<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______ to ______.
Commission File Numbers:
333-77499
333-77499-01
CHARTER COMMUNICATIONS HOLDINGS, LLC
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION*
(Exact names of registrants as specified in their charters)
Delaware 43-1843179
-------- ----------
Delaware 43-1843177
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12444 Powerscourt Drive - Suite 100
St. Louis, Missouri 63131
------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (314) 965-0555
--------------
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No __
Number of shares of Charter Communications Holdings Capital Corporation common
stock outstanding as of November 13, 2000: 100.
* Charter Communications Holdings Capital Corporation meets the conditions set
forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore
filing this Form with the reduced disclosure format.
<PAGE> 2
CHARTER COMMUNICATIONS HOLDINGS, LLC
CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION
FORM 10-Q - FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
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Part I. Financial Information
---------------------
<S> <C>
Item 1. Financial Statements - Charter Communications Holdings, LLC and Subsidiaries. 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 31
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K. 32
Signatures. 33
</TABLE>
NOTE: Separate financial statements of Charter Communications Holdings
Capital Corporation have not been presented as this entity had no
operations and substantially no assets or equity. Accordingly,
management has determined that these financial statements are not
material.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This Report includes forward-looking statements regarding, among other things,
our plans, strategies and prospects, both business and financial. Although we
believe that our plans, intentions and expectations reflected in or suggested by
these forward-looking statements are reasonable, we cannot assure you that we
will achieve or realize these plans, intentions or expectations. Forward-looking
statements are inherently subject to risks, uncertainties and assumptions. Many
of the forward-looking statements contained in this Report may be identified by
the use of forward-looking words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential," among others. Important
factors that could cause actual results to differ materially from the
forward-looking statements we make in this Report are set forth in this Report
and in other reports or documents that we file from time to time with the
Securities and Exchange Commission and include, but are not limited to:
- Our plans to achieve growth by offering new products and services;
- 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.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999*
------------------ -----------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 44,992 $ 114,096
Accounts receivable, less allowance for doubtful accounts of $10,184
and $11,471, respectively 190,479 93,743
Receivables from manager of cable systems - related parties 12,095 --
Prepaid expenses and other 43,062 34,513
----------- -----------
Total current assets 290,628 242,352
----------- -----------
INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment, net of accumulated depreciation of
$906,641 and $317,079, respectively 4,640,836 3,490,573
Franchises, net of accumulated amortization of $1,562,235 and $650,476,
respectively 17,273,858 14,985,793
----------- -----------
21,914,694 18,476,366
----------- -----------
OTHER ASSETS 219,516 220,759
----------- -----------
$22,424,838 $18,939,477
=========== ===========
LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,201,931 $ 704,734
Payables to manager of cable systems - related parties -- 6,713
----------- -----------
Total current liabilities 1,201,931 711,447
----------- -----------
LONG-TERM DEBT 12,167,729 8,936,455
----------- -----------
LOANS PAYABLE - RELATED PARTIES -- 1,079,163
----------- -----------
DEFERRED MANAGEMENT FEES - RELATED PARTIES 13,751 21,623
----------- -----------
OTHER LONG-TERM LIABILITIES 162,849 142,836
----------- -----------
MINORITY INTEREST 637,353 --
----------- -----------
MEMBER'S EQUITY:
Member's equity (217,585,246 units issued and outstanding at
September 30, 2000 and December 31, 1999) 8,239,483 8,045,737
Accumulated other comprehensive income 1,742 2,216
----------- -----------
Total member's equity 8,241,225 8,047,953
----------- -----------
$22,424,838 $18,939,477
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
---------
* Agrees with the supplemental audited consolidated balance sheet included
in Amendment No. 1 to the Company's Registration Statement on Form S-4.
3
<PAGE> 4
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------- ---------------------
<S> <C> <C>
REVENUES $ 838,961 $ 376,189
----------- -----------
OPERATING EXPENSES:
Operating, general and administrative 426,010 194,716
Depreciation 310,378 71,898
Amortization 312,829 119,541
Option compensation expense 8,116 21,094
Corporate expense charges - related parties 14,055 7,236
----------- -----------
1,071,388 414,485
----------- -----------
Loss from operations (232,427) (38,296)
OTHER INCOME (EXPENSE):
Interest expense (283,221) (131,081)
Interest income 607 8,241
Other, net (2,314) (3,017)
----------- -----------
(284,928) (125,857)
----------- -----------
Loss before minority interest (517,355) (164,153)
MINORITY INTEREST EXPENSE (3,173) --
----------- -----------
Net loss $ (520,528) $ (164,153)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 5
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------- ---------------------
<S> <C> <C>
REVENUES $ 2,355,345 $ 845,182
----------- -----------
OPERATING EXPENSES:
Operating, general and administrative 1,203,987 436,057
Depreciation 860,166 150,626
Amortization 912,598 290,765
Option compensation expense 34,205 59,288
Corporate expense charges - related parties 41,570 18,309
----------- -----------
3,052,526 955,045
----------- -----------
Loss from operations (697,181) (109,863)
OTHER INCOME (EXPENSE):
Interest expense (780,111) (288,750)
Interest income 6,077 18,326
Other, net (2,780) (177)
----------- -----------
(776,814) (270,601)
----------- -----------
Loss before minority interest and extraordinary item (1,473,995) (380,464)
MINORITY INTEREST EXPENSE (7,864) --
----------- -----------
Loss before extraordinary item (1,481,859) (380,464)
EXTRAORDINARY ITEM - Loss from early extinguishment of debt -- 7,794
----------- -----------
Net loss $(1,481,859) $ (388,258)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 6
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
-------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(1,481,859) $ (388,258)
Adjustments to reconcile net loss to net cash provided by operating activities:
Minority interest expense 7,864 --
Depreciation and amortization 1,772,765 441,391
Option compensation expense 34,205 59,288
Non-cash interest expense 126,565 66,028
Loss from early extinguishment of debt -- 7,794
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (85,250) (2,358)
Prepaid expenses and other 14,224 (11,665)
Accounts payable and accrued expenses 517,594 76,591
Payables to manager of cable systems - related parties,
including deferred management fees (71,163) 17,887
Other operating activities 2,324 (1,087)
----------- -----------
Net cash provided by operating activities 837,269 265,611
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,810,952) (385,301)
Note receivable from parent company -- (51,458)
Payments for acquisitions, net of cash acquired (74,619) (2,659,384)
Loan to Marcus Cable Holdings, LLC -- (1,680,142)
Other investing activities (14,807) (11,106)
----------- -----------
Net cash used in investing activities (1,900,378) (4,787,391)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt, including proceeds from Charter Holdings Notes 5,551,303 6,464,188
Repayments of long-term debt (3,437,008) (2,539,340)
Borrowings of loans payable to related parties 817,000 --
Repayments of loans payable to related parties (1,896,163) --
Payments for debt issuance costs (62,848) (107,562)
Capital contribution 47,100 1,144,290
Capital distributions (26,591) (14,786)
Other financing activities 1,212 (400)
----------- -----------
Net cash provided by financing activities 994,005 4,946,390
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (69,104) 424,610
CASH AND CASH EQUIVALENTS, beginning of period 114,096 9,573
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 44,992 $ 434,183
=========== ===========
CASH PAID FOR INTEREST $ 455,984 $ 136,626
=========== ===========
NON-CASH TRANSACTIONS:
Transfer of operating subsidiaries to the Company $ 1,228,478 $ 1,252,370
=========== ===========
Issuance of equity by parent for acquisition $ 384,621 $ 314,022
=========== ===========
Issuance of preferred equity in connection with acquisitions $ 629,489 $ 25,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
<PAGE> 7
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Charter Communications Holdings, LLC (Charter Holdings), a Delaware
limited liability company, owns and operates cable systems serving approximately
6.3 million customers. Charter Holdings currently offers a full array of
traditional cable television services and advanced bandwidth services such as
digital video and related enhancements, interactive video programming, Internet
access through television-based service, dial-up telephone modems and high-speed
cable modems. Charter Holdings is a subsidiary of Charter Communications Holding
Company, LLC (Charter Holdco), which is a subsidiary of Charter Communications,
Inc. (Charter).
Charter Holdings and its subsidiaries are collectively referred to as
the "Company" herein. All material intercompany transactions and balances have
been eliminated in consolidation.
2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of the Company have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The accompanying consolidated financial statements are unaudited;
however, in the opinion of management, such statements include all adjustments,
which consist of only normal recurring adjustments, necessary for a fair
presentation of the results for the periods presented. Interim results are not
necessarily indicative of results for a full year. For further information, see
the Company's Annual Report on Form 10-K for the year ended December 31, 1999
and Amendment No.1 to the Company's Registration Statement on Form S-4.
3. ACQUISITIONS AND TRANSFERS
On January 1, 2000, Charter Holdco and Charter Holdings effected a
number of transactions in which certain cable systems acquired by Charter Holdco
in November 1999 were contributed to Charter Holdings (the "Transferred
Systems"). Effective January 1, 2000, Charter Holdings accounted for the
contribution of the Transferred Systems as a reorganization of entities under
common control in a manner similar to a pooling of interests. The accompanying
consolidated balance sheet as of December 31, 1999, reflects this
reorganization. The accounts of the Transferred Systems are included in Charter
Holdings' financial statements from the date the Transferred Systems were
acquired by Charter Holdco.
On February 14, 2000, Charter Holdco and Charter Holdings completed the
acquisition of Bresnan Communications Company Limited Partnership (Bresnan). The
Bresnan cable systems acquired are primarily located in Michigan, Minnesota,
Wisconsin and Nebraska and serve approximately 682,100 customers at September
30, 2000.
The purchase price for Bresnan was $3.1 billion, subject to adjustment,
and was comprised of $1.1 billion in cash, $384.6 million of equity (14.8
million Class C common membership units) in Charter Holdco and $629.5 million of
equity (24.2 million Class A preferred membership units) in CC VIII, LLC (CC
VIII), a subsidiary of Charter Holdings, and $963.3 million in assumed debt. The
holders of the Class A preferred membership units are entitled to a 2% annual
return. All of the membership units received by the sellers are exchangeable on
a one-for-one basis for shares of Class A common stock of Charter. The Bresnan
sellers who acquired Class C common membership units of Charter Holdco and Class
A preferred membership units in CC VIII may have rescission rights against
Charter Holdco and Charter arising out of possible violations of Section 5 of
the Securities Act of 1933, as amended, in connection with the offers and sales
of these equity interests (see Note 5). The purchase price was
7
<PAGE> 8
allocated to assets acquired and liabilities assumed based on their relative
fair values, including amounts assigned to franchises of $2.8 billion.
