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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
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Commission File Number 333-83887
CHARTER COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charters)
Delaware 43-1857213
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
12444 Powerscourt Drive - Suite 400
St. Louis, Missouri 63131
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(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (314) 965-0555
Indicate by check mark whether the registrant (1) has 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 registrant was
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
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CHARTER COMMUNICATIONS, INC.
FORM 10-Q - FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
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Part I. Financial Information
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<S> <C>
Item 1. Financial Statements - Charter Communications, Inc. and Subsidiaries
a. Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 3
b. Consolidated Statements of Operations - Three and Nine Months Ended
September 30, 1999 4
c. Consolidated Statement of Cash Flows - Nine Months Ended
September 30, 1999 5
d. Notes to Consolidated Financial Statements 6
Financial Statements of Charter Communications Properties Holdings, LLC and Subsidiaries
a. Consolidated Statements of Operations - Three and Nine Months Ended
September 30, 1998. 18
b. Consolidated Statement of Cash Flows - Nine Months Ended
September 30, 1998. 19
c. Notes to Consolidated Financial Statements 20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 51
Part II. Other Information
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Item 1. Legal Proceedings - None 51
Item 2. Change in Securities 51
Item 3. Defaults on Senior Securities - None 51
Item 4. Submission of Matters to a Vote of Security Holders - None 51
Item 5. Other Information - None 51
Item 6. Exhibits and Reports on Form 8-K 51
Signature Page 53
</TABLE>
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CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 434,183 $ 9,573
Accounts receivable, net of allowance for doubtful accounts of $4,327 and
$1,728, respectively 48,470 15,108
Prepaid expenses and other 27,374 2,519
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Total current assets 510,027 27,200
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INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment 2,279,489 716,242
Franchises 8,268,021 3,590,054
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10,547,510 4,306,296
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OTHER ASSETS 177,654 2,031
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$ 11,235,191 $ 4,335,527
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and short-term debt $ 133,312 $ 10,450
Accounts payable 40,781 7,439
Accrued expenses 339,749 120,147
Payables to manager of cable systems--related party 10,071 4,334
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Total current liabilities 523,913 142,370
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LONG-TERM DEBT 6,244,632 1,991,756
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DEFERRED MANAGEMENT FEES - RELATED PARTY 17,004 15,561
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OTHER LONG-TERM LIABILITIES 68,648 38,461
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MINORITY INTEREST 4,380,192 2,146,549
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STOCKHOLDERS' EQUITY:
Class B common stock; $.001 par value; 750 million shares authorized;
50,000 shares issued and outstanding --- ---
Additional paid-in capital 905 832
Retained deficit (103) (2)
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Total stockholders' equity 802 830
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$ 11,235,191 $ 4,335,527
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
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CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
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<S> <C> <C>
REVENUES $ 376,189 $ 845,182
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OPERATING EXPENSES:
Operating, general and administrative 194,716 436,057
Depreciation and amortization 191,439 441,391
Stock option compensation expense 21,094 59,288
Corporate expense charges--related party 7,236 18,309
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414,485 955,045
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Loss from operations (38,296) (109,863)
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OTHER INCOME (EXPENSE):
Interest expense (131,081) (288,750)
Interest income 8,241 18,326
Other, net (3,017) (177)
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(125,857) (270,601)
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Loss before extraordinary item and minority interest (164,153) (380,464)
EXTRAORDINARY ITEM - Loss from early extinguishment of debt --- 7,794
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Loss before minority interest in loss of subsidiary (164,153) (388,258)
MINORITY INTEREST IN LOSS OF SUBSIDARY 164,118 388,161
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Net loss $ (35) $ (97)
========= =========
PER SHARE DATA:
Basic loss per share $ (0.70) $ (1.94)
========= =========
Diluted loss per share $ (0.70) $ (1.94)
========= =========
Weighted-average Class B shares outstanding 50,000 50,000
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1999
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<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (97)
Adjustments to reconcile net loss to net cash provided by operating activities:
Minority interest (388,161)
Depreciation and amortization 441,391
Stock option compensation expense 59,288
Amortization of non-cash interest expense 66,028
Loss from early extinguishment of debt 7,794
Changes in assets and liabilities, net of effects from acquisitions --
Accounts receivable, net (2,358)
Prepaid expenses and other (11,665)
Accounts payable and accrued expenses 74,556
Payables to manager of cable systems, including deferred management fees 19,922
Other operating activities (1,087)
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Net cash provided by operating activities 265,611
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (385,301)
Deposit paid for pending acquisition (51,458)
Payments for acquisitions, net of cash acquired (2,659,384)
Loan to Marcus Cable Holdings (1,680,142)
Other investing activities (11,106)
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Net cash used in investing activities (4,787,391)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 6,464,188
Repayments of long-term debt (2,539,340)
Payments for debt issuance costs (107,562)
Capital contributed to subsidiary 1,144,290
Distributions (14,786)
Other financing activities (400)
-----------
Net cash provided by financing activities 4,946,390
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NET INCREASE IN CASH AND CASH EQUIVALENTS 424,610
CASH AND CASH EQUIVALENTS, beginning of period 9,573
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CASH AND CASH EQUIVALENTS, end of period $ 434,183
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CASH PAID FOR INTEREST $ 136,626
===========
NON CASH TRANSACTIONS:
Transfer of Marcus Holdings' net assets to the Company $ 1,252,370
===========
Transfer of Rifkin equity interests to the Company and preferred equity retained by former
Rifkin owners in the Company $ 314,022
===========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
5
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CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
CHARTER COMMUNICATIONS, INC.
On July 22, 1999, Charter Investment, Inc. (Charter Investment), a company
controlled by Paul G. Allen, formed a wholly owned subsidiary, Charter
Communications, Inc. (Charter), a Delaware corporation, with a nominal initial
investment.
On November 12, 1999, Charter sold 195.5 million shares of Class A common stock
in an initial public offering and 50,000 shares of high vote Class B common
stock to Mr. Allen. The net proceeds from the offerings of approximately $3.57
billion were used to purchase membership units of Charter Communications Holding
Company, LLC (Charter Holdco), except for a portion of the proceeds that were
retained by Charter to acquire a portion of the equity interests of Avalon Cable
LLC (Avalon). In exchange for the contribution of the net proceeds from the
offering and equity interests of Avalon, Charter received 195,550,000 membership
units of Charter Holdco on November 12, 1999, representing a 100% voting
interest and an approximate 40.6% economic interest.
Prior to November 12, 1999, Charter Holdco was owned 100% by Charter Investment
and Vulcan Cable III Inc. (Vulcan Cable), both entities controlled by Mr. Allen.
Subsequent to November 12, 1999, Mr. Allen controls Charter through his
ownership of all of the high vote Class B common stock and Charter controls
Charter Holdco through its ownership of all the voting interests. Charter's
purchase of 50,000 membership units of Charter Holdco was accounted for as a
reorganization of entities under common control similar to a pooling of
interests. Accordingly, beginning December 23, 1998, the date Mr. Allen first
controlled Charter Holdco, the assets and liabilities of Charter Holdco are
reflected in the consolidated financial statements of Charter at Mr. Allen's
basis and a minority interest is recorded representing that portion of the
economic interests not owned by Charter. For financial reporting purposes,
50,000 of the membership units previously issued by Charter Holdco to companies
controlled by Mr. Allen are considered held by Charter effective December 23,
1998, representing an economic interest of less than 1%.
Charter is a holding company whose sole asset is a controlling equity interest
in Charter Holdco, a direct and indirect owner of cable systems. Charter and
Charter Holdco and its subsidiaries are collectively referred to as the Company.
The Company owns and operates cable systems currently serving approximately 5.5
million customers. The Company offers a full range of traditional cable
television services and has begun to offer digital cable television services,
interactive video programming and high-speed Internet access.
CHARTER COMMUNICATIONS HOLDING COMPANY, LLC
Charter Holdco, a Delaware limited liability company, was formed in 1999 as a
wholly owned subsidiary of Charter Investment. Charter Investment through its
wholly owned subsidiary, Charter Communications Properties Holdings, LLC (CCPH),
commenced operations with the acquisition of a cable system on September 30,
1995.
Effective December 23, 1998, through a series of transactions, Mr. Allen
acquired approximately 94% of Charter Investment for an aggregate purchase price
of $2.2 billion, excluding $2.0 billion in debt assumed (the "Paul Allen
Transaction"). In conjunction with the Paul Allen Transaction, Charter
Investment acquired, for fair value from unrelated third parties 100% of the
interests it did not already own in CharterComm Holdings, LLC (CharterComm
Holdings) and CCA Group (comprised of CCA Holdings Corp., CCT Holdings Corp. and
Charter Communications Long Beach, Inc.), all cable television operating
companies, for $2.0 billion, excluding $1.8 billion in debt assumed. Charter
Investment previously managed and owned minority interests in these companies.
These acquisitions were accounted for using the purchase method of accounting
and accordingly, results of operations of CharterComm Holdings and CCA Group are
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included in the financial statements from the date of acquisition. In February
1999, Charter Investment transferred all of its cable television operating
subsidiaries to a wholly owned subsidiary of Charter Communications Holdings,
LLC (Charter Holdings), Charter Communications Operating, LLC (Charter
Operating). Charter Holdings is a wholly owned subsidiary of Charter Holdco.
This transfer was accounted for as a reorganization of entities under common
control similar to a pooling of interests.
As a result of the change in ownership of CCPH, CharterComm Holdings and CCA
Group, Charter Holdco has applied push-down accounting in the preparation of its
consolidated financial statements. Accordingly, on December 23, 1998, Charter
Holdco increased its members' equity by $2.2 billion to reflect the amounts paid
by Mr. Allen and Charter Investment. The purchase price was allocated to assets
acquired and liabilities assumed based on their relative fair values, including
amounts assigned to franchises of $3.6 billion. The allocation of the purchase
price is based, in part, on preliminary information which is subject to
adjustment upon obtaining complete appraisal and valuation information of
intangible assets. The valuation information is expected to be finalized in the
fourth quarter of 1999. Management believes that finalization of the purchase
price will not have a material impact on the results of operations or financial
position of the Company.
