Senior Discount Notes.
/s/ ERNST & YOUNG LLP
Denver, Colorado
April 13, 2000
<PAGE> 1
Exhibit 23.18
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 16, 1998, with respect to the combined
financial statements of the Picayune MS, Lafourche LA, St. Tammany LA, St.
Landry LA, Pointe Coupee LA and Jackson TN cable television systems included in
Amendment No. 1 to the Registration Statement on Form S-4 (No. 333-77499) and
related Prospectus of Charter Communications Holdings, LLC and Charter
Communications Holdings Capital Corporation for the registration of
$1,532,000,000 Senior Notes and Senior Discount Notes.
/s/ ERNST & YOUNG LLP
New York, New York
April 17, 2000
<PAGE> 1
Exhibit 23.19
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 4, 1999 (except for Note 11, as to which the date
is June 29, 1999), with respect to the consolidated financial statements of
Renaissance Media Group LLC included in Amendment No. 1 to the Registration
Statement on Form S-4 (No. 333-77499) and related Prospectus of Charter
Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation for the registration of $1,532,000,000 Senior Notes and Senior
Discount Notes.
/s/ ERNST & YOUNG LLP
New York, New York
April 17, 2000
<PAGE> 1
Exhibit 23.20
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated March 9, 1999, March 10, 1999, and March 9, 1999,
with respect to the financial statements of North Texas Cablevision LTD., Spring
Green Communications L.P., and Cable Systems, Inc. and Fanch Narragansett CSI
Limited Partnership, respectively, included in Amendment No. 1 to the
Registration Statement on Form S-4 (No. 333-77499) and related Prospectus of
Charter Communications Holdings, LLC and Charter Communications Holdings Capital
Corporation for the registration of $1,532,000,000 Senior Notes and Senior
Discount Notes.
/s/ SHIELDS & CO.
Denver, Colorado
April 13, 2000