In April 2000, one of Charter's subsidiaries purchased a cable system
from Falcon/Capital Cable Partners, L.P. (Capital Cable) and another cable
system from Farmington Cablevision Company (Farmington). These cable systems are
primarily located in Illinois, Indiana and Missouri and serve approximately
28,900 customers at September 30, 2000. The aggregate purchase price for these
acquisitions was $75.0 million in cash and was funded with borrowings from the
Charter Operating Credit Facilities (see Note 4).
On September 7, 2000, Charter completed a stock-for-stock merger with
Cablevision of Michigan, Inc., the owner of a cable system in Kalamazoo,
Michigan. In the merger, Charter acquired all of the outstanding stock of
Cablevision of Michigan in exchange for 11,173,376 shares of Charter's Class A
common stock valued at approximately $170.6 million. After the merger, Charter
contributed 100% of the equity interests acquired to Charter Holdco in exchange
for membership units. Charter Holdco in turn contributed the interests to
Charter Holdings. The Kalamazoo cable system has approximately 50,700 customers
at September 30, 2000.
All of the above transactions 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 date of
acquisition. The allocation of the purchase price for the Bresnan and Kalamazoo
transactions 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 allocation will not have a material
impact on the consolidated results of operations or financial position of the
Company.
Summarized pro forma operating results of the Company as though all
acquisitions completed since January 1, 1999 and the contribution of the
transferred systems, the issuance and sale of the January 2000 Charter Holdings
Notes (see Note 4) and the drawdown of the Charter Holdings Senior Bridge Loan
Facility (see Note 4) had occurred on January 1, 1999, with adjustments to give
effect to amortization of franchises, interest expense, minority interest and
certain other adjustments, follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ ----------------------------------
2000 1999 2000 1999
-------------- ----------------- -------------- ----------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues $ 842,881 $ 740,090 $2,406,986 $2,187,785
Loss from operations (233,137) (104,302) (726,998) (351,718)
Net loss (537,656) (363,278) (1,563,747) (1,108,554)
</TABLE>
The pro forma information has been presented for comparative purposes
and does not purport to be indicative of the consolidated results of operations
had these transactions been completed as of the assumed date or which may be
obtained in the future.
4. LONG-TERM DEBT
JANUARY 2000 CHARTER HOLDINGS NOTES. On January 12, 2000, Charter
Holdings and Charter Communications Holdings Capital Corporation issued notes
with a principal amount of $1.5 billion. The January 2000 Charter Holdings Notes
consist of $675.0 million 10.00% Senior Notes due 2009, $325.0 million 10.25%
Senior Notes due 2010 and $532.0 million 11.75% Senior Discount Notes due 2010.
The net proceeds were approximately $1.3 billion, after giving effect to
discounts, commissions and expenses. The proceeds from the sale of the January
2000 Charter Holdings Notes were used to finance the repurchases of debt assumed
in certain transactions, as described below.
8
<PAGE> 9
In June 2000, Charter Holdings and Charter Communications Holdings
Capital Corporation exchanged these notes for new January 2000 Charter Holdings
Notes, with substantially similar terms, except that the new January 2000
Charter Holdings Notes are registered under the Securities Act of 1933, as
amended, and, therefore, do not bear legends restricting their transfer.
CC V HOLDINGS, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "AVALON") NOTES.
In January 2000, through change of control offers and purchases in the open
market, all of the Avalon 9.375% Senior Subordinated Notes due 2008 with a
principal amount of $150.0 million were repurchased for $153.7 million. In
addition, also through change of control offers, $16.3 million in aggregate
principal amount at maturity of the Avalon 11.875% Senior Discount Notes due
2008 was repurchased for $10.5 million. As of September 30, 2000, Avalon 11.875%
notes with an aggregate principal amount of $179.8 million at maturity and an
accreted value of $124.8 million remain outstanding.
CC VII HOLDINGS, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "FALCON")
DEBENTURES. In February 2000, through change of control offers and purchases in
the open market, all of the Falcon 8.375% Senior Debentures due 2010 with a
principal amount of $375.0 million were repurchased for $388.0 million, and all
of the Falcon 9.285% Senior Discount Debentures due 2010 with an aggregate
principal amount at maturity of $435.3 million were repurchased for $328.1
million.
CC VIII, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "BRESNAN") CREDIT
FACILITIES. Upon the closing of the Bresnan acquisition on February 14, 2000,
the then-existing Bresnan credit facilities were amended and assumed. The
Bresnan credit facilities provide for borrowings of up to $900.0 million,
consisting of: two term facilities, one with a principal amount of $403.0
million (Term A) and the other with a principal amount of $297.0 million (Term
B), and a reducing revolving loan facility in the amount of $200.0 million. The
Bresnan credit facilities provide for the amortization of the principal amount
of the Term A loan facility and the reduction of the revolving loan facility
beginning March 31, 2002 with a final maturity date of June 30, 2007. The
amortization of the Term B loan facility is substantially "back-ended" with more
than ninety percent of the principal balance due on the final maturity date of
February 2, 2008. The Bresnan credit facilities also provide for an incremental
facility of up to $200.0 million that is conditioned upon receipt of additional
commitments from lenders. Amounts under the Bresnan credit facilities bear
interest at the Base Rate or the Eurodollar Rate, as defined, plus a margin of
up to 2.75%. A quarterly commitment fee of between 0.250% and 0.375% is payable
on the unborrowed balance of Term A and the revolving loan facility. At the
closing of the Bresnan acquisition, $599.9 million was borrowed to replace the
borrowings outstanding under the previous credit facilities, and an additional
$31.3 million was borrowed to fund a portion of the Bresnan purchase price. As
of September 30, 2000, $668.0 million was outstanding, and $232.0 million was
available for borrowing.
BRESNAN NOTES. Upon the closing of the Bresnan acquisition, Charter
Holdco and Charter assumed Bresnan's $170.0 million in principal amount of 8%
Senior Notes due 2009 and $275.0 million in principal amount at maturity of
9.25% Senior Discount Notes due 2009. In March 2000, all of the outstanding
Bresnan notes were repurchased at 101% of the outstanding principal amounts plus
accrued and unpaid interest or accreted value, as applicable, for a total of
$369.7 million using proceeds from the sale of the January 2000 Charter Holdings
Notes.
CHARTER COMMUNICATIONS OPERATING, LLC CREDIT FACILITIES. In March 2000,
the Charter Operating Credit Facilities were amended to increase the amount of
the supplemental credit facility to $1.0 billion. In connection with this
amendment, $600.0 million of the supplemental credit facility was exercised,
thereby increasing the total borrowing capacity to $4.7 billion. The remaining
$400.0 million of the supplemental credit facility is subject to the Company's
ability to obtain additional commitments from the lenders. As of September 30,
2000, outstanding borrowings were $3.6 billion, and the unused availability was
$1.1 billion.
CHARTER HOLDINGS SENIOR BRIDGE LOAN FACILITY. On August 4, 2000, Morgan
Stanley Senior Funding, Inc. and others, and Charter Holdings and Charter
Communications Holdings Capital Corporation entered into a senior bridge loan
agreement providing for senior increasing rate bridge loans in an aggregate
principal amount of up to $1.0 billion.
9
<PAGE> 10
On August 14, 2000, the Company borrowed $1.0 billion under the senior
bridge loan facility and used substantially all of the proceeds to repay a
portion of the amounts outstanding under the Charter Operating and Falcon
revolving credit facilities. The bridge loan initially bears interest at an
annual rate of 10.21%. If this loan is not repaid within 90 days following
August 14, 2000, the interest rate will increase by 1.25% at the end of such
90-day period and will increase by an additional 0.50% at the end of each
additional 90-day period. Unless additional special interest is assessed, the
interest rate on the bridge loan will not exceed 15% annually. If the bridge
loan has not been repaid in full by August 14, 2001, then it will be converted
to a term loan. The bridge loan matures one year from August 14, 2000 and upon
payment of any accrued and unpaid interest shall convert to a term loan that
matures on the tenth anniversary of the initial bridge loan borrowing. The term
loan will bear interest at a fixed rate equal to the greater of the applicable
rate of the bridge loan on the date on the conversion plus 0.50%, and the yield
corresponding to the bid price on Charter Holdings 10.25% notes as of the date
immediately prior to the conversion. If the term loan is not repaid within 90
days after the conversion from the bridge loan, the interest rate thereon will
increase by 0.50% at the end of each 90-day period. Unless additional special
interest is assessed, the interest rate on the term loan will not exceed 15%
annually. The term loan will mature on the tenth anniversary of the initial
senior bridge loan borrowing.
5. POSSIBLE RESCISSION LIABILITY
The Company acquired Helicon I, L.P. and affiliates (Helicon) in July
1999 and acquired Rifkin Acquisition Partners L.L.L.P. and InterLink
Communications Partners, LLLP (collectively, "Rifkin") in September 1999.
Charter Holdco acquired Falcon Communications, L.P. (Falcon) in November 1999,
and the Company acquired Bresnan in February 2000. In connection with these
acquisitions, the Rifkin, Falcon and Bresnan sellers who acquired Charter Holdco
membership units or, in the case of Bresnan, additional equity interests in a
subsidiary of Charter Holdings and the Helicon sellers who acquired shares of
Class A common stock in Charter's initial public offering may have rescission
rights against Charter and Charter Holdco arising out of possible violations of
Section 5 of the Securities Act of 1933, as amended, in connection with the
offers and sales of these equity interests.
If all of these equity holders successfully exercised their possible
rescission rights, Charter or Charter Holdco would become obligated to
repurchase all such equity interests, and the total repurchase obligation could
be as much as up approximately $1.8 billion as of September 30, 2000 (see Note
10). If Charter and Charter Holdco fail to obtain capital sufficient to fund any
required repurchases, they could seek funds from Charter Holdings and its
subsidiaries. This could adversely affect the Company's consolidated financial
condition and results of operations. These possible rescission rights expire one
year from the dates of issuance or purchase of these equity interests.