On April 23, 1998, Mr. Allen and a company controlled by Mr. Allen, (the "Mr.
Allen Companies") purchased substantially all of the outstanding partnership
interests in Marcus Cable Company, L.L.C. (Marcus Cable) for $1.4 billion,
excluding $1.8 billion in assumed liabilities. The owner of the remaining
partnership interest retained voting control of Marcus Cable. In February 1999,
Marcus Cable Holdings, LLC (Marcus Holdings) was formed, and Mr. Allen's
interests in Marcus Cable were transferred to Marcus Holdings. On March 31,
1999, Mr. Allen purchased the remaining partnership interests in Marcus Cable,
including voting control. On April 7, 1999, Marcus Holdings was merged into
Charter Holdings. For financial reporting purposes, the merger was accounted for
as an acquisition of Marcus Holdings effective March 31, 1999,the date Mr. Allen
obtained voting control of Marcus Holdings. Accordingly, the results of
operations of Marcus Holdings have been included in the financial statements
from April 1, 1999. The assets and liabilities of Marcus Holdings have been
recorded in the financial statements using historical carrying values reflected
in the accounts of the Mr. Allen Companies. Total members' equity of Charter
Holdco increased by $1.3 billion as a result of the Marcus Holdings acquisition.
Previously, on April 23, 1998, the Mr. Allen Companies recorded the assets
acquired and liabilities assumed of Marcus Holdings based on their relative fair
values.
The consolidated financial statements of Charter Holdco include the accounts of
Charter Operating and CCPH, the accounts of CharterComm Holdings and CCA Group
and their subsidiaries since December 23, 1998 (date acquired by Charter
Investment), and the accounts of Marcus Holdings since March 31, 1999. All
subsidiaries are, directly or indirectly, wholly owned by Charter Holdco. All
material intercompany transactions and balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. At December 31, 1998, and September
30, 1999, cash equivalents consist primarily of repurchase agreements. These
investments are carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installations. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, and equipment replacement and betterments are capitalized.
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Depreciation is provided on the straight-line basis over the estimated useful
lives of the related assets as follows:
<TABLE>
<S> <C>
Cable distribution systems 3-15 years
Buildings and leasehold improvements 5-15 years
Vehicles and equipment 3-5 years
</TABLE>
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable systems represent management's estimate
of fair value and are generally amortized using the straight-line method over a
period of 15 years. The period of 15 years is management's best estimate of the
useful lives of the franchises and assumes substantially all of those franchises
that expire during the period will be renewed by the Company.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired, the
carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized when
the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of December 31, 1998 and September 30, 1999, no
installation revenue has been deferred, as direct selling costs have exceeded
installation revenue.
Fees collected from programmers to guarantee carriage are deferred and amortized
to income over the life of the contracts. Local governmental authorities impose
franchise fees on the Company ranging up to a federally mandated maximum of 5.0%
of gross revenues. On a monthly basis, such fees are collected from the
Company's customers and are periodically remitted to local franchises. Franchise
fees collected and paid are reported as revenues.
INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate hedge
agreements, as required by certain debt agreements. Interest rate swaps, caps
and collars are accounted for as hedges of debt obligations, and accordingly,
the net settlement amounts are recorded as adjustments to interest expense in
the period incurred. Premiums paid for interest rate caps are deferred, included
in other assets, and are amortized over the original term of the interest rate
agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a fixed
rate and receive a floating rate thereby creating fixed rate debt. Interest rate
caps and collars are entered into by the Company to reduce the impact of rising
interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
INCOME TAXES
Prior to November 12, 1999, income taxes were the responsibility of the owners
of Charter Investment and Vulcan Cable and are not provided for in the
accompanying consolidated financial statements. Beginning November 12, 1999,
Charter
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is responsible for its pro rata share of taxable income (loss) of
Charter Holdco. Deferred income tax liabilities will be recorded during November
1999, with a charge to income tax expense related to the change in tax status.
Charter Holdco's limited liability company agreement provides that through the
end of 2003, tax losses of Charter Holdco that would otherwise have been
allocated to Charter will instead be allocated to the membership units held by
Vulcan Cable and Charter Investment. At the time Charter first becomes
profitable (as determined under the applicable federal income tax rules), the
profits that would otherwise have been allocated to Charter will instead be
allocated to the membership units held by Vulcan Cable and Charter Investment
until the tax benefits are fully restored. Management does not expect Charter
Holdco to generate tax profits in the foreseeable future.
SEGMENTS
In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." Segments have been identified based upon
management responsibility however the individual segments have been aggregated
into one segment, cable services.
LOSS PER SHARE
Loss per share is calculated in accordance with FASB Statement No.128, "Earnings
Per Share." For purposes of the loss per share calculation, Mr. Allen's 50,000
shares of high vote Class B common stock are considered to be outstanding for
the entire period. Basic loss per share is computed by dividing the net loss by
the 50,000 shares. Diluted loss per share equals basic loss per share for the
periods presented, as the effect of stock options is anti-dilutive because the
Company generated net losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS:
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. The interim consolidated financial
statements of the Company should be read in conjunction with the consolidated
financial statements of Charter Holdco and notes thereto as of and for the
periods ended December 31, 1998, included in the Form S-1 Registration Statement
of Charter. Interim results are not necessarily indicative of results for a full
year.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
4. ACQUISITIONS:
In addition to the Paul Allen Transaction and the acquisitions by Charter
Investment of CharterComm Holdings, CCA Group and Marcus Holdings, through
September 30, 1999, the Company has acquired cable systems in seven separate
transactions for an aggregate purchase price, net of cash acquired, of $2.7
billion, excluding debt assumed of $354 million. In connection with one of the
acquisitions, Charter Holdco issued preferred equity interests totaling $133.3
million. The purchase prices were allocated to assets acquired and liabilities
assumed based on their relative fair values, including amounts assigned to
franchises of $2.9 billion. The allocation of the purchase prices for these
acquisitions are based, in part, on preliminary information, which is subject to
adjustment upon obtaining complete valuation information. Management
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believes that finalization of the purchase prices will not have a material
impact on the consolidated results of operations or financial position of the
Company.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of acquisition. The
purchase prices were allocated to tangible and intangible assets based on
estimated fair values at the acquisition dates.
Pro forma operating results of Charter Holdco as though the acquisitions
discussed above, including the Paul Allen Transaction and the acquisition of
Marcus Holdings, and the refinancing discussed herein, had occurred on January
1, 1998, with adjustments to give effect to amortization of franchises, interest
expense and certain other adjustments are as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
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<S> <C> <C>
Revenues $ 1,264,090 $ 1,154,204
Loss from operations (111,400) (144,408)
Net loss (512,967) (560,444)
</TABLE>
The pro forma information has been presented for comparative purposes and does
not purport to be indicative of the results of operations had these transactions
been completed as of the assumed date or which may be obtained in the future. No
pro forma adjustments have been reflected to give effect to Charter's initial
public offering.
5. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
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<S> <C> <C>
Charter Holdings:
Credit Agreements (including CCPH, CCA Group and CharterComm Holdings) $ --- $ 1,726,500
Senior Secured Discount Debentures --- 109,152
11.250% Senior Notes --- 125,000
8.250% Senior Notes 600,000 ---
8.625% Senior Notes 1,500,000 ---
9.920% Senior Discount Notes 1,475,000 ---
Charter Operating Credit Facilities 2,850,000 ---
Renaissance:
10.0% Senior Discount Notes 114,413 ---
Rifkin:
11.125% Senior Subordinated Notes 125,000 ---
Note payable to former owner 3,000 ---
Helicon:
11.0% Senior Secured Notes 115,000 ---
----------- -----------
6,782,413 1,960,652
Current maturities --- (10,450)
Unamortized net (discount) premium (537,781) 41,554
----------- -----------
$ 6,244,632 $ 1,991,756
=========== ===========
</TABLE>
In March 1999, Charter Holdings and Marcus Holdings extinguished substantially
all existing long-term debt, excluding borrowings under its credit agreements,
and refinanced substantially all existing credit agreements at various
subsidiaries with a new credit agreement entered into by Charter Operating (the
"Charter Operating Credit Facilities"). The excess of the
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amount paid over the carrying value of the Company's long-term debt was recorded
as an extraordinary item-loss on early extinguishment of debt in the
accompanying consolidated statement of operations.
CHARTER HOLDINGS NOTES
In March 1999, Charter Holdings and Charter Communications Holdings Capital
Corporation, a subsidiary of Charter Holdings, (collectively the "Issuers")
issued $600.0 million 8.250% Senior Notes due 2007 (the "8.250% Senior Notes")
for net proceeds of $598.4 million, $1.5 billion 8.625% Senior Notes due 2009
(the "8.625% Senior Notes") for net proceeds of $1,495.4 million, and $1,475.0
million 9.920% Senior Discount Notes due 2011 (the "9.920% Senior Discount
Notes") for net proceeds of $905.6 million, (collectively with the 8.250% Senior
Notes and the 8.625% Senior Notes, referred to as the "Charter Holdings Notes").
The 8.250% Senior Notes are not redeemable prior to maturity. Interest is
payable semiannually in arrears on April 1 and October 1, beginning October 1,
1999 until maturity.