6. REVENUES
Revenues consist of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- ------------------- -------------- --------------
<S> <C> <C> <C> <C>
Basic $ 574,348 $ 264,886 $ 1,668,092 $ 593,076
Premium 57,465 33,260 171,432 76,036
Pay-per-view 5,848 8,389 21,875 18,750
Digital 25,582 1,372 49,844 2,081
Advertising sales 37,693 19,255 112,765 42,577
Data services 13,542 2,100 36,880 4,275
Other 124,483 46,927 294,457 108,387
-------------- ------------------ ------------- -------------
$ 838,961 $ 376,189 $ 2,355,345 $ 845,182
============== ================== ============= =============
</TABLE>
7. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Operating, general and administrative expenses consist of the following
(in thousands):
10
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- -------------------------------
2000 1999 2000 1999
-------------- ------------------ -------------- -------------
<S> <C> <C> <C> <C>
Programming $ 180,919 $ 85,905 $ 527,379 $ 193,852
General and administrative 144,621 64,068 404,130 145,124
Service 49,900 26,373 143,585 55,989
Marketing 14,046 11,298 45,693 24,421
Other 36,523 7,072 83,199 16,671
---------- ---------- ---------- ----------
$ 426,009 $ 194,716 $1,203,986 $ 436,057
========== ========== ========== ==========
</TABLE>
8. COMPREHENSIVE LOSS (in thousands)
Comprehensive loss was $506,921 and $164,153 for the three months ended
September 30, 2000 and 1999, respectively, and $1,469,306 and $388,258 for the
nine months ended September 30, 2000 and 1999, respectively. The Company owns
common stock of WorldGate Communications, Inc. and of Motorola, Inc. that is
classified as "available for sale" and reported at market value, with unrealized
gains and losses recorded as accumulated other comprehensive income in the
accompanying consolidate balance sheets.
9. RELATED PARTY TRANSACTIONS
In September 2000, Charter Communications Ventures, LLC, a subsidiary
of Charter Holdco, entered into a joint venture with General Instrument
Corporation (doing business as the Broadband Communications Sector of Motorola,
Inc.), Replay TV, Inc. and Interval Research Corporation, an entity controlled
by Mr. Allen, to develop and integrate digital video recording capabilities in
advanced digital set-top boxes.
10. SUBSEQUENT EVENTS
On October 19, 2000, Charter Ventures entered into a stock purchase
agreement pursuant to which Vulcan Ventures Inc., an entity controlled by Mr.
Allen, and Charter Ventures will invest $38.0 million and $37.0 million,
respectively, in exchange for 38,000 shares and 37,000 shares, respectively, of
senior convertible preferred stock of High Speed Access Corp. The preferred
stock will have a liquidation preference of $1,000 per share, will in general
share in dividends on High Speed Access common stock on an "as converted to
common stock" basis and would be convertible into common stock of High Speed
Access at a conversion rate of $5.01875 per share of High Speed Access common
stock, subject to certain adjustments. Vulcan Ventures and Charter Ventures will
be granted certain preemptive, first refusal, registration and significant board
representation rights as part of the transaction. The stock purchase agreement
is subject to approval by High Speed Access shareholders. It is anticipated that
the transaction will close in the fourth quarter 2000.
In October 2000, Charter completed a convertible debt offering for
$650.0 million in Convertible Senior Notes due in 2005 plus an additional $100.0
million pursuant to an option granted to the initial purchasers. The Convertible
Senior Notes have an annual interest rate of 5.75% and are convertible into
shares of Charter's Class A common stock at $21.56 per share. The issuance and
sale was made in a private placement pursuant to Rule 144A under the Securities
Act. The net proceeds of this issuance were contributed as equity to Charter
Holdings and used to repay a portion of amounts outstanding under the Charter
Holdings Senior Bridge Loan Facility.
In November 2000, Rifkin's, Helicon's and a portion of Falcon's
possible rescission rights with a maximum potential obligation of $741.8 million
expired without these parties requesting repurchase of their securities (see
Note 5).
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to the "Certain Trends and Uncertainties" section below in
this Management's Discussion and Analysis for a discussion of important factors
that could cause actual results to differ from expectations and non-historical
information contained herein.
INTRODUCTION
We do not believe that our historical financial condition and results of
operations are accurate indicators of future results because of certain past and
pending events, including:
(1) the merger of Marcus Cable Holdings, LLC (Marcus Holdings) with and
into Charter Communications Holdings, LLC (Charter Holdings) in March
1999;
(2) the acquisitions of charter communications Holdings Company, LLC
(Charter Holdco) and its direct and indirect subsidiaries since January
1, 1999, including the Kalamazoo acquisition;
(3) the refinancing or replacement of previous credit facilities; and
(4) the purchase of publicly held notes that had been issued by several of
our direct and indirect subsidiaries.
As of September 30, 2000, our cable systems served approximately 400% more
customers than we served as of December 31, 1998.
12
<PAGE> 13
GENERAL
Charter owns and operates cable systems serving approximately 6.3 million
customers. We currently offer our customers a full array of traditional cable
television services and advanced bandwidth services such as digital television,
interactive video programming, Internet access through television-based service,
dial-up telephone modems and high-speed cable modems. We plan to continually
enhance and upgrade these services, including adding new programming and other
telecommunications services such as interactive programming and telephony
service.
We are beginning to offer video-on-demand (VOD) service to some of our
customers. With VOD service, customers can access hundreds of movies and other
programming at any time, with digital picture quality. VOD allows customers to
pause, rewind and fast-forward programs. They can also stop a program and resume
watching it several hours later during the rental period. VOD service requires
the use of a digital set-top converter and is offered as a standard feature of
our digital service packages. Generally, customers pay for VOD on a
per-selection basis.
We have entered into an agreement to offer VOD to the Los Angeles and
Atlanta areas and other future markets with DIVA Systems Corporation, a company
providing interactive VOD products and services to the cable industry. DIVA will
provide us with hardware, software, programming and operational support as part
of this agreement. We worked with DIVA for over a year on a VOD trial with 7,000
customers in our Gwinnett County, Georgia cable system. VOD has now been
launched in this North Atlanta system, and every digital customer there can
receive VOD service. In addition, we completed a launch of VOD technology to
about 167,000 homes in the Pasadena area of the Los Angeles area in October 2000
with a planned rollout to 275,000 homes by year-end. We plan on launching VOD
service to additional markets in 2001.
We expect to be able to offer cable telephony services in the next twelve to
eighteen months in selected markets 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.
13
<PAGE> 14
The following statistics for September 30, 2000 and September 30, 1999, are
actual; the statistics for December 31, 1999, are pro forma for acquisitions
completed since that date, including the Bresnan and Kalamazoo acquisitions.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA ACTUAL
SEPTEMBER 30,2000 DECEMBER 31, 1999 SEPTEMBER 30, 1999
------------------ ----------------- ------------------
<S> <C> <C> <C>
CABLE TELEVISION
Homes Passed 10,160,200 9,970,000 5,540,700
Basic Customers 6,318,300 6,193,700 3,425,700
Basic Penetration 62.2% 62.1% 61.8%
Premium Subscriptions 4,426,200 3,144,500 2,039,000
Premium Penetration 70.1% 50.8% 59.5%
Average Monthly Revenue per
Basic Customer (quarter) $ 44.26 $ 41.13 $ 36.60
DIGITAL VIDEO
Homes Passed 7,568,100 4,675,000 897,600
Digital Customers 653,800 155,400 28,600
Penetration 8.6% 3.3% 3.2%
Digital Converters Deployed 807,900 176,600 35,300
DATA SERVICES
Homes Passed 4,580,400 4,422,000 2,589,000
Data Customers 184,600 84,400 21,900
Penetration 4.0% 1.9% 0.8%
TELEVISION-BASED INTERNET ACCESS
Homes Passed 463,700 429,000 429,000
Customers 10,100 7,100 6,200
Penetration 2.2% 1.7% 1.4%
</TABLE>
14
<PAGE> 15
ACQUISITIONS AND TRANSFERS
The following table sets forth information on our acquisitions in 1999:
<TABLE>
<CAPTION>
PURCHASE PRICE,
INCLUDING DEBT CUSTOMERS
ACQUISITION ASSUMED AS OF
DATE (IN MILLIONS) SEPTEMBER 30, 2000
---- --------------- ------------------
<S> <C> <C> <C>
Renaissance Media Group LLC 4/99 $ 459 135,100
American Cable Entertainment, LLC 5/99 240 68,700
Cable systems of Greater Media Cablevision, Inc. 6/99 500 176,800
Helicon Partners I, L.P. and affiliates 7/99 550 173,200
Vista Broadband Communications, L.L.C. 7/99 126 26,700
Cable system of Cable Satellite of South Miami, Inc. 8/99 22 8,000
Rifkin Acquisition Partners, L.L.L.P. and
InterLink Communications Partners, LLLP 9/99 1,460 463,000
Cable systems of InterMedia Capital Partners IV, L.P.
InterMedia Partners and affiliates (InterMedia) 10/99 873+ 415,300
systems swap (142,000)(a)
-------------
Cable systems of Fanch Cablevision L.P. and 273,300
Affiliates
Falcon Communications, L.P. 11/99 2,400 535,600
Avalon Cable of Michigan Holdings, Inc. (Avalon) 11/99 3,481 977,200
11/99 832 270,800
-------------- -------------
Total $10,943 3,108,400
============== =============
</TABLE>
--------
(a) As part of the October 1999 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
cable system, with customers totaling 30,000, was transferred in March
2000 after receipt of the necessary regulatory approvals. This swap is
reflected in its entirety in the 1999 acquisition table above.
In addition, in April 1999, Marcus Holdings was merged into Charter
Holdings, and the operating subsidiaries of Marcus Holdings and all of the cable
systems they owned came under the ownership of Charter Holdings. As of September
30, 2000, Marcus Holdings had 1,006,000 customers.