The 8.625% Senior Notes are redeemable at the option of the Issuers at amounts
decreasing from 104.313% to 100% of par value beginning on April 1, 2004, plus
accrued and unpaid interest, to the date of redemption. At any time prior to
April 1, 2002, the Company may redeem up to 35% of the aggregate principal
amount of the 8.625% Senior Notes at a redemption price of 108.625% of the
principal amount under certain conditions. Interest is payable semi-annually in
arrears on April 1 and October 1, beginning October 1, 1999 until maturity.
The 9.920% Senior Discount Notes are redeemable at the option of the Issuers at
amounts decreasing from 104.960% to 100% of accreted value beginning April 1,
2004. At any time prior to April 1, 2002, the Issuers may redeem up to 35% of
the aggregate principal amount of the 9.920% Senior Discount Notes at a
redemption price of 109.920% of the accreted value under certain conditions. No
cash interest will be payable until April 1, 2004. Thereafter, cash interest is
payable semi-annually in arrears on April 1 and October 1 beginning April 1,
2004 until maturity. The discount on the 9.920% Senior Discount Notes is being
accreted using the effective interest method at a rate of 9.920% per year. The
unamortized discount was $520.9 million at September 30, 1999.
The Charter Holdings Notes rank equally with current and future unsecured and
unsubordinated indebtedness (including trade payables of the Company). The
Issuers are required to make an offer to repurchase all of the Charter Holdings
Notes, at a price equal to 101% of the aggregate principal or 101% of the
accreted value, together with accrued and unpaid interest, upon a Change of
Control of Charter Holdings, as defined.
RENAISSANCE NOTES
In connection with the acquisition of Renaissance Media Group LLC (Renaissance)
during the second quarter of 1999, the Company assumed $163.2 million principal
amount of senior discount notes due April 2008 (the "Renaissance Notes"). As a
result of the change in control of Renaissance, the Company was required to make
an offer to repurchase the Renaissance Notes at 101% of their accreted value
plus accrued interest. In May 1999, the Company made an offer to repurchase the
Renaissance Notes pursuant to this requirement, and the holders of the
Renaissance Notes tendered an amount representing 30% of the total outstanding
principal amount for repurchase.
As of September 30, 1999, $114.4 million aggregate principal amount of
Renaissance Notes with an accreted value of $83.8 million remains outstanding.
Interest on the Renaissance Notes shall be paid semi-annually at a rate of 10%
per annum beginning on October 15, 2003.
The Renaissance Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after April 15, 2003, initially at 105% of their
principal amount at maturity, plus accrued interest, declining to 100% of the
principal amount at maturity, plus accrued interest, on or after April 15, 2006.
In addition, at any time prior to April 15, 2001, the Company may redeem up to
35% of the original principal amount at maturity with the proceeds of one or
more sales of membership units at 110% of their accreted value plus accrued
interest on the redemption date, provided that after any such redemption, at
least $106 million aggregate principal amount at maturity remains outstanding.
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HELICON NOTES
The Company acquired Helicon I, L.P. (Helicon) and affiliates in July 1999. As
of September 30, 1999, Helicon had outstanding $115.0 million in principal
amount of 11% senior secured notes due 2003 (the "Helicon Notes"). On November
1, 1999, the Company redeemed all of the Helicon Notes at a purchase price equal
to 103% of their principal amount, plus accrued interest, for $124.8 million
using borrowings from the Charter Operating Credit Facilities. Accordingly, the
Helicon Notes have been classified as long-term debt in the accompanying
consolidated balance sheet as of September 30, 1999.
RIFKIN NOTES
The Company acquired Rifkin Acquisition Partners L.L.P. and InterLink
Communications, Partners IV, LLP (collectively Rifkin) in September 1999. As of
September 30, 1999, Rifkin had outstanding $125.0 million in principal amount of
11.125% senior subordinated notes due 2006 (the "Rifkin Notes"). Interest on the
Rifkin subordinated notes is payable semi-annually on January 15 and July 15 of
each year. In September 1999, the Company commenced an offer to repurchase any
and all of the outstanding Rifkin Notes, together with a $3.0 million promissory
note payable to Monroe Rifkin, for cash at a premium over the principal amounts.
In conjunction with this tender offer, the Company sought and obtained the
consent of a majority in principal amount of the note holders of the outstanding
Rifkin Notes to proposed amendments to the indenture governing the Rifkin Notes,
which eliminated substantially all of the restrictive covenants. In November
1999, the Company repurchased the Rifkin Notes with a total outstanding
principal amount of $124.1 million for a total of $140.6 million, including a
consent fee to the holders who delivered timely consents to amending the
indenture, and repurchased the promissory note issued to Monroe Rifkin for $3.4
million. These notes were paid using borrowings from the Charter Operating
Credit Facilities. Accordingly, the Rifkin Notes and note payable to Monroe
Rifkin have been classified as long-term debt in the accompanying consolidated
balance sheet as of September 30, 1999.
CHARTER OPERATING CREDIT AGREEMENT
The Charter Operating Credit Facilities provides for two term facilities, one
with a principal amount of $1.0 billion that matures September 2008 (Term A),
and the other with the principal amount of $1.85 billion that matures March 2009
(Term B). The Charter Operating Credit Facilities also provides for a $1.25
billion revolving credit facility with a maturity date of September 2008.
Amounts under the Charter Operating Credit Facilities bear interest at the Base
Rate or the Eurodollar rate, as defined, plus a margin of up to 2.75% (7.53% as
of September 30, 1999). A quarterly commitment fee of between 0.25% and 0.375%
per annum is payable on the unborrowed balance of Term A and the revolving
credit facility.
The indentures governing the debt agreements require issuers of the debt and/or
its subsidiaries to comply with various financial and other covenants, including
the maintenance of certain operating and financial ratios. These debt
instruments also contain substantial limitations on, or prohibitions of
distributions, additional indebtedness, liens, asset sales and certain other
items. As a result of limitations and prohibitions of distributions,
substantially all of the net assets of the consolidated subsidiaries are
restricted for distribution to Charter Holdings, Charter Holdco and Charter.
Based upon outstanding indebtedness at September 30, 1999, the amortization of
term loans, scheduled reductions in available borrowings of the revolving credit
facility, and the maturity dates for all senior and subordinated notes,
aggregate future principal payments on the total borrowings under all debt
agreements at September 30, 1999, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
2000 $ --
2001 --
2002 88,875
2003 156,000
2004 168,500
Thereafter 6,369,038
--------------
$ 6,782,413
==============
</TABLE>
12
<PAGE> 13
6. RELATED-PARTY TRANSACTIONS:
The Company is charged a management fee equal to 3.5% percent of gross revenues
payable quarterly. To the extent management fees charged to the Company are
greater (less) than the corporate expenses incurred by Charter Investment, the
Company records a distribution to (capital contribution from) parent. For the
three and nine months ended September 30, 1999, the Company recorded a
distribution of $5.1 million and $14.8 million, respectively, substantially all
of which was allocated to minority interest. As of September 30, 1999,
management fees currently payable of $12.2 million are included in payables to
manager of cable systems -- related party. Also, included in payables to manager
of cable systems -- related party is a receivable of $2.2 million from Charter
Investment for the settlement of certain obligations related to the Paul Allen
Transaction. Beginning November 1999, the management fee charged to the Company
will equal the actual corporate expenses incurred by Charter Investment.
Pursuant to a membership interests purchase agreement, as amended, Vulcan Cable
contributed $500 million on August 10, 1999 to Charter Holdco, contributed an
additional $180.7 million in certain equity interests acquired in connection
with the acquisition of Rifkin Acquisitions Partners, L.L.L.P. and Interlink
Communications Partners, LLLP (collectively, "Rifkin") in September 1999 to
Charter Holdco, and contributed $644.3 million in September 1999 to Charter
Holdco. All funds and equity interests were contributed to Charter Holding.
Concurrently with closing of the initial public offering, Vulcan Cable
contributed $750 million to Charter Holdco.
7. MINORITY INTEREST AND PREFERRED EQUITY INTERESTS:
Minority interest represents total members' equity of Charter Holdco multiplied
by 99.96 % as of December 31, 1998 and 99.98 % as of September 30, 1999, the
ownership percentages of Charter Holdco not owned by Charter, plus preferred
equity interests issued to the sellers of acquired cable companies totaling
$133.3 million as of September 30, 1999. Members' equity of Charter Holdco
totaled $2.15 billion as of December 31, 1998 and $4.51 billion as of September
30, 1999.
The preferred equity interests in Charter Holdco held by the Rifkin sellers are
exchangeable into Class A common stock of Charter at the option of the Rifkin
sellers only at the time of the initial public offering. In November 1999,
preferred equity interests of $130.3 million were exchanged into Class A common
stock of Charter.
8. STOCK OPTION PLAN:
In accordance with an employment agreement between Charter Investment and the
President and Chief Executive Officer of Charter Investment and a related option
agreement between Charter Holdco and with the President and Chief Executive
Officer, an option to purchase 3% of the equity value of Charter Holdco, or
7,044,121 membership interests, was issued to the President and Chief Executive
Officer. The option vests over a four year period from the date of grant and
expires ten years from the date of grant.
In February 1999, Charter Investment adopted an option plan providing for the
grant of options to purchase up to an aggregate of 10% of the equity value of
the Company. The plan was assumed by Charter Holdco. The option plan provides
for grants of options to employees, officers and directors of Charter Holdco and
its affiliates and consultants who provide services to Charter Holdco. Options
granted vest over five years from the grant date commencing 15 months after the
date of grant. Options not exercised accumulate and are exercisable, in whole or
in part, in any subsequent period, but not later than ten years from the date of
grant.
Membership units received upon exercise of the options will be automatically
exchanged for shares of Class A common stock of Charter on a one-for-one basis.