The following table sets forth information on transfers from Charter Holdco
to Charter Holdings in January 2000:
<TABLE>
<CAPTION>
PURCHASE
PRICE,
INCLUDING CUSTOMERS
TRANSFER DEBT ASSUMED AS OF
DATE (in millions) SEPTEMBER 30, 2000
----------- ------------- ------------------
<S> <C> <C> <C>
Fanch 1/00 2,400 535,600
Falcon 1/00 3,481 977,200
Avalon 1/00 832 270,800
-------------- -------
Total $ 6,713 1,783,600
============== =========
</TABLE>
15
<PAGE> 16
The following table sets forth information on acquisitions since January 1,
2000:
<TABLE>
<CAPTION>
PURCHASE
PRICE, CUSTOMERS
INCLUDING AS OF
ACQUISITION DEBT ASSUMED SEPTEMBER 30,
DATE (in millions) 2000
----------- ------------- ------------------
<S> <C> <C> <C>
Cable system of Interlake
Cablevision Enterprises, LLC (ICE) 2/00 $ 13 6,000
Bresnan 2/00 3,100 695,100
Cable system of Falcon/Capital
Cable Partners, L.P. 4/00 60 23,200
Cable system of Farmington
Cablevision Company 4/00 15 5,700
Cablevision of Michigan, Inc.
(Kalamazoo) 9/00 173 50,700
------- -------
Total $ 3,361 780,700
======= =======
</TABLE>
Effective January 31, 2000, Charter Holdings acquired the ICE cable system
from former affiliates of Avalon using available cash.
On February 14, 2000, Charter Holdco and Charter Holdings completed the
acquisition of Bresnan Communications Company Limited Partnership (Bresnan). The
Bresnan cable systems acquired are primarily located in Michigan, Minnesota,
Wisconsin, and Nebraska. The purchase price for Bresnan was $3.1 billion,
subject to adjustment, and was comprised of $1.1 billion in cash, $384.6 million
and $629.5 million in equity in Charter Holdco and CC VIII, LLC (CC VIII),
respectively, and approximately $963.3 million in assumed debt. The holders of
the CC VIII equity are entitled to a 2% annual return. All of the membership
units received by the sellers are exchangeable on a one-for-one basis for Class
A common stock of Charter.
The $75.0 million aggregate purchase price for the acquisitions of cable
systems from Capital Cable and Farmington was funded with borrowings from the
Charter Operating Credit Facilities (as defined herein).
On September 7, 2000, Charter completed a stock-for-stock merger with
Cablevision of Michigan, Inc., the owner of a cable system in Kalamazoo,
Michigan. In the merger, Charter acquired all of the outstanding stock of
Cablevision of Michigan in exchange for 11,173,376 shares of Charter's Class A
common stock valued at approximately $170.6 million. After the merger, Charter
contributed 100% of the equity interests acquired to Charter Holdco in exchange
for membership units. Charter Holdco in turn contributed the interests to
Charter Holdings. The Kalamazoo cable system has approximately 50,700 customers
at September 30, 2000.
OVERVIEW OF OPERATIONS
Approximately 85% and 87% of our historical revenues for the three months
and nine months ended September 30, 2000, respectively, are attributable to
monthly subscription fees charged to customers for our basic, expanded basic,
premium and digital cable television programming services, Internet access
through television-based service, dial-up telephone modems and high-speed cable
modem service, equipment rental and ancillary services provided by our cable
systems. In addition, we derive other revenues from installation and
reconnection fees charged to customers to commence or reinstate service,
pay-per-view programming, where users are charged a fee for individual programs
requested, advertising revenues and commissions related to the sale of
merchandise by home shopping services.
We have generated increased revenues in each of the past three years,
primarily through internal customer growth, basic and expanded tier rate
increases, customer growth from acquisitions, and revenues from new services and
products. These new services and products are expected to significantly
contribute to our future revenues provided that the necessary equipment is
available from our vendors.
One of these services is digital cable, which provides customers with
additional programming options. During
16
<PAGE> 17
the first nine months of 2000, we added an average of 12,800 digital customers
per week compared to our original estimate of 10,000 customers per week
throughout the year. During the third quarter of 2000, we added approximately
21,400 digital customers per week and we anticipate similar results for the
remaining quarter. This success was largely due to an innovative promotion
conducted in July and August.
We are also offering high-speed Internet access to the World Wide Web via
cable modems. The number of customers signing up for our high-speed Internet
access service also continues to increase. As of the end of the third quarter of
2000, we served approximately 184,600 data customers compared to approximately
65,000 at the end of last year. Throughout the first three quarters of the year
we have added an average of 2,570 customers per week, ahead of our original goal
of averaging 2,500 new customers each week throughout the year.
In addition, we are launching VOD service in certain systems. Our
television-based Internet access allows us to offer users TV-based e-mail and
other Internet service. Finally, we continue to work together with several
companies in a field trial of telephony.
Our expenses primarily consist of operating costs, general and
administrative expenses, depreciation and amortization expense, interest expense
and corporate expense charges. Operating costs primarily include programming
costs, cable service related expenses, marketing and advertising costs,
franchise fees and expenses related to customer billings. Programming costs
accounted for approximately 42% and 44% of our operating, general and
administrative expenses for the three months and nine months ended September 30,
2000, respectively. Programming costs have increased in recent years and are
expected to continue to increase due to additional programming being provided to
customers and increased cost to purchase cable programming due to inflation and
other factors affecting the cable television industry. As we continue to upgrade
and rebuild our cable systems, additional channel capacity will be available
resulting in increased programming costs. In each year we have operated, our
costs to acquire programming have exceeded customary inflationary increases.
Significant factors with respect to increased programming costs are the rate
increases and surcharges imposed by national and regional sports networks
directly tied to escalating costs to acquire programming for professional sports
packages in a competitive market. We benefited in the past from our membership
in an industry cooperative that provided members with volume discounts from
programming networks. This industry cooperative no longer exists. However, our
increased size is believed to give us substantially equivalent buying power.
Also, we have been able to negotiate favorable terms with premium networks in
conjunction with the premium packages we offer, which minimized the impact on
margins and provided substantial volume incentives to grow the premium category.
Although we believe that we will be able to pass future increases in programming
costs through to customers, there can be no assurance that we will be able to do
so.
General and administrative expenses primarily include system level
management and administrative personnel, and expenditures primarily related to
professional fees, copyright licensing fees and property taxes. Depreciation and
amortization expense primarily relates to the depreciation of our tangible
assets and the amortization of our franchise costs (both increase with the
closing of acquisitions). Corporate expense charges are fees paid or charges for
management services. Pursuant to a mutual services agreement between Charter and
Charter Investment, each entity leases the necessary personnel and provides
services to the other in order to manage Charter Holdco and to manage and
operate the cable systems owned by its subsidiaries. We record actual expenses
incurred by Charter on our behalf. All expenses and costs incurred by Charter
with respect to the services provided are paid by us. Our credit facilities
limit the amount of such reimbursements.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. The principal reasons for our prior and
anticipated net losses include depreciation and amortization expenses associated
with our acquisitions and capital expenditures related to construction and
upgrading of our systems, and interest costs on borrowed money. We cannot
predict what impact, if any, continued losses will have on our ability to
finance our operations in the future.
17
<PAGE> 18
RESULTS OF OPERATIONS
The following discusses the results of operations for:
(1) Charter Holdings, comprised of the Charter companies (Charter
Communications Properties Holdings, LLC, CCA Group, and CharterComm
Holdings, LLC) and the following for the three months and nine
months ended September 30, 1999:
- Marcus Holdings for the period from March 31, 1999, the date
Mr. Allen acquired voting control, through September 30, 1999;
- Renaissance Media Group LLC for the period from April 30, 1999,
the acquisition date, through September 30, 1999;
- American Cable Entertainment, LLC for the period from May 7,
1999, the acquisition date, through September 30, 1999;
- Cable systems of Greater Media Cablevision, Inc. for the period
from June 30, 1999, the acquisition date, through September 30,
1999;
- Helicon Partners I, LP and affiliates for the period from
July 30, 1999, the acquisition date, through September 30, 1999;
- Vista Broadband Communications, LLS for the period from July 20,
1999 the acquisition date, through September 30, 1999;
- Cable system of Cable Satellite of South Miami, Inc. for the
period from August 4, 1999, the acquisition date, through
September 30, 1999; and
- Rifkin Acquisition Partners, LLLP and InterLink Communications
Partners, LLLP for the period from September 13, 1999, the
acquisition date, through September 30, 1999.
(2) Charter Holdings, comprised of the Charter companies, all
acquisitions closed during 1999 and the following for the three
months and nine months ended September 30, 2000:
- ICE from January 31, 2000, the acquisition date, through
September 30, 2000;
- Bresnan from February 14, 2000, the acquisition date, through
September 30, 2000;
- Cable system of Farmington from April 1, 2000, the acquisition
date, through September 30, 2000;
- Cable system of Capital Cable from April 1, 2000, the
acquisition date, through September 30, 2000; and
- Kalamazoo from September 7, 2000, the acquisition date, through
September 30, 2000.
Since January 1, 1999, we have closed numerous acquisitions. In addition, we
merged with Marcus Holdings effective in April 1999. As of September 30, 2000,
our cable systems served approximately 400% more customers than we served as of
December 31, 1998. Thus, amounts for the three months and nine months ended
September 30, 2000, are not comparable to those for the three months and nine
months ended September 30, 1999.
18
<PAGE> 19
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
The following table sets forth the percentages of revenues that items in the
statements of operations constitute for the indicated periods (dollars in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------------ ------------------------------
AMOUNT % AMOUNT %
------ --- ------ ---
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues.......................................... $ 838,961 100.0% $ 376,189 100.0%
----------- ----------- ----------- -----------
Operating expenses:
Operating ...................................... 281,389 33.5% 130,648 34.7%
General and administrative ..................... 144,621 17.2% 64,068 17.0%
Depreciation ................................... 310,378 37.0% 71,898 19.1%
Amortization ................................... 312,829 37.3% 119,541 31.8%
Option compensation expense .................... 8,116 1.0% 21,094 5.7%
Corporate expense charges ...................... 14,055 1.7% 7,236 1.9%
----------- ----------- ----------- -----------
Total operating expenses ......................... 1,071,388 127.7% 414,485 110.2%
----------- ----------- ----------- -----------
Loss from operations ............................. (232,427) (27.7%) (38,296) (10.2%)
Interest expense ................................. (283,221) (33.8%) (131,081) (34.8%)
Interest income .................................. 607 0.1% 8,241 2.2%
Other income (expense) ........................... (2,314) (0.3%) (3,017) (0.8%)
----------- ----------- ----------- -----------
Loss before minority interest .................... (517,355) (61.7%) (164,153) (43.6%)
Minority interest expense ........................ (3,173) (0.3%) -- --
----------- ----------- ----------- -----------
Net loss ......................................... $ (520,528) (62.0%) $ (164,153) (43.6%)
=========== =========== =========== ===========
</TABLE>
REVENUES. Revenues increased by $462.8 million, from $376.2 million for the
three months ended September 30, 1999, to $839.0 million for the three months
ended September 30, 2000. The increase in revenues primarily resulted from
acquisitions.