13
<PAGE> 14
Options outstanding as of December 3, 1999, are as follows:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
---------------------------------------------------------------- -----------
REMAINING NUMBER
NUMBER OF EXERCISE TOTAL CONTRACT LIFE OF
OPTIONS PRICE DOLLARS (IN YEARS) OPTIONS
------- ----- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Outstanding as of
January 1, 1999 7,044,127 $ 20.00 $ 140,883 9.2 (1) 1,761,032
Granted:
February 9, 1999 9,111,681 20.00 182,234 130,000
April 5, 1999 473,000 20.73 9,805 --
November 8, 1999 4,741,400 19.00 90,087 200,000
Cancelled (607,000) 20.00-20.73 (12,162) --
--------------- ----------- ------------ ------ -----------
Outstanding as of
December 3, 1999 20,763,208 $ 19.79 (1) $ 410,847 9.4 (1) 2,091,032
=============== ========= ============ ====== ===========
</TABLE>
- ---------------------------
(1) Weighted average
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" to account for the option plans. Stock option
compensation expense of $845 for the year end December 31, 1998 and $59.3
million for the nine months ended September 30, 1999, respectively, has been
recorded in the financial statements since the exercise prices were less than
the estimated fair values of the underlying membership interests on the date of
grant. Estimated fair values were determined by the Company using the valuation
inherent in the Paul Allen Transaction and valuations of public companies in the
cable television industry adjusted for factors specific to the Company.
Compensation expense is being accrued over the vesting period of each grant that
varies from four to five years. As of September 30, 1999, deferred compensation
remaining to be recognized in future periods totaled $104 million. No stock
option compensation expense will be recorded for the November 8, 1999 options
since the exercise price is equal to the estimated fair value of the underlying
membership interests on the date of grant. Since the membership units are
exchangeable into Class A common stock of Charter on a one-for-one basis, the
estimated fair value was equal to the initial offering price of Class A common
stock.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
As previously disclosed in Charter's Form S-1 Registration Statement, the Rifkin
sellers who own preferred membership units of Charter Holdco, including those
sellers that exchanged their units for common stock of Charter in November 1999,
may have rescission rights arising out of possible violations of Section 5 of
the Securities Act of 1933 in connection with the offers and sales of these
equity interests. Accordingly, these equity interests have been classified as
short-term debt because these obligations could be put to the Company as
unsecured creditor claims.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the federal,
local and, in some instances, state levels. The Cable Communications Policy Act
of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable
Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996
Telecom Act"), establish a national policy to guide the development and
regulation of cable systems. The Federal Communications Commission (FCC) has
principal responsibility for
14
<PAGE> 15
implementing the policies of the Cable Acts. Many aspects of such regulation are
currently subject to judicial proceedings and administrative or legislative
proposals. Legislation and regulations continue to change, and the Company
cannot predict the impact of future developments on the cable television
industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable systems and have
resulted in additional regulatory oversight by the FCC and local or state
franchise authorities. The Cable Acts and the corresponding FCC regulations have
established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations, of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates for
certain small cable operators and in certain limited circumstances rates on the
basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may revisit the CPST rate
regulation issue if confronted with substantial rate increases. Continued rate
regulation, if adopted, could limit the rates charged by the Company.
A number of states subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. State governmental agencies are required to
follow FCC rules when prescribing rate regulation, and thus, state regulation of
cable television rates is not allowed to be more restrictive than the federal or
local regulation. The Company is subject to state regulation in Connecticut.
10. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either as asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivatives gains and
losses to offset related results on the hedged items in the income statement,
and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133--An Amendment of FASB Statement No.
133" has delayed the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. We have not yet quantified the impact of adopting SFAS No.
133 on our consolidated financial statements nor have we determined the timing
of our adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility
in earnings (losses).
15
<PAGE> 16
11. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
CHARTER COMMUNICATIONS, INC. (PARENT COMPANY ONLY)
BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSET
INVESTMENT IN CHARTER HOLDCO $ 802 $ 830
===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY:
Class B common stock; $.001 par value; 750 million shares authorized;
50,000 shares issued and outstanding -- --
Additional paid-in capital 905 832
Retained deficit (103) (2)
----- -----
$ 802 $ 830
===== =====
</TABLE>
CHARTER COMMUNICATIONS, INC. (PARENT COMPANY ONLY)
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
---- ----
<S> <C> <C>
EQUITY IN LOSSES OF CHARTER HOLDCO $(35) $(97)
---- ----
Net loss $(35) $(97)
==== ====
</TABLE>
The investment in Charter Holdco is accounted for on the equity method. No
statement of cash flows has been presented, as Charter (parent company only) had
no cash flow activity during the periods presented.
12. SUBSEQUENT EVENTS:
In October 1999, the Company acquired certain cable systems from InterMedia
Capital Partners IV, L.P., InterMedia Partners and affiliates (collectively
InterMedia) in a transaction for an aggregate purchase price of $873 million in
cash plus adjustments and exchanged company-operated cable systems serving
approximately 142,000 customers. At the closing, Charter Holdings retained a
cable system serving approximately 30,000 customers for which Charter Holdings
was unable to obtain the necessary regulatory approvals. If the necessary
regulatory approvals cannot be obtained for the transfer of this system by March
28, 2000, InterMedia could require the Company to pay it $88.2 million in lieu
of transferring the retained cable system. If InterMedia has not required the
Company to make such payment by October 1, 2000 and the Company is still unable
to transfer to InterMedia satisfactory replacement systems by that date because
of a failure to obtain the necessary regulatory approvals, the Company could
elect to pay InterMedia $88.2 million. In addition, if the Company transfers
cash or property other than the retained system to InterMedia, in certain
circumstances, the Company must indemnify InterMedia 50% of all taxes and
related costs incurred or arising out of any claim that InterMedia suffered tax
16
<PAGE> 17
losses to which it would not have been subject to if the Company had transferred
the retained system. The exchange of cable systems will be recorded at the fair
value of the systems exchanged.
As a result of the initial public offering in November 1999 as well and the
exchange of Charter Holdco equity interests for Charter Class A common stock by
the Rifkin and Falcon Communications, L.P. (Falcon) sellers, as of November 30,
1999, the Company's stockholders' equity is as follows:
- Class A common stock; $.001 par value; 1.5 billion shares authorized,
221,690,584 shares issued and outstanding
- Class B common stock; $.001 par value; 750 million shares authorized,
50,000 shares issued and outstanding
- Preferred stock; $.001 par value; 250 million shares authorized; no
shares issued and outstanding
In November 1999, Charter Holdco acquired cable systems from Fanch Cablevision
L.P. (Fanch), Falcon, and Avalon. These transactions had an aggregate purchase
price of $6.7 billion plus adjustments. The purchase price consisted of cash of
$4.2 billion, assumed debt of $2.0 billion and the issuance of 20.8 million
membership units of Charter Holdco with a value of $550.0 million. All of these
membership units were exchanged for Class A common stock of Charter on a
one-for-one basis and 1.6 million shares were put to Mr. Allen. All remaining
shares held by the Falcon sellers are putable to Mr. Allen for two years.
In June 1999, Charter Holdco entered into an agreement to purchase the cable
systems of Bresnan Communications Company Limited Partnership (Bresnan). The
purchase price will be paid with a portion of the proceeds from Charter's
initial public offering, $1.0 billion of equity of Charter Holdco to be issued
to specified sellers in the acquisition, assumed debt (comprised of the existing
Bresnan credit facilities and publicly held notes) and borrowings under credit
facilities. The Bresnan acquisition is anticipated to close in the first quarter
of 2000.
Charter Holdings is contemplating a Rule 144A debt offering of Senior Notes and
Senior Discount Notes (the Notes). Upon completion of this offering, Charter
Holdings will use the proceeds to repurchase certain notes of Falcon and Avalon
related to change of control provisions.
In connection with the offering of the Notes, Charter Holdings and Charter
Holdco will effect a number of transactions to transfer recently acquired cable
systems and the Bresnan cable systems to be acquired to Charter Holdings. As a
result of these transactions, Charter Holdings will become the indirect parent
of the Fanch, Avalon, Falcon and Bresnan cable systems. Prior to the sale of the
Notes, the Avalon, Falcon, and Fanch transfers will occur. Shortly after the
consummation of the Bresnan acquisition, which is expected to be completed in
the first quarter of 2000, the Bresnan transfer will occur.
On December 1, 1999, Charter and AT&T entered into a non-binding letter of
intent to exchange certain of Charter's cable systems for cable systems owned by
AT&T. As part of this transaction, Charter will be required to pay AT&T
approximately $108 million in cash. This payment represents the difference in
the agreed values of the systems to be exchanged.
17
<PAGE> 18
CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
-------- --------
<S> <C> <C>
REVENUES $ 17,403 $ 32,532
-------- --------
OPERATING EXPENSES:
Operating, general and administrative 9,121 17,498
Depreciation and amortization 5,925 11,236
Corporate expense charges--related party 871 1,499
-------- --------
15,917 30,233
-------- --------
Income from operations 1,486 2,299
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (6,212) (11,831)
Interest income 9 23
Other, net 3 6
-------- --------
(6,200) (11,802)
-------- --------
Net loss $ (4,714) $ (9,503)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
18
<PAGE> 19
CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1998
---------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,503)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 11,236
Amortization of non-cash interest expense 802
Changes in assets and liabilities, net of effects from acquisitions --
Accounts receivable, net (1,380)
Prepaid expenses and other (229)
Accounts payable and accrued expenses 15,265
Payables to manager of cable systems, including deferred management fees 1,974
---------------
Net cash provided by operating activities 18,165
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,896)
Payments for acquisitions, net of cash acquired (167,484)
Other investing activities 8
---------------
Net cash used in investing activities (174,372)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 201,200
Repayments of long-term debt (48,500)
Payments for debt issuance costs (3,440)
Capital contributions 7,000
---------------
Net cash provided by financing activities 156,260
---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 53
CASH AND CASH EQUIVALENTS, beginning of period 626
---------------
CASH AND CASH EQUIVALENTS, end of period $ 679
===============
CASH PAID FOR INTEREST $ 9,248
===============
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
19
<PAGE> 20
CHARTER COMMUNICATIONS PROPERTIES HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Charter Communications Properties Holdings, LLC (CCPH), formerly Charter
Communications Properties Holdings, Inc., through its wholly owned cable
television operating subsidiary, Charter Communications Properties, LLC (CCP),
commenced operations with the acquisition of a cable television system on
September 30, 1995. Prior to February 19, 1999, CCPH was wholly owned by Charter
Investment, Inc. (Charter Investment).