OPERATING COSTS. Operating costs increased by $150.7 million, from $130.6
million for the three months ended September 30, 1999, to $281.4 million for the
three months ended September 30, 2000. This increase was due primarily to
acquisitions.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs increased
by $80.6 million, from $64.1 million for the three months ended September 30,
1999, to $144.6 million for the three months ended September 30, 2000. This
increase was due primarily to acquisitions.
DEPRECIATION. Depreciation expense increased by $238.5 million, from $71.9
million for the three months ended September 30, 1999, to $310.4 million for the
three months ended September 30, 2000. This increase was due primarily to
acquisitions. In addition, capital expenditures for system upgrades have
increased, resulting in greater property, plant and equipment balances and a
corresponding increase in depreciation expense.
AMORTIZATION. Amortization expense increased by $193.3 million, from $119.5
million for the three months ended September 30, 1999, to $312.8 million for the
three months ended September 30, 2000. This increase was due primarily to
franchises acquired.
OPTION COMPENSATION EXPENSE. Option compensation expense decreased by $13.0
million, from $21.1 million for the three months ended September 30, 1999, to
$8.1 million for the three months ended September 30, 2000. This expense results
from granting options to employees prior to Charter's initial public offering at
exercise prices less than the estimated fair values of the underlying membership
units at time of grant, resulting in compensation expense being accrued over the
vesting period of each grant.
19
<PAGE> 20
CORPORATE EXPENSE CHARGES. Corporate expense charges increased by $6.8
million, from $7.2 million for the three months ended September 30, 1999, to
$14.1 million for the three months ended September 30, 2000. The increase was
primarily the result of increased costs incurred by the manager due to the
Company's growth from acquisitions.
INTEREST EXPENSE. Interest expense increased by $152.1 million, from $131.1
million for the three months ended September 30, 1999, to $283.2 million for the
three months ended September 30, 2000. This increase resulted primarily from
interest on debt used to finance acquisitions.
INTEREST INCOME. Interest income decreased by $7.6 million, from $8.2
million for the three months ended September 30, 1999, to $0.6 million for the
three months ended September 30, 2000. This decrease is attributed to the fact
that we had more excess cash for investment in 1999 (resulting from required
credit facilities drawdowns and the issuance and sale of the March 1999 Charter
Holdings notes) as compared to the amount available in 2000 (resulting from the
issuance and sale of the January 2000 Charter Holdings notes prior to completing
the change of control offers described herein).
OTHER INCOME (EXPENSE). Other income (expense) decreased by $0.7 million,
from $3.0 million of expense for the three months ended September 30, 1999, to
$2.3 million of expense for the three months ended September 30, 2000. The
amount in 1999 reflected a gain on the sale of aircraft.
MINORITY INTEREST EXPENSE. Minority interest expense for the three months
ended September 30, 2000, represents the accretion of dividends on the preferred
membership units in an indirect subsidiary of Charter Holdings held by certain
Bresnan sellers.
NET LOSS. Net loss increased by $356.4 million for the three months ended
September 30, 2000, compared to the three months ended September 30, 1999. The
increase in revenues that resulted from acquisitions was not sufficient to
offset the increased expenses (including depreciation and amortization)
associated with the acquired systems.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
The following table sets forth the percentages of revenues that items in the
statements of operations constitute for the indicated periods (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
---------------------------- -----------------------------
AMOUNT % AMOUNT %
------ --- ------ ---
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues ....................................... $ 2,355,345 100.0% $ 845,182 100.0%
----------- ----------- ----------- -----------
Operating expenses:
Operating .................................... 799,857 34.0% 290,933 34.4%
General and administrative ................... 404,130 17.2% 145,124 17.2%
Depreciation ................................. 860,166 36.5% 150,626 17.8%
Amortization ................................. 912,598 38.7% 290,765 34.4%
Option compensation expense .................. 34,205 1.4% 59,288 7.0%
Corporate expense charges .................... 41,570 1.8% 18,309 2.2%
----------- ----------- ----------- -----------
Total operating expenses ....................... 3,052,526 129.6% 955,045 113.0%
----------- ----------- ----------- -----------
Loss from operations ........................... (697,181) (29.6%) (109,863) (13.0%)
Interest expense ............................... (780,111) (33.1%) (288,750) (34.2%)
Interest income ................................ 6,077 0.2% 18,326 2.2%
Other income (expense) ......................... (2,780) (0.1)% (177) --
----------- ----------- ----------- -----------
Loss before minority interest
and extraordinary item ....................... (1,473,995) (62.6%) (380,464) (45.0%)
Minority interest expense ...................... (7,864) (0.3%) -- --
Extraordinary item ............................. -- -- 7,794 0.9%
----------- ----------- ----------- -----------
Net loss ....................................... $(1,481,859) (62.9%) $ (388,258) (45.9%)
=========== =========== =========== ===========
</TABLE>
20
<PAGE> 21
REVENUES. Revenues increased by $1,510.2 million, from $845.2 million for
the nine months ended September 30, 1999, to $2,355.3 million for the nine
months ended September 30, 2000. The increase in revenues primarily resulted
from acquisitions.
OPERATING COSTS. Operating costs increased by $508.9 million, from $290.9
million for the nine months ended September 30, 1999, to $799.9 million for the
nine months ended September 30, 2000. This increase was due primarily to
acquisitions.
GENERAL AND ADMINISTRATIVE COSTS. General and administrative costs increased
by $259.0 million, from $145.1 million for the nine months ended September 30,
1999, to $404.1 million for the nine months ended September 30, 2000. This
increase was due primarily to acquisitions.
DEPRECIATION. Depreciation expense increased by $709.5 million, from $150.6
million for the nine months ended September 30, 1999, to $860.2 million for the
nine months ended September 30, 2000. This increase was due primarily to
acquisitions. In addition, capital expenditures for system upgrades have
increased, resulting in greater property, plant and equipment balances and a
corresponding increase in depreciation expense.
AMORTIZATION. Amortization expense increased by $621.8 million, from $290.8
million for the nine months ended September 30, 1999, to $912.6 million for the
nine months ended September 30, 2000. This increase was due primarily to
franchises acquired.
OPTION COMPENSATION EXPENSE. Option compensation decreased by $25.1 million,
from $59.3 million for the nine months ended September 30, 1999, to $34.2
million for the nine months ended September 30, 2000. This expense results from
granting options to employees prior to Charter's initial public offering at
exercise prices less than the estimated fair values of the underlying membership
units at time of grant, resulting in compensation expense being accrued over the
vesting period of each grant.
CORPORATE EXPENSE CHARGES. Corporate expense charges increased by $23.3
million, from $18.3 million for the nine months ended September 30, 1999, to
$41.6 million for the nine months ended September 30, 2000. The increase was
primarily the result of increased costs incurred by the manager due to the
Company's growth from acquisitions.
INTEREST EXPENSE. Interest expense increased by $491.4 million, from $288.8
million for the nine months ended September 30, 1999, to $780.1 million for the
nine months ended September 30, 2000. This increase resulted primarily from
interest on debt used to finance acquisitions.
INTEREST INCOME. Interest income decreased by $12.2 million, from $18.3
million for the nine months ended September 30, 1999, to $6.1 million for the
nine months ended September 30, 2000. This decrease is attributed to the fact
that we had more excess cash for investment in 1999 (resulting from required
credit facilities drawdowns and the issuance and sale of the March 1999 Charter
Holdings notes) as compared to the amount available in 2000 (resulting from the
issuance and sale of the January 2000 Charter Holdings notes prior to completing
the change of control offers described herein).
OTHER INCOME (EXPENSE). Other income (expense) decreased by $2.6 million,
from $177,000 of expense for the nine months ended September 30, 1999, to $2.8
million of expense for the nine months ended September 30, 2000.
MINORITY INTEREST EXPENSE. Minority interest expense for the nine months
ended September 30, 2000, represents the accretion of dividends on the preferred
membership units in an indirect subsidiary of Charter Holdings held by certain
Bresnan sellers.
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<PAGE> 22
EXTRAORDINARY ITEM. In March 1999, the Company extinguished all
then-existing long-term debt, excluding borrowings of the Company under its
credit facilities, and refinanced substantially all then-existing credit
facilities at various subsidiaries with a new credit facility. The excess of the
amount paid over the carrying value, net of deferred financing costs, of the
then-existing long-term debt was recorded as an extraordinary item.
NET LOSS. Net loss increased by $1,093.6 million for the nine months ended
September 30, 2000, compared to the nine months ended September 30, 1999. The
increase in revenues that resulted from acquisitions was not sufficient to
offset the increased expenses (including depreciation and amortization)
associated with the acquired systems.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant cash to fund acquisitions, capital
expenditures, debt service costs and ongoing operations. We have historically
funded and expect to fund future liquidity and capital requirements through cash
flows from operations, equity contributions, borrowings under our credit
facilities, and debt and equity financings.
Our historical cash flows from operating activities were $837.3 million and
$265.6 million for the nine months ended September 30, 2000 and 1999,
respectively.
INVESTING ACTIVITIES
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 digital converters. Converters are set-top
devices added to a customer's television to change the frequency of the cable
television signals to a viewable channel. The television 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, VOD and interactive services.
We made capital expenditures, excluding acquisitions of cable systems, of
$1.9 billion and $385.3 million for the nine months ended September 30, 2000 and
1999, respectively. The majority of these capital expenditures relate to our
accelerated rebuild and upgrade program and converters, and were funded from
cash flows from operations and borrowings under credit facilities.