Effective December 23, 1998, as part of a series of transactions, through which
Mr. Allen acquired approximately 94% of Charter Investment, Mr. Allen acquired
CCPH for an aggregate purchase price of $211 million, excluding $214 million in
debt assumed (the "Paul Allen Transaction"). In conjunction with the Paul Allen
Transaction, Charter Investment acquired 100% of the interest it did not already
own in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised
of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach
Inc.), all cable television operating companies, for $2.0 billion, excluding
$1.8 billion in debt assumed from unrelated third parties for fair value.
Charter Investment previously managed and owned minority interests in these
companies. In February 1999, Charter Investment transferred all of its cable
television operating subsidiaries to a wholly owned subsidiary of Charter
Communications Holdings, LLC (Charter Holdings), Charter Communications
Operating, LLC (Charter Operating). Charter Holdings is a wholly owned
subsidiary of Charter Investment. The transfer was accounted for as a
reorganization of entities under common control similar to a pooling of
interests.
The accompanying financial statements include the accounts of CCPH and its
wholly owned cable operating subsidiary CCP, (the Company). The accounts of
CharterComm Holdings and CCA Group are not included since these companies were
not owned and controlled by Charter Investment prior to December 23, 1998.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installations. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred, and
equipment replacement and betterments are capitalized.
Depreciation is provided on the straight-line basis over the estimated useful
life of the related assets as follows:
Cable distribution systems 3-15 years
Buildings and leasehold improvements 5-15 years
Vehicles and equipment 3-5 years
20
<PAGE> 21
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable systems represent management's best
estimate of fair value and generally are amortized using the straight-line
method over a period of up to 15 years. The period of 15 years is management's
best estimate of the useful lives of the franchises and assumes substantially
all of those franchises that expire during the period will be renewed by the
Company.
OTHER ASSETS
Debt issuance costs are being amortized to interest expense over the term of the
related debt. The interest rate cap costs are being amortized over the terms of
the agreement, which approximates three years.
IMPAIRMENT OF ASSETS
If the facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized when
the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
average estimated period that customers are expected to remain connected to the
cable television system. In 1998, no installation revenue was deferred, as
direct selling costs have exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and amortized
to income over the life of the contracts. Local governmental authorities impose
franchise fees on the Company ranging up to a federally mandated maximum of 5.0%
of gross revenues. On a monthly basis, such fees are collected from the
Company's customers and are periodically remitted to local franchises. Franchise
fees collected and paid are reported as revenues.
INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate hedge
agreements, as required by certain debt agreements. Interest rate swaps, caps
and collars are accounted for as hedges of debt obligations, and accordingly,
the net settlement amounts are recorded as adjustments to interest expense in
the period incurred. Premiums paid for interest rate caps are deferred, included
in other assets, and are amortized over the original term of the interest rate
agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a fixed
rate and receive a floating rate thereby creating fixed rate debt. Interest rate
caps and collars are entered into by the Company to reduce the impact of rising
interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
INCOME TAXES
The Company files a consolidated income tax return with Charter Investment.
Income taxes are allocated to the Company in accordance with the tax-sharing
agreement between the Company and Charter Investment.
21
<PAGE> 22
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. ACQUISITIONS:
In 1998, the Company acquired cable systems for an aggregate purchase price, net
of cash acquired, of $228,400, comprising $167,500 in cash and $60,900 in a note
payable to Seller. The excess of cost of properties acquired over the amounts
assigned to net tangible assets at the date of acquisition was $207,600 and is
included in franchises.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of acquisition. The
purchase prices were allocated to tangible and intangible assets based on
estimated fair values at the acquisition dates.
Unaudited pro forma operating results as though the acquisitions discussed
above, including the Paul Allen Transaction, had occurred on January 1, 1998,
with adjustments to give effect to amortization of franchises, interest expense
and certain other adjustments are as follows:
<TABLE>
<CAPTION>
Period from
January 1,
1998, through
December 23,
1998
------------
(Unaudited)
<S> <C>
Revenues $588,760
Loss from operations (92,014)
Net loss (192,789)
</TABLE>
The unaudited pro forma information has been presented for comparative purposes
and does not purport to be indicative of the results of operations had these
transactions been completed as of the assumed date or which may be obtained in
the future.
3. INCOME TAXES:
Deferred tax assets and liabilities are recognized for the estimated future tax
consequence attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred income tax assets and liabilities are measured using the enacted tax
rates in effect for the year in which those temporary differences are expected
to be recovered or settled. Deferred income tax expense or benefit is the result
of changes in the liability or asset recorded for deferred taxes. A valuation
allowance must be established for any portion of a deferred tax asset for which
it is more likely than not that a tax benefit will not be realized.
No current provision (benefit) for income taxes was recorded. The effective
income tax rate is less than the federal rate of 35% primarily due to providing
a valuation allowance on deferred income tax assets.
4. RELATED PARTY TRANSACTIONS:
Charter Investment provides management services to the Company under the terms
of contracts which provide for fees from to 3% to 5% of revenues or a flat fee
plus an additional fee equal to 30% of the excess, if any, of operating cash
flows (as defined in the management agreement). The debt agreements prohibit
payment of a portion of such management fees until repayment in full of the
outstanding indebtedness. Expenses recognized under the contract for the three
months and nine months ended September 30, 1998, were $871 and $1,499,
respectively.
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<PAGE> 23
The Company utilizes a combination of insurance coverage and self-insurance
programs for medical, dental and workers' compensation claims. The Company is
allocated charges monthly based upon its total number of employees, historical
claims and medical cost trend rates. Management considers this allocation to be
reasonable for the operations of the Company. For the three months and nine
months ended September 30, 1998, the Company expensed $102 and $247,
respectively, relating to insurance allocations.
The Company employs the services of Charter Investment's National Data Center
(the "National Data Center"). The National Data Center performs certain customer
billing services and provides computer network, hardware and software support
for the Company and other entities managed by Charter Investment. The cost of
these services is allocated based on the number of basic customers. Management
considers this allocation to be reasonable for the operations of the Company.
For the three months and nine months ended September 30, 1998, the Company
expensed $15 and $42, respectively, relating to these services.
The entities managed by Charter Investment maintain regional offices. The
regional offices perform certain operational services. The cost of these
services is allocated based on the number of basic customers. Management
considers this allocation to be reasonable for the operations of the Company.
For the three months and nine months ended September 30, 1998, the Company
expensed $239 and $461, respectively, relating to these services.
5. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the federal,
local and, in some instances, state levels. The Cable Communications Policy Act
of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable
Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996
Telecom Act"), establish a national policy to guide the development and
regulation of cable systems. The Federal Communications Commission (FCC) has
principal responsibility for implementing the policies of the Cable Acts. Many
aspects of such regulation are currently the subject to judicial proceedings and
administrative or legislative proposals. Legislation and regulations continue to
change, and the Company cannot predict the impact of future developments on the
cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable systems and have
resulted in additional regulatory oversight by the FCC and local or state
franchise authorities. The Cable Acts and the corresponding FCC regulations have
established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
23
<PAGE> 24
The 1996 Telecom Act, among other things, immediately deregulated the rates for
certain small cable operators and in certain limited circumstances rates on the
basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable systems to the jurisdiction of centralized
state governmental agencies, some of which impose regulation of a character
similar to that of a public utility. State governmental agencies are required to
follow FCC rules when prescribing rate regulation, and thus, state regulation of
cable television rates is not allowed to be more restrictive than the federal or
local regulation. The Company is subject to state regulation in Connecticut.
6. EMPLOYEE BENEFIT PLANS:
APPRECIATION RIGHTS PLAN
Certain employees of Charter Investment participate in the 1995 Charter
Communications, Inc. Appreciation Rights Plan (the "Plan"). As a result of the
acquisition of Charter Investment by Mr. Allen, the plan was terminated and all
amounts were paid by Charter Investment in the fourth quarter of 1998. The cost
of this plan was allocated to the Company based on the number of basic
customers. Management considers this allocation to be reasonable for the
operations of the Company.
7. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the financial Accounting Standards Board (FASB) adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing of its adoption of SFAS
No. 133. However, SFAS No. 133 could increase volatility in earnings (loss).
24
<PAGE> 25
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.
CHARTER COMMUNICATIONS, INC.
On July 22, 1999, Charter Investment, Inc. (Charter Investment), a Company
controlled by Paul G. Allen, formed a wholly owned subsidiary, Charter
Communications, Inc. (Charter), a Delaware corporation, with a nominal
investment.
On November 12, 1999, Charter sold 195.5 million shares of Class A common stock
in an initial public offering and 50,000 shares of high vote Class B common
stock to Mr. Allen. The net proceeds from the offerings of approximately $3.57
billion were used to purchase membership units of Charter Communications Holding
Company LLC (Charter Holdco), except for a portion of the proceeds that were
retained by Charter to acquire a portion of the equity interests of Avalon
Cable, LLC (Avalon). In exchange for the contribution of the net proceeds of the
offering and equity interests acquired, Charter received 195,550,000 membership
units of Charter Holdco on November 12, 1999, representing a 100% voting
interest and an approximately 40.6% economic interest.