For the period from January 1, 2000 to December 31, 2002, we plan to spend
approximately $6.4 billion for capital expenditures, approximately $3.5 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 $2.9 billion will be used for extensions of
systems, roll-out of new products and services, converters and system
maintenance. Capital expenditures for 2000 are expected to be approximately $2.7
billion, and aggregate capital expenditures for 2001 and 2002 are expected to be
approximately $3.7 billion. We currently expect to finance the anticipated
capital expenditures with cash generated from operations and additional
borrowings under credit facilities, including a bridge loan entered into on
August 4, 2000 and other debt financing. Currently a projected $1.75 billion
funding shortfall through late 2002 exists, when we expect to become cash flow
positive. We expect to satisfy the funding shortfall with a combination of a new
high-yield debt offering and additional bank debt. We cannot be assured that
these amounts will be sufficient to accomplish our planned system upgrades,
expansion and maintenance, or that we can acquire necessary plant and equipment
from vendors to complete these as scheduled. If we are not able to obtain
amounts sufficient for our planned upgrades and other capital expenditures, it
could adversely affect our ability to offer new products and services and
compete effectively, and could adversely affect our growth, financial condition
and results of operations. See "-- Certain Trends and Uncertainties" for further
information.
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JOINT VENTURE FOR DEVELOPMENT OF DIGITAL VIDEO RECORDER SET-TOP BOX. In
September 2000, Charter Communications Ventures, LLC, a subsidiary of Charter
Communications Holding Company, entered into a joint venture with General
Instrument Corporation (doing business as Broadband Communications Sector of
Motorola Inc.), Replay TV Inc. and Internal Research Corporation, an entity
controlled by Mr. Allen, to develop and integrate digital video recording
capabilities in advanced digital set-top boxes. The joint venture will focus on
creating a set-top based digital video recording platform that will be designed
for storing video, audio and Internet content. In connection with the formation
of this joint venture, Charter Ventures contributed $3.2 million in October
2000.
HIGH SPEED ACCESS CORP. PENDING INVESTMENT. On October 19, 2000, our
subsidiary, Charter Communications Ventures, LLC, entered into a stock purchase
agreement pursuant to which Vulcan Ventures, Inc., an entity controlled by Mr.
Allen, and Charter Ventures will invest $38.0 million and $37.0 million,
respectively, in exchange for 38,000 shares and 37,000 shares, respectively, of
senior convertible preferred stock of High Speed Access. The preferred stock
will have a liquidation preference of $1,000 per share, will in general share in
dividends on High speed Access common stock on an "as converted to common stock"
basis and would be convertible into common stock of High Speed Access at a
conversion rate of $5.01875 per share of High Speed Access common stock, subject
to certain adjustments. Vulcan Ventures and Charter Ventures will be granted
certain preemptive, first refusal, registration and significant board
representation rights as part of the transaction. The stock purchase agreement
is subject to approval by High Speed Access shareholders. It is anticipated that
the transaction will close in the fourth quarter 2000.
FINANCING ACTIVITIES
As of September 30, 2000, our total debt was approximately $12.2 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.
JANUARY 2000 CHARTER HOLDINGS NOTES. On January 12, 2000, Charter Holdings
and Charter Communications Holdings Capital Corporation issued notes with a
principal amount of $1.5 billion (January 2000 Charter Holdings Notes). The
January 2000 Charter Holdings Notes are comprised of $675.0 million 10.00%
Senior Notes due 2009, $325.0 million 10.25% Senior Notes due 2010, and $532.0
million 11.75% Senior Discount Notes due 2010. The net proceeds were
approximately $1.3 billion, after giving effect to discounts, commissions and
expenses. The proceeds from the January 2000 Charter Holdings Notes were used to
finance the repurchases of debt assumed in certain transactions, as described
below.
In June 2000, Charter Holdings and Charter Communications Holdings Capital
Corporation exchanged these notes for new January 2000 Charter Holdings Notes,
with substantially similar terms, except that the new January 2000 Charter
Holdings Notes are registered under the Securities Act of 1933, as amended, and,
therefore, do not bear legends restricting their transfer.
CC V HOLDINGS, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "AVALON") NOTES. In
January 2000, through change of control offers and purchases in the open market,
all of the Avalon 9.375% Senior Subordinated Notes due 2008 with a principal
amount of $150.0 million were repurchased for $153.7 million. In addition, also
through change of control offers, $16.3 million in aggregate principal amount at
maturity of the Avalon 11.875% Senior Discount Notes due 2008 was repurchased
for $10.5 million. As of September 30, 2000, Avalon 11.875% notes with an
aggregate principal amount of $179.8 million at maturity and an accreted value
of $124.8 million remain outstanding.
CC VII HOLDINGS, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "FALCON")
DEBENTURES. In February 2000, through change of control offers and purchases in
the open market, all of the Falcon 8.375% Senior Debentures due 2010 with a
principal amount of $375.0 million were repurchased for $388.0 million, and all
of the Falcon 9.285% Senior Discount Debentures due 2010 with an aggregate
principal amount at maturity of $435.3 million were repurchased for $328.1
million.
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CC VIII, LLC AND ITS SUBSIDIARIES (COLLECTIVELY, "BRESNAN") CREDIT
FACILITIES. Upon the closing of the Bresnan acquisition on February 14, 2000,
the then-existing Bresnan credit facilities were amended and assumed. The
Bresnan credit facilities provide for borrowings of up to $900.0 million,
consisting of: two term facilities, one with a principal amount of $403.0
million (Term A) and the other with a principal amount of $297.0 million (Term
B), and a reducing revolving loan facility in the amount of $200.0 million. The
Bresnan credit facilities provide for the amortization of the principal amount
of the Term A loan facility and the reduction of the revolving loan facility
beginning March 31, 2002 with a final maturity date of June 30, 2007. The
amortization of the Term B loan facility is substantially "back-ended" with more
than ninety percent of the principal balance due on the final maturity date of
February 2, 2008. The Bresnan credit facilities also provide for an incremental
facility of up to $200.0 million that is conditioned upon receipt of additional
commitments from lenders. Amounts under the Bresnan credit facilities bear
interest at the Base Rate or the Eurodollar Rate, as defined, plus a margin of
up to 2.75%. A quarterly commitment fee of between 0.250% and 0.375% is payable
on the unborrowed balance of Term A and the revolving loan facility. At the
closing of the Bresnan acquisition, $599.9 million was borrowed to replace the
borrowings outstanding under the previous credit facilities, and an additional
$31.3 million was borrowed to fund a portion of the Bresnan purchase price. As
of September 30, 2000, $668.0 million was outstanding, and $232.0 million was
available for borrowing.
BRESNAN NOTES Upon the closing of the Bresnan acquisition, Charter Holdco
and Charter assumed Bresnan's $170.0 million in principal amount of 8% Senior
Notes due 2009 and $275.0 million in principal amount at maturity of 9.25%
Senior Discount Notes due 2009. In March 2000, all of the outstanding Bresnan
notes were repurchased at 101% of the outstanding principal amounts plus accrued
and unpaid interest or accreted value, as applicable, for a total of $369.7
million using proceeds from the sale of the January 2000 Charter Holdings Notes.
CHARTER COMMUNICATIONS OPERATING, LLC CREDIT FACILITIES. In March 2000, the
Charter Operating Credit Facilities were amended to increase the amount of the
supplemental credit facility to $1.0 billion. In connection with this amendment,
$600.0 million of the supplemental credit facility was exercised, thereby
increasing the total borrowing capacity to $4.7 billion. The remaining $400.0
million of the supplemental credit facility is subject to the Company's ability
to obtain additional commitments from the lenders. As of September 30, 2000,
outstanding borrowings were $3.6 billion, and the unused availability was $1.1
billion.
CHARTER HOLDINGS SENIOR BRIDGE LOAN FACILITY. On August 4, 2000, Morgan
Stanley Senior Funding, Inc. (Sole Arranger) and others, and Charter Holdings
and Charter Communications Holdings Capital Corporation entered into a senior
bridge loan agreement providing for senior increasing rate bridge loans in an
aggregate principal amount of up to $1.0 billion.
On August 14, 2000, the Company borrowed $1.0 billion under the senior
bridge loan facility and used substantially all of the proceeds to repay a
portion of the amounts outstanding under the Charter Operating and Falcon
revolving credit facilities. The bridge loan initially bears interest at an
annual rate of 10.21%. If this loan is not repaid within 90 days following
August 14, 2000, the interest rate will increase by 1.25% at the end of such
90-day period and will increase by an additional 0.50% at the end of each
additional 90-day period. Unless additional special interest is assessed, the
interest rate on the bridge loan will not exceed 15% annually. If the bridge
loan has not been repaid in full by August 14, 2001, then it will be converted
to a term loan. The bridge loan matures one year from August 14, 2000 and upon
payment of any accrued and unpaid interest shall convert to a term loan that
matures on the tenth anniversary of the initial bridge loan borrowing. The term
loan will bear interest at a fixed rate equal to the greater of the applicable
rate of the bridge loan on the date on the conversion plus 0.50%, and the yield
corresponding to the bid price on Charter Holdings 10.25% notes as of the date
immediately prior to the conversion. If the term loan is not repaid within 90
days after the conversion from the bridge loan, the interest rate thereon will
increase by 0.50% at the end of each 90-day period. Unless additional special
interest is assessed, the interest rate on the term loan will not exceed 15%
annually. The term loan will mature on the tenth anniversary of the initial
senior bridge loan borrowing.
As discussed below, a portion of the bridge loan facility was refinanced and
we expect to refinance the remaining portion of the amounts outstanding with
permanent financing.
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CHARTER CONVERTIBLE SENIOR NOTES. On October 25, 2000, Charter issued
convertible senior notes due 2005 with a principal amount of $650.0 million. An
additional $100.0 million pursuant to the underwriter's over-allotment option
were issued on November 3, 2000. The Convertible Senior Notes have an annual
interest rate of 5.75%, payable semi-annually, and are convertible into shares
of Charter Communications, Inc.'s Class A common stock at $21.56 per share. The
issuance was made in a private placement pursuant to Rule 144A under the
Securities Act. The net proceeds of approximately $720.5 million were used to
repay a portion of amounts outstanding under the Charter Holdings Senior Bridge
Loan Facility.
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and uncertainties, in
addition to those discussed elsewhere in this Quarterly Report, that could
materially impact our business, results of operations and financial condition.
SUBSTANTIAL LEVERAGE. As of September 30, 2000, our total debt was
approximately $12.2 billion. We anticipate incurring significant additional debt
in the future to fund the expansion, maintenance and upgrade of our cable
systems.
Our ability to make payments on our debt and to fund our planned capital
expenditures for upgrading our cable systems and our ongoing operations will
depend on our ability to generate cash and secure financing in the future. This,
to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond our control. We cannot assure
you that our business will generate sufficient cash flow from operations, or
that future borrowings will be available to us under our existing credit
facilities, new facilities or from other sources of financing at acceptable
rates or in an amount sufficient to enable us to repay our debt, to grow our
business or to fund our other liquidity and capital needs.
VARIABLE INTEREST RATES. At September 30, 2000, approximately 40% of our
debt bears interest at variable rates that are linked to short-term interest
rates. In addition, a significant portion of debt we might arrange in the future
will bear interest at variable rates. If interest rates rise, our costs relative
to those obligations will also rise. At September 30, 2000, our weighted average
rate on outstanding bank commitments is approximately 8.6% and approximately
9.6% on high-yield debt resulting in a blended weighted average rate of 9.1%.
See discussion in Item 3.
RESTRICTIVE COVENANTS. Our credit facilities and the indentures governing
our outstanding debt contain a number of significant covenants that, among other
things, restrict our ability and the ability of our 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 trigger acceleration of the debt. Any
default under our credit facilities or the indentures governing our outstanding
debt may adversely affect our growth, our financial condition and our results of
operations.
NEW SERVICES AND PRODUCTS GROWTH STRATEGY. We expect that a substantial
portion of any of our future growth will be achieved through revenues from
additional services. We cannot assure you that we will be able to offer new
advanced services successfully to our customers or that those new advanced
services will generate revenues.
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The amount of our capital expenditures and related roll-out of advanced services
may be limited by the availability of certain equipment (in particular, digital
converter boxes and cable modems) due to production capacity constraints of
certain vendors and materials shortages. We continue to work with our primary
vendors to address such problems and have been assured that we will have an
adequate supply to meet our demand. If we are unable to grow our cash flow
sufficiently, we may be unable to fulfill our obligations or obtain alternative
financing.
MANAGEMENT OF GROWTH. We have experienced rapid growth that has placed and
is expected to continue to place a significant strain on our management,
operations and other resources. Our future success will depend in part on our
ability to successfully integrate the operations acquired and to be acquired and
to attract and retain qualified personnel. No significant severance cost was
incurred in conjunction with acquisitions in 1999 and 2000. The failure to
retain or obtain needed personnel or to implement management, operating or
financial systems necessary to successfully integrate acquired operations or
otherwise manage growth when and as needed could have a material adverse effect
on our business, results of operations and financial condition.
REGULATION AND LEGISLATION. Cable systems are extensively regulated at the
federal, state, and local level. Effective March 31, 1999, the scope of rate
regulation was reduced so that it continues to impact only the lowest level of
basic cable service and associated equipment. This change affords cable
operators much greater pricing flexibility, although Congress could revisit this
issue if confronted with substantial rate increases.
Cable operators also face significant regulation of their channel capacity.
They currently can be required to devote substantial capacity to the carriage of
programming that they would not carry voluntarily, including certain local
broadcast signals, local public, educational and government access users, and
unaffiliated commercial leased access programmers. This carriage burden could
increase in the future, particularly if the Federal Communications Commission
(FCC) were to require cable systems to carry both the analog and digital
versions of local broadcast signals. The FCC is currently conducting a
proceeding in which it is considering this channel usage possibility.
There is also uncertainty whether local franchising authorities, state
regulators, the FCC, or the U.S. Congress will impose obligations on cable
operators to provide unaffiliated Internet service providers with access to
cable plant on non-discriminatory terms. If they were to do so, and the
obligations were found to be lawful, it could complicate our operations in
general, and our Internet operations in particular, from a technical and
marketing standpoint. These access obligations could adversely impact our
profitability and discourage system upgrades and the introduction of new
products and services. Recently, a federal district court in Virginia and a
federal circuit court in California struck down as unlawful open access
requirements imposed by two different franchising authorities. The federal
circuit court ruling reversed an earlier district court decision that had upheld
an open access requirement. There are other instances where "open access"
requirements have been imposed and judicial challenges are pending. The FCC has
initiated a new proceeding to categorize cable-delivered Internet service and
perhaps establish an appropriate regulatory scheme.
POSSIBLE RESCISSION LIABILITY RIGHTS. The Company acquired Helicon I,
L.P. and affiliates (Helicon) in July 1999 and acquired Rifkin Acquisition
Partners L.L.L.P. and InterLink Communications Partners, LLLP (collectively,
"Rifkin") in September 1999. Charter Holdco acquired Falcon Communications, L.P.
(Falcon) in November 1999, and the Company acquired Bresnan in February 2000. In
connection with these acquisitions, the Rifkin, Falcon and Bresnan sellers who
acquired Charter Holdco membership units or, in the case of Bresnan, additional
equity interests in a subsidiary of Charter Holdings and the Helicon sellers who
acquired shares of Class A common stock in Charter's initial public offering may
have rescission rights against Charter and Charter Holdco arising out of
possible violations of Section 5 of the Securities Act of 1933, as amended, in
connection with the offers and sales of these equity interests. Any such rights
expired on November 12, 2000, the one year anniversary of the issuance of the
equity interests. As a result, we have reclassified such amounts, totaling
$741.8 million, from redeemable securities (temporary equity) to shareholders'
equity and minority interest.
If all of these equity holders successfully exercised their possible
rescission rights, Charter or Charter Holdco would become obligated to
repurchase all such equity interests, and the total repurchase obligation could
be as much as up approximately $1.1 billion as of November 14, 2000. If Charter
and Charter Holdco fail to obtain capital sufficient to fund any required
repurchases, they could seek funds from Charter Holdings and its subsidiaries.
This
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could adversely affect the Company's consolidated financial condition and
results of operations. These possible rescission rights expire one year from the
dates of issuance or purchase of these equity interests.
ACCOUNTING STANDARDS RECENTLY IMPLEMENTED
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), Revenue Recognition in Financial Statements, which summarizes certain of
the SEC staff's views on applying generally accepted accounting principles to
revenue recognition in financial statements. Charter adopted the accounting
provisions of SAB 101 effective April 1, 2000. Management believes that the
implementation of SAB 101 has not had a significant effect on Charter's
financial condition or results of operations.
SUPPLEMENTAL UNAUDITED PRO FORMA DATA
The following Supplemental Unaudited Pro Forma Data is based on the
historical financial data of Charter Holdings. Our financial data, on a
consolidated basis, is adjusted on a pro forma basis to illustrate the estimated
effects of the following transactions as if they had occurred on January 1,
2000:
- the acquisitions by Charter Communications, Inc. and its subsidiaries
completed since January 1, 2000, including the Bresnan and Kalamazoo
acquisitions;
- borrowings under the Charter Holdings Senior Bridge Loan Facility and
the applications of a portion of such borrowings to repay a portion of
the amounts outstanding under the Charter Operating and CC VIII
revolving credit facilities; and
- the repayment of a portion of the Charter Holdings Senior Bridge Loan
Facility with an equity contribution from the net proceeds from the
issuance and sale of the Senior Convertible Notes by Charter.
The pro forma impact of the issuance and sale of the January 2000 Charter
Holdings Notes and the impact of the Chat TV transaction (See Part II - Other
Information - Item 2. changes in Securities and Use of Proceeds for more
information) are not significant and are therefore not taken into account below.
The Supplemental Unaudited Pro Forma Data reflects the application of the
principles of purchase accounting to the ICE, Bresnan, Capital Cable, Farmington
and Kalamazoo acquisitions completed since January 1, 2000. The allocation of
the Bresnan and Kalamazoo 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 finalization of the purchase price allocation will
not have a material impact on our results of operations or financial position.
The Supplemental Unaudited Pro Forma Data does not purport to be indicative
of what our results of operations would actually have been had the transactions
described above been completed on the dates indicated or to project our results
of operations for any future date.
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<TABLE>
<CAPTION>
SUPPLEMENTAL UNAUDITED PRO FORMA DATA
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
------------------------------------------------------
CHARTER PRO FORMA
HOLDINGS ADJUSTMENTS (A) TOTAL
-------- --------------- -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Basic ................................................... $ 1,668,092 $ 38,186 $ 1,706,278
Premium ................................................. 171,432 5,202 176,634
Pay-per-view ............................................ 21,875 480 22,355
Digital ................................................. 49,844 754 50,598
Advertising ............................................. 112,765 2,989 115,754
Data .................................................... 42,676 1,643 44,319
Other ................................................... 288,661 2,387 291,048
----------- ----------- -----------
Total revenues ........................................ 2,355,345 51,641 2,406,986
OPERATING EXPENSES:
Programming ............................................. 527,379 13,767 541,146
General and administrative .............................. 404,130 7,837 411,967
Service ................................................. 143,585 7,208 150,793
Marketing ............................................... 45,693 572 46,265
Other ................................................... 83,200 4,027 87,227
Depreciation ............................................ 860,166 16,025 876,191
Amortization ............................................ 912,598 31,305 943,903
Option compensation expense ............................. 34,205 -- 34,205
Corporate expense charges ............................... 41,570 717 42,287
----------- ----------- -----------
Total operating expenses .............................. 3,052,526 81,458 3,133,984
----------- ----------- -----------
Loss from operations .................................... (697,181) (29,817) (726,998)
Interest expense ........................................ (780,111) 9,899 (770,212)
Interest income ......................................... 6,077 (49) 6,028
Other expense ........................................... (2,780) (137) (2,917)
----------- ----------- -----------
Loss before minority interest ........................... (1,473,995) (20,104) (1,494,099)
Minority interest expense (b) ........................... (7,864) (1,578) (9,442)
----------- ----------- -----------
Net loss ................................................ $(1,481,859) $ (21,682) $(1,503,541)
=========== =========== ===========
OTHER FINANCIAL DATA:
EBITDA (c) .............................................. $ 1,072,803 $ 17,376 $ 1,090,179
EBITDA margin (d) ....................................... 45.5% 33.6% 45.3%
Adjusted EBITDA (e) ..................................... $ 1,151,358 $ 18,230 $ 1,169,588
OPERATING DATA (at end of period, except for average):
Homes passed (f) .................................. 10,160,200
Basic customers (g) ............................... 5,537,600 780,700 6,318,300
Basic penetration (h) 62.2%
Premium units (i) ................................. 3,962,400 463,800 4,426,200
Premium penetration (j) ........................... 71.6% 59.4% 70.1%
Average monthly revenue per basic
customer (k) .................................... $ 42.33
</TABLE>
----------
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(a) Comprised of: (1) ICE's results of operations through January 31, 2000, the
date of acquisition, Bresnan's results of operations through February 14,
2000, the date of acquisition, the results of operations of cable systems
acquired by Bresnan through the respective dates of acquisition, Capital
Cable's and Farmington's results of operations through April 1, 2000, the
date of acquisition as well as Kalamazoo's results of operations through
September 7, 2000, the date of acquisition; (2) borrowings under the
Charter Holdings Senior Bridge Loan Facility and the applications of a
portion of such borrowings to repay a portion of the amounts outstanding
under the Charter Operating and CC VIII revolving credit facilities; and
(3) the repayment of a portion of the Charter Holdings Senior Bridge Loan
Facility with an equity contribution from the net proceeds from the
issuance and sale of the Senior Convertible Notes by Charter.