Prior to November 12, 1999, Charter Holdco was owned 100% by Charter Investment
and Vulcan Cable III Inc. (Vulcan Cable), both entities controlled by Mr. Allen.
Subsequent to November 12, 1999, Mr. Allen controls Charter through his
ownership of all of the high vote Class B common stock and Charter controls
Charter Holdco through its ownership of all the voting interests. Charter's
purchase of 50,000 membership units of Charter Holdco was accounted for as a
reorganization of entities under common control similar to a pooling of
interests. Accordingly, beginning December 23, 1998, the date Mr. Allen first
controlled Charter Holdco, the assets and liabilities of Charter Holdco are
reflected in the consolidated financial statements of Charter at Mr. Allen's
basis and a minority interest is recorded representing that portion of the
economic interests not owned by Charter. For financial reporting purposes,
50,000 of the membership units previously issued by Charter Holdco to companies
controlled by Mr. Allen are considered held by Charter effective December 23,
1998, representing an economic interest of less than 1%.
Charter is a holding company whose sole asset is a controlling equity interest
in Charter Holdco, a direct and indirect owner of cable systems. Charter and
Charter Holdco and its subsidiaries are collectively referred to as the Company.
The Company owns and operates cable systems currently serving approximately 5.5
million customers. The Company offers a full range of traditional cable
television services and has begun to offer digital cable television services,
interactive video programming and high-speed Internet access.
We do not believe that the historical financial condition and results of
operations are accurate indicators of future results because of recent
significant events, including:
(1) the acquisition by Mr. Allen of CCA Group, Charter
Communications Properties Holdings, LLC (CCPH) and CharterComm
Holdings LLC, referred to together with their subsidiaries as
the Charter companies;
(2) the merger of Marcus Cable Holdings, LLC with and into Charter
Holdings;
(3) the recent and pending acquisitions of Charter Holdings and
Charter Holdco and their direct and indirect subsidiaries;
(4) the refinancing of the previous credit facilities of the
Charter companies;
(5) the purchase of publicly held notes that had been issued by
several of the direct and indirect subsidiaries of Charter
Holdings and Marcus Holdings; and
(6) the allocation of substantially all losses to minority
interests.
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<PAGE> 26
Provided below is a discussion of our organizational history consisting of:
(1) the operation and development of the Charter companies prior
to the acquisition by Mr. Allen, together with the acquisition
of the Charter companies by Mr. Allen;
(2) the merger of Marcus Holdings with and into Charter Holdings;
(3) the recent and pending acquisitions; and
(4) the initial public offering by Charter Communications, Inc.
and acquisitions of Charter Holdco.
ORGANIZATIONAL HISTORY
Prior to the acquisition of the Charter companies by Mr. Allen on December 23,
1998 and the merger of Marcus Holdings with and into Charter Holdings effective
April 7, 1999, the cable systems of the Charter and Marcus companies were
operated under four groups of companies. Three of these groups were comprised of
companies that were managed by Charter Investment prior to the acquisition of
the Charter companies by Mr. Allen and the fourth group was comprised of
companies that were subsidiaries of Marcus Holdings. Charter Investment started
managing Marcus Holdings in October 1998.
The following is an explanation of how:
(1) CCPH; the operating companies that formerly comprised CCA
Group and CharterComm Holdings; and the Marcus companies
became wholly owned subsidiaries of Charter Operating;
(2) Charter Operating became a wholly owned subsidiary of Charter
Holdings;
(3) Charter Holdings became a wholly owned subsidiary of Charter
Holdco; and
(4) Charter Holdco became a wholly owned subsidiary of Charter
Investment.
THE CHARTER COMPANIES
Prior to Charter Investment acquiring the remaining interests that it did not
previously own in two of the three groups of Charter companies, namely CCA Group
and CharterComm Holdings, as described below, the operating subsidiaries of the
three groups of Charter companies were parties to separate management agreements
with Charter Investment pursuant to which Charter Investment provided management
and consulting services. Prior to our acquisition by Mr. Allen, the Charter
companies were as follows:
(1) CCPH
CCPH was a wholly owned subsidiary of Charter Investment. The primary
subsidiary of CCPH, which owned the cable systems, was Charter
Communications Properties, LLC. In connection with Mr. Allen's
acquisition on December 23, 1998, CCPH was merged out of existence.
CCPH became a direct, wholly owned subsidiary of Charter Investment. In
May 1998, CCPH acquired certain cable systems from Sonic
Communications, Inc. for a total purchase price, net of cash acquired,
of $228.4 million, including $60.9 million of assumed debt.
(2) CCA Group
The controlling interests in CCA Group were held by affiliates
of Kelso & Co. Charter Investment had only a minority interest.
Effective December 23, 1998, prior to Mr. Allen's acquisition, the
remaining interests it did not previously own in CCA Group were
acquired by Charter Investment from the Kelso affiliates. Consequently,
the companies comprising CCA Group became wholly owned subsidiaries of
Charter Investment.
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<PAGE> 27
CCA Group consisted of the following three sister companies:
(a) CCT Holdings, LLC,
(b) CCA Holdings, LLC, and
(c) Charter Communications Long Beach, LLC.
The cable systems were owned by the various subsidiaries of these three
sister companies. The financial statements for these three sister
companies historically were combined and the term "CCA Group" was
assigned to these combined entities. In connection with Mr. Allen's
acquisition on December 23, 1998, the three sister companies and some
of the non-operating subsidiaries were merged out of existence, leaving
certain of the operating subsidiaries owning all of the cable systems
under this former group. These operating subsidiaries became indirect,
wholly owned subsidiaries of Charter Investment.
(3) CharterComm Holdings, LLC
The controlling interests in CharterComm Holdings were held by
affiliates of Charterhouse Group International Inc. Charter Investment
had only a minority interest. Effective December 23, 1998, prior to Mr.
Allen's acquisition, the remaining interests it did not previously own
in CharterComm Holdings were acquired by Charter Investment from the
Charterhouse affiliates. Consequently, CharterComm Holdings became a
wholly owned subsidiary of Charter Investment.
The cable systems were owned by the various subsidiaries of CharterComm
Holdings. In connection with Mr. Allen's acquisition on December 23, 1998, some
of the non-operating subsidiaries were merged out of existence, leaving certain
of the operating subsidiaries owning all of the cable systems under this former
group. CharterComm Holdings was merged out of existence. Charter Communications,
LLC became a direct, wholly owned subsidiary of Charter Investment.
In February 1999, Charter Holdings was formed as a wholly owned subsidiary of
Charter Investment and Charter Operating was formed as a wholly owned subsidiary
of Charter Holdings. All of Charter Investment's direct interests in the
entities described above were transferred to Charter Operating. All of the prior
management agreements were terminated and a new management agreement was entered
into between Charter Investment and Charter Operating.
In May 1999, Charter Holdco was formed as a wholly owned subsidiary of Charter
Investment. All of Charter Investment interests in Charter Holdings were
transferred to Charter Holdco.
The acquisition by Mr. Allen became effective on December 23, 1998, through a
series of transactions in which Mr. Allen acquired approximately 94% of the
equity interests of Charter Investment for an aggregate purchase price of $2.2
billion, excluding $2.0 billion in assumed debt. CCPH, the operating companies
that formerly comprised CCA Group and CharterComm Holdings were contributed to
Charter Operating subsequent to Mr. Allen's acquisition. CCPH deemed to be our
predecessor. Consequently, the contribution of CCPH was accounted for as a
reorganization under common control. Accordingly, Charter Holdings results of
operations for periods prior to and including December 23, 1998 include the
accounts of CCPH. The contributions of the operating companies that formerly
comprised CCA Group and CharterComm Holdings were accounted for in accordance
with purchase accounting. Accordingly, Charter Holdings results of operations
for periods after December 23, 1998 include the accounts of CCPH, CCA Group and
CharterComm Holdings.
THE MARCUS COMPANIES
In April 1998, Mr. Allen acquired approximately 99% of the non-voting economic
interests in Marcus Cable, and agreed to acquire the remaining interests. The
owner of the remaining partnership interests retained voting control of Marcus
Cable. In October 1998, Marcus Cable entered into a management consulting
agreement with Charter Investment, pursuant to which Charter Investment provided
management and consulting services to Marcus Cable and its subsidiaries which
own cable systems. This agreement placed the Marcus cable systems under common
management with the cable systems of the Charter companies acquired by Mr. Allen
in December 1998.
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<PAGE> 28
In March 1999, all of Mr. Allen's interests in Marcus Cable were transferred to
Marcus Holdings, a then newly formed company. Later in March 1999, Mr. Allen
acquired the remaining interests in Marcus Cable, including voting control,
which interests were transferred to Marcus Holdings. In April 1999, Mr. Allen
merged Marcus Holdings into Charter Holdings, and the operating subsidiaries of
Marcus Holdings and all of the cable systems they owned came under the ownership
of Charter Holdings and, in turn, Charter Operating. For financial reporting
purposes, the merger of Marcus Holdings with and into Charter Holdings was
accounted for as an acquisition of Marcus Holdings effective March 31, 1999, and
accordingly, the results of operations of Marcus Holdings have been included in
the consolidated financial statements of Charter Holdco since that date.
RECENT AND PENDING ACQUISITIONS
In 1999, direct or indirect subsidiaries of Charter Holdings acquired
Renaissance Media Group LLC (Renaissance), American Cable Entertainment, LLC
(American Cable), cable systems of Greater Media Cablevision, Inc.(Greater
Media), Helicon Partners I, L.P. and affiliates (Helicon), Vista Broadband
Communications, L.L.C.(Vista), a cable system of Cable Satellite of South Miami,
Inc.(Cable Satellite), Rifkin Acquisition Partners, L.L.L.P. and InterLink
Communications, LLLP (collectively Rifkin), and cable systems of InterMedia
Partners and affiliates (collectively InterMedia) for a total purchase price of
approximately $4.3 billion which included assumed debt of $354 million. These
acquisitions were funded through excess cash from the issuance by Charter
Holdings of senior notes, borrowings under the Charter Operating credit
facilities, capital contributions to Charter Holdings by Mr. Allen and the
assumption of the outstanding Renaissance, Helicon and Rifkin notes.
As part of the transaction with InterMedia, we agreed to "swap" some of our
non-strategic cable systems located in Indiana, Montana, Utah and northern
Kentucky, representing 142,000 basic customers. The InterMedia systems serve
approximately 413,000 customers in Georgia, North Carolina, South Carolina and
Tennessee. We have transferred cable systems with 112,000 customers to
InterMedia in connection with this swap. A cable system with customers totaling
30,000 has yet to be transferred pending the necessary regulatory approvals. If
the necessary regulatory approvals cannot be obtained for the transfer of this
system by March 28, 2000, InterMedia could require us to pay it $88.2 million in
lieu of transferring the retained cable system. If InterMedia has not required
us to make such payment by October 1, 2000 and we are still unable to transfer
to InterMedia satisfactory replacement systems by that date because of a failure
to obtain the necessary regulatory approvals, we could elect to pay InterMedia
$88.2 million. In addition, if we transfer cash or property other than the
retained system to InterMedia, in certain circumstances, we must indemnify
InterMedia 50% of all taxes and related costs incurred or arising out of any
claim that InterMedia suffered tax losses to which it would not have been
subject to if we had transferred the retained system. The exchange of cable
systems will be recorded at the agreed value of the systems exchanged.
In addition to these acquisitions, since the beginning of 1999, Charter Holdco
acquired Avalon Cable LLC (Avalon), Cable systems of Fanch Cablevision L.P. and
affiliates (collectively Fanch), and Falcon Communications, L.P. (Falcon) cable
systems and entered into a definitive agreement to acquire the Bresnan
Communications Company Limited Partnership (Bresnan) cable systems. All of these
acquisitions are set forth in the table below. The Avalon, Fanch and Falcon
purchase prices were paid with the net proceeds of the initial public offering,
an equity contribution to Charter Holdco by Mr. Allen through Vulcan Cable,
borrowings under credit facilities, and the assumption of outstanding notes
issued by Avalon and Falcon. The Bresnan acquisition will be financed with a
portion of the proceeds from Charter's initial public offering, borrowings under
credit facilities, equity to be issued to specific sellers in the acquisition
and assumed debt (comprised of the Bresnan credit facilities and publicly held
notes). We intend to amend and assume the existing Bresnan credit facilities.
Not all of the funding necessary to purchase the Bresnan notes that we expect
will be put to us has been arranged.
Under the Falcon purchase agreement, specified Falcon sellers received $550.0
million of the Falcon purchase price in the form of 20.8 million membership
units in Charter Holdco. All of the membership units were exchanged for Class A
common stock of Charter on a one-for-one basis and 1.6 million shares were put
to Mr. Allen. Under the Bresnan purchase agreement, the Bresnan sellers have
agreed to receive $1.0 billion of the Bresnan purchase price in the form of
membership units in Charter Holdco. In addition, certain Rifkin sellers received
$133.3 million of the purchase price in the form of preferred equity of Charter
Holdco. In November 1999, the Rifkin Sellers exchanged $130.3 million preferred
interests for Class A common stock of Charter. Under the Helicon purchase
agreement, $25 million of the purchase price was paid in the form of preferred
limited liability company interests of Charter-Helicon, LLC, a direct wholly
owned subsidiary of Charter Communications, LLC, itself an indirect subsidiary
of Charter Holdco.
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<TABLE>
<CAPTION>
PURCHASE BASIC SUBSCRIBERS
ACQUISITION PRICE AS OF
ACQUISITION DATE (IN MILLIONS) SEPTEMBER 30, 1999
- ----------- ---- ------------- ------------------
<S> <C> <C> <C>
Renaissance ...................... 4/99 $ 459 132,000
American Cable ................... 5/99 240 69,000
Greater Media systems ............ 6/99 500 174,000
Helicon ......................... 7/99 550 172,000
Vista ......................... 7/99 126 27,000
Cable Satellite................... 8/89 22 9,000
Rifkin ......................... 9/99 1,460 464,000
InterMedia systems................ 10/99 873+ 413,000
systems swap (142,000)(a)
------------
271,000
------------
Avalon (b)........................ 11/99 845 261,000
Fanch ......................... 11/99 2,400 538,000
Falcon ......................... 11/99 3,481 1,004,000
Bresnan ......................... 1st Qtr 2000 3,100 687,000
---------------- ------------
Total.................... $ 14,056 3,808,000
================ ============
</TABLE>
(a) Represents the number of basic customers served by cable systems that
we agreed to transfer to InterMedia. This number includes 30,000 basic
customers served by an Indiana cable television system that we did not
transfer at the time of the InterMedia closing because necessary
regulatory approvals were still pending.
(b) Includes approximately 5,400 customers served by cable systems that we
will acquire from certain former affiliates of Avalon. We expected the
acquisition of these systems to be completed in January 2000. The $845
million purchase price for Avalon includes the purchase price for these
systems of approximately $13 million.
The systems acquired pursuant to these recent and pending acquisitions served,
in the aggregate, approximately 3.8 million customers as of September 30, 1999.
On December 1, 1999, Charter and AT&T entered into a non-binding letter of
intent to exchange certain of Charter's cable systems for cable systems owned by
AT&T. As part of this transaction, we will be required to pay to AT&T
approximately $108 million in cash. This payment represents the difference in
the agreed values of the systems to be exchanged. In addition, we are
negotiating with several other potential acquisitions and swapping candidates
whose systems would further complement our regional operating clusters.
CHARTER COMMUNICATIONS, INC. INITIAL PUBLIC OFFERING
The sale of shares of Class A common stock in the initial public offering and
the sale of the shares of Class B common stock in November 1999 to Mr. Allen,
will affected us in many ways, including the following:
- - Our Management. The current management agreement between Charter Operating
and Charter Investment was amended and assigned from Charter Investment to
Charter. Charter and Charter Holdco entered into a new agreement relating
to the management of the cable systems of the subsidiaries of Charter
Holdco. In addition, Charter Investment and Charter entered into a mutual
services agreement.
- - Option Plan. After the offering, each membership unit in Charter Holdco
received as a result of an exercise of an option issued under the Charter
Holdco option plan will automatically be exchanged for one share of Class A
common stock of Charter.
- - Business Activities. Upon the completion of the offering, we are not
permitted to engage in any business activity other than the cable
transmission of video, audio and data unless Mr. Allen first consents to
our pursuing that particular business activity.
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<PAGE> 30
- - Special Loss Allocation. Charter Holdco's operating agreement provides
that through the end of 2003, tax losses of Charter Holdco that would
otherwise have been allocated to Charter based generally on its percentage
equity interest will be allocated instead to the membership units held by
Vulcan Cable and Charter Investment. The operating agreement also provides
that beginning at the time that Charter Holdco first becomes profitable,
tax profits (as determined under applicable tax accounting rules for
determining book profits) that would otherwise have been allocated to
Charter based generally on its percentage equity interest will instead be
allocated to the membership units held by Vulcan Cable and Charter
Investment. The purpose of these arrangements is to allow Mr. Allen to take
advantage, for tax purposes, of the losses expected to be generated by
Charter Holdco. These arrangements should not have a material affect our
results of operations.
OVERVIEW
Approximately 87% of our historical revenues for the nine months ended September
30, 1999, are attributable to monthly subscription fees charged to customers for
our basic, expanded basic and premium cable television programming services,
equipment rental and ancillary services provided by our cable systems. In
addition, we derive other revenues from installation and reconnection fees
charged to customers to commence or reinstate service, pay-per-view programming,
where users are charged a fee for individual programs requested, advertising
revenues and commissions related to the sale of merchandise by home shopping
services. We have generated increased revenues in each of the past three fiscal
quarters, primarily through internal customer growth, basic and expanded tier
rate increases and acquisitions as well as innovative marketing. We are
beginning to offer our customers several other services, which are expected to
contribute to our revenues. One of these services is digital cable, which
provides subscribers with additional programming options. We are also offering
high speed Internet access to the World Wide Web through cable modems. Cable
modems can be attached to personal computers so that users can send and receive
data over cable systems. Our television based Internet access allows us to offer
the services provided by WorldGate Communications, Inc., which offers users
TV-based e-mail and other Internet access.
Our expenses primarily consist of operating costs, general and administrative
expenses, depreciation and amortization expense and management fees/corporate
expense charges. Operating costs primarily include programming costs, cable
service related expenses, marketing and advertising costs, franchise fees and
expenses related to customer billings. Programming costs account for
approximately 44% of our operating costs and general and administrative expenses
for the nine months ended September 30, 1999. Programming costs have increased
in recent years and are expected to continue to increase due to additional
programming being provided to customers, increased cost to produce or purchase
cable programming, inflation and other factors affecting the cable television
industry. In each year we have operated, our costs to acquire programming have
exceeded customary inflationary increases. 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
have benefited in the past from our membership in an industry cooperative that
provides members with volume discounts from programming networks. We believe our
membership has minimized increases in our programming costs relative to what the
increases would otherwise have been. We also believe that we should derive
additional discounts from programming networks due to our increased size.
Finally, we were able to negotiate favorable terms with premium networks in
conjunction with the premium packages, which minimized the impact on margins and
provided substantial volume incentives to grow the premium category. Although we
believe that we will be able to pass future increases in programming costs
through to customers, there can be no assurance that we will be able to do so.