(b) Represents the accretion of dividends on the preferred membership units in
an indirect subsidiary of Charter Holdings held by certain Bresnan sellers.
(c) EBITDA represents earnings (loss) before interest, income taxes,
depreciation and amortization, and minority interest. EBITDA is presented
because it is a widely accepted financial indicator of a cable company's
ability to service indebtedness. However, EBITDA should not be considered
as an alternative to income from operations or to cash flows from
operating, investing or financing activities, as determined in accordance
with generally accepted accounting principles. EBITDA should also not be
construed as an indication of a company's operating performance or as a
measure of liquidity. In addition, because EBITDA is not calculated
identically by all companies, the presentation here may not be comparable
to other similarly titled measures of other companies. Management's
discretionary use of funds depicted by EBITDA may be limited by working
capital, debt service and capital expenditure requirements and by
restrictions related to legal requirements, commitments and uncertainties.
(d) EBITDA margin represents EBITDA as a percentage of revenues.
(e) Adjusted EBITDA means EBITDA before option compensation expense, corporate
expense charges, management fees and other income (expense). Adjusted
EBITDA is presented because it is a widely accepted financial indicator of
a cable company's ability to service its indebtedness. However, adjusted
EBITDA should not be considered as an alternative to income from operations
or to cash flows from operating, investing or financing activities, as
determined in accordance with generally accepted accounting principles.
Adjusted EBITDA should also not be construed as an indication of a
company's operating performance or as a measure of liquidity. In addition,
because adjusted EBITDA is not calculated identically by all companies, the
presentation here may not be comparable to other similarly titled measures
of other companies. Management's discretionary use of funds depicted by
adjusted EBITDA may be limited by working capital, debt service and capital
expenditure requirements and by restrictions related to legal requirements,
commitments and uncertainties.
(f) Homes passed are the number of living units, such as single residence
homes, apartments and condominium units, passed by the cable distribution
network in a given cable system service area.
(g) Basic customers are customers who receive basic cable service.
(h) Basic penetration represents basic customers as a percentage of homes
passed.
(i) Premium units represent the total number of subscriptions to premium
channels.
(j) Premium penetration represents premium units as a percentage of basic
customers.
(k) Average monthly revenue per basic customer represents revenues divided by
the number of months in the period divided by the number of basic customers
at period end.
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The following information presents operating results and data for the three
months ended September 30, 2000, as compared to the three months ended September
30, 1999, for the cable systems owned by us as of July 1, 1999.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, PERCENT
2000 1999 VARIANCE
---- ---- --------
(Dollar amounts in thousands, except average
STATEMENTS OF OPERATIONS (Unaudited) monthly revenue per basic customer)
<S> <C> <C> <C>
Revenues:
Basic....................................................... $248,690 $231,135
Premium..................................................... 28,162 29,765
Pay-per-view................................................ 3,356 7,697
Digital..................................................... 14,018 1,134
Advertising sales........................................... 19,773 15,096
Data services............................................... 7,215 1,814
Other....................................................... 51,338 43,522
---------- ----------
Total revenues........................................... 372,552 330,163 12.8%
---------- ----------
Operating Expenses:
Programming................................................. 78,284 75,855
General and administrative.................................. 64,378 56,687
Service..................................................... 20,216 22,076
Marketing................................................... 5,338 8,623
Other operating expenses.................................... 14,092 7,728
---------- ----------
Total operating expenses................................. 182,308 170,969 6.6%
---------- ----------
Adjusted EBITDA............................................... $ 190,244 $ 159,194 19.5%
========== ==========
<CAPTION>
PERCENT
OPERATING DATA (Unaudited) SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 VARIANCE
------------------ ------------------ --------
<S> <C> <C> <C>
Homes passed.................................................. 4,538,500 4,514,400
Basic customers............................................... 2,671,000 2,611,400 2.3%
Basic penetration............................................. 58.9% 57.8%
Premium units................................................. 2,125,100 1,653,100 28.6%
Digital video customers....................................... 332,600 28,600
Data customers................................................ 54,100 21,400
Average monthly revenue per basic customer.................... $ 46.49 $ 42.14 10.3%
</TABLE>
Revenues increased by $42.4 million, or 12.8%, when comparing the revenues
for the three months ended September 30, 2000, to the results for the comparable
systems for the three months ended September 30, 1999. This increase is
primarily due to: rate increases for basic customers and organic growth of basic
customers, both digital and data revenues rising due to the roll-out of these
services, advertising revenues increasing as a result of launching advertising
in new markets and increasing the number of cable channels on which advertising
is sold and beginning to sell more of our ad avails inventory internally as
opposed to using third parties.
Total operating expenses increased approximately $11.3 million, or 6.6%,
when comparing the operating expenses for the three months ended September 30,
2000, to the results for the same systems for the three months ended September
30, 1999. This increase is primarily due to increases in franchise fees,
copyright fees and salary expenses associated with the growth of the business.
Additionally, digital and data expenses increased due to the roll-out of these
services and advertising expenses increased as we began to sell more of our ad
avails inventory internally as opposed to using third parties.
We experienced growth in adjusted EBITDA of approximately $31.1 million, or
19.5%, when comparing adjusted EBITDA for the three months ended September 30,
2000, to the results for the same systems for the three months ended September
30, 1999. Adjusted EBITDA margin increased from 48.2% to 51.1% when comparing
the similar periods.
30
<PAGE> 31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The use of interest rate risk management instruments, such as interest rate
exchange agreements, interest rate cap agreements and interest rate collar
agreements is required under the terms of the credit facilities of our
subsidiaries. Our policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, we agree to exchange,
at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed-upon notional principal amount.
Interest rate cap agreements are used to lock in a maximum interest rate should
variable rates rise, but enable us to otherwise pay lower market rates. Collars
limit our exposure to and benefits from interest rate fluctuations on variable
rate debt to within a certain range of rates.
Our participation in interest rate hedging transactions involves instruments
that have a close correlation with its debt, thereby managing its risk. Interest
rate hedge agreements have been designated for hedging purposes and are not held
or issued for speculative purposes.
At September 30, 2000, we had outstanding $2.0 billion, $15.0 million and
$725.0 million in notional amounts of interest rate swaps, caps and collars,
respectively. The notional amounts of interest rate instruments do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure to credit loss. While swaps, caps and collars represent an integral
part of our interest rate risk management program, their incremental effect on
interest expense for the three months and nine months ended September 30, 2000
and 1999, was not significant.
The fair value of fixed-rate debt at September 30, 2000 was $4.2 billion.
The fair value of fixed-rate debt is based on quoted market prices. The fair
value of variable-rate debt approximates the carrying value of $7.5 billion at
September 30, 2000, since this debt bears interest at current market rates.
31
<PAGE> 32
PART II. OTHER INFORMATION.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.34 Senior Bridge Loan Agreement, dated as of August 4,
2000, by and among Charter Communications Holdings,
LLC and Charter Communications Holdings Capital
Corporation as borrowers and the initial lenders
named therein and Morgan Stanley Senior Funding, Inc.
as sole arranger, syndication agent and
administrative agent. (1)
27.1 Financial Data Schedule (supplied for the information
of the Commission).*
---------
* Filed herewith.
(1) Incorporated by reference to the quarterly report on Form 10-Q filed by
Charter Communications Holdings, LLC and Charter Communications Holdings
Capital Corporation on August 14, 2000 (File No. 333-77499).
(b) REPORTS ON FORM 8-K
- On August 3, 2000, an 8-K dated August 2, 2000 was filed
reporting the announcement of second quarter 2000 financial
results under Item 5 and the filing of the related press
release under Item 7.
- On September 6, 2000, an 8-K dated September 6, 2000 was filed
reporting the completion of the merger of Cablevision of
Michigan, Inc. with Charter under Item 5 and the filing of the
related press release under Item 7.
- On October 25, 2000, an 8-K dated October 24, 2000 was filed
reporting the announcement of Charter's intent to issue
Convertible Senior Notes due 2005 and the offering of $650
million of Convertible Senior Notes due 2005 in a private
placement under Rule 144A under Item 5 and the filing of the
related press release under Item 7.
- On November 2, 2000, an 8-K dated November 1, 2000 was filed
reporting the announcement of third quarter 2000 financial
results under Item 5 and the filing of the related press
release under Item 7.
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
CHARTER COMMUNICATIONS HOLDINGS, LLC, a registrant
By: CHARTER COMMUNICATIONS, INC.,
---------------------------------------------
sole manager
Dated November 13, 2000 By: /s/ Kent D. Kalkwarf
-----------------------------------------
Name: Kent D. Kalkwarf
Title: Executive Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
CHARTER COMMUNICATIONS HOLDINGS CAPITAL
CORPORATION,
a registrant
Dated November 13, 2000 By: /s/ Kent D. Kalkwarf
---------------------------------------------
Name: Kent D. Kalkwarf
Title: Executive Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
33