General and administrative expenses primarily include accounting and
administrative personnel and professional fees. Depreciation and amortization
expense relates to the depreciation of our tangible assets and the amortization
of our franchise costs. Management fees/corporate expense charges are fees paid
to or charges from Charter Investment, Inc. for corporate management and
consulting services. Charter Holdings records actual corporate expense charges
incurred by Charter on behalf of Charter Holdings. Prior to the acquisition of
us by Mr. Allen, the CCA Group and CharterComm Holdings recorded management fees
payable to Charter Investment, Inc. equal to 3.0% to 5.0% of gross revenues plus
certain expenses. In October 1998, Charter Investment began managing the cable
operations of Marcus Holdings under a management agreement, which was terminated
in February 1999 and replaced by a master management fee arrangement. The
Charter Operating credit facilities limit management fees to 3.5% of gross
revenues.
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<PAGE> 31
In connection with our initial public offering in November 1999, the existing
management agreement between Charter Investment and Charter Operating was
assigned to Charter and Charter entered into a new management agreement with
Charter Holdco. These management agreements are substantially similar to the
previous management agreement with Charter Operating except that Charter is only
entitled to receive reimbursement of its expenses as consideration for its
provision of management services.
We have had a history of net losses and expect to continue to report net losses
for the foreseeable future. The principal reasons for our prior and anticipated
net losses include depreciation and amortization expenses associated with our
acquisitions, capital expenditures related to construction and upgrading of our
systems, and interest costs on borrowed money. We cannot predict what impact, if
any, continued losses will have on our ability to finance our operations in the
future.
RESULTS OF OPERATIONS
The following discusses the results of operations for:
(1) Charter Communications Properties Holdings for the nine months
ended September 30, 1998, and
(2) Charter Communications, Inc. comprised of the following for the
nine months ended September 30, 1999:
- Charter Communications Properties Holdings, CCA Group and
CharterComm Holdings for the entire period.
- Marcus Holdings for the period from March 31, 1999 (the date Mr.
Allen acquired voting control) through September 30, 1999.
- Renaissance Media Group LLC for the period from 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, L.P. and affiliates for the period from July
30, 1999 (the acquisition date) through September 30, 1999.
- Vista Broadband Communications, L.L.C. for the period from July
30, 1999 (the acquisition date) through September 30, 1999.
- Cable television system of Cable Satellite of South Miami, Inc.
for the period from August 4, 1999 (the acquisition date) through
September 30, 1999.
- Rifkin Acquisition Partners, L.L.L.P. and InterLink Communications
Partners, LLLP for the period from September 13, 1999
(the acquisition date) through September 30, 1999.
- No operating results are included for the InterMedia, Falcon, Fanch
or Avalon systems as they were acquired after September 30, 1999.
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<PAGE> 32
The following table sets forth the percentages of revenues that items in the
unaudited statements of operations constitute for the indicated periods.
<TABLE>
<CAPTION>
Three Months Ended September 30
-----------------------------------------------------------
1999 1998
--------------------------- ---------------------------
(dollars in thousands, except
per share data)
Charter Communications
Charter Communications, Properties Holdings, LLC
Inc. and Subsidiaries and Subsidiaries
----------------------- ---------------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues $ 376,189 100.0% $ 17,403 100.0%
-------------- -------------- ------------ -------
Operating expenses:
Operating, general and administrative 194,716 51.8 9,121 52.4
Depreciation and amortization 191,439 50.9 5,925 34.0
Stock option compensation expense 21,094 5.6 --- ---
Management fees/corporate expense charges 7,236 1.9 871 5.0
-------------- -------------- ------------ ----------
Total operating expenses 414,485 110.2 15,917 91.4
-------------- -------------- ------------ ----------
Income (loss) from operations (38,296) (10.2) 1,486 8.6
Interest income 8,241 2.2 0.1
Interest expense (131,081) (34.8) (6,212) (35.7)
Other income (3,017) (0.8) 3 ---
-------------- -------------- ------------ ----------
Loss before minority interest in loss of subsidiary (164,153) (43.6) (4,714) (27.0)
Minority interest in loss of subsidiary 164,118 43.6 --- ---
-------------- -------------- ------------ ----------
Net loss $ (35) 0.0% $ (4,714) (27.0)%
============== ============== ============ ==========
Loss per share $ (0.70)
==============
</TABLE>
PERIOD FROM JULY 1, 1999 THROUGH SEPTEMBER 30, 1999
COMPARED TO PERIOD FROM JULY 1, 1998 THROUGH SEPTEMBER 30, 1998
REVENUES. Revenues increased by $358.8 million, from $17.4 million for the
period from July 1, 1998 through September 30, 1998 to $376.2 million for the
period from July 1, 1999 through September 30, 1999. The increase in revenues
primarily resulted from the acquisitions of CCA Group and CharterComm Holdings,
Marcus Holdings and other recent acquisitions. Additional revenues from these
entities included for the period from July 1, 1999 through September 30, 1999
were $151.0 million, $133.0 million and $74.6 million, respectively.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $185.6 million, from $9.1 million for the
period from July 1, 1998 through September 30, 1998 to $194.7 million for the
period from July 1, 1999 through September 30, 1999. This increase was due
primarily to the acquisitions of the CCA Group and CharterComm Holdings, Marcus
Holdings and other recent acquisitions. Additional operating, general and
administrative expenses from these entities included for the period from July 1,
1999 through September 30, 1999 were $76.2 million, $70.9 million and $39.2
million, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
by $185.5 million, from $5.9 million for the period from July 1, 1998 through
September 30, 1998 to $191.4 million for the period from July 1, 1999 through
September 30, 1999. There was a significant increase in amortization expense
resulting from the acquisitions of the CCA Group and CharterComm Holdings,
Marcus Holdings and other recent acquisitions. Additional depreciation and
amortization expense from these entities included for the period from July 1,
1999 through September 30, 1999 were $78.9 million, $68.3 million and $38.7
million, respectively.
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<PAGE> 33
STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense for the
period from July 1, 1999 through September 30, 1999 was $21.1 million due to the
granting of options to employees in December 1998, February 1999 and April 1999.
The exercise prices of the options are less than the estimated fair values of
the underlying membership units on the date of grant, resulting in compensation
expense accrued over the vesting period of each grant that varies from four to
five years.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate expense
charges increased by $6.4 million, from $0.9 million for the period from July 1,
1998 through September 30, 1998 to $7.2 million for the period from July 1, 1999
through September 30, 1999. The increase from the period from July 1, 1998
through September 30, 1998 compared to the period from July 1, 1999 through
September 30, 1999 was the result of the acquisitions of CCA Group and
CharterComm Holdings, Marcus Holdings and other recent acquisitions.
INTEREST INCOME. Interest income increased by $8.2 million from $9,000 for the
period from July 1, 1998 to September 30, 1998 to $8.2 million for the period
from July 1, 1999 through September 30, 1999. The increase was primarily due to
investing excess cash that resulted from required credit facilities drawdowns.
INTEREST EXPENSE. Interest expense increased by $124.9 million, from $6.2
million for the period from July 1, 1998 through September 30, 1998 to $131.1
million for the period from July 1, 1999 through September 30, 1999. This
increase resulted primarily from interest on the notes and credit facilities
used to finance the acquisitions of CCA Group and CharterComm Holdings, Sonic,
Marcus Holdings and other recent acquisitions.
MINORITY INTEREST IN LOSS OF SUBSIDIARY. Minority interest in loss of subsidiary
is $164.1 million for the period from July 1, 1999 through September 30, 1999.
The minority interest represents the ownership in Charter Holdco by entities
other than Charter. For financial reporting purposes, 50,000 of the membership
units in Charter Holdco previously issued to companies controlled by Mr. Allen
are considered held by Charter during the entire period.
NET LOSS. Net loss decreased by $4.7 million, from $4.7 million for the period
from July 1, 1998 through September 30, 1998 to $35,000 for the period from July
1, 1999 through September 30, 1999. The decrease is primarily due to recording
minority interest in loss of subsidiary for periods ending after December 23,
1998.
LOSS PER SHARE. Loss per share is $0.70 for three months ended September 30,
1999. Loss per share is computed using the 50,000 shares that are considered
outstanding during the entire period.
33
<PAGE> 34
<TABLE>
<CAPTION>
Nine Months Ended September 30
-----------------------------------------------------------
1999 1998
--------------------------- ---------------------------
(dollars in thousands, except
per share data)
Charter Communications
Charter Communications, Inc. Properties Holdings, LLC
and Subsidiaries and Subsidiaries
---------------------------- ------------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues $ 845,182 100.0% $ 32,532 100.0%
--------------- -------------- ------------ --------
Operating expenses:
Operating, general and administrative 436,057 51.6 17,498 53.8
Depreciation and amortization 441,391 52.2 11,236 34.5
Stock option compensation expense 59,288 7.0 --- ---
Management fees/corporate expense charges 18,309 2.2 1,499 4.6
-------------- -------------- ------------ --------
Total operating expenses 955,045 113.0 30,233 92.9
-------------- -------------- ------------ --------
Income (loss) from operations (109,863) (13.0) 2,299 7.1
Interest income 18,326 2.2 23 0.1
Interest expense (288,750) (34.2) (11,831) (36.4)
Other income (expense) (177) --- 6 ---
-------------- -------------- ------------ --------
Loss before extraordinary item (380,464) (45.0) (9,503) (29.2)
Extraordinary item-loss from early extinguishment of
debt 7,794 0.9 --- ---
Loss before minority interest in loss of -------------- -------------- ------------ --------
subsidiary (388,258) (45.9) (9,503) (29.2)
Minority interest in loss of subsidiary 388,161 45.9 --- ---
-------------- -------------- ------------ --------
Net loss $ (97) 0.0% $ (9,503) (29.2)%
============== ============== ============ ========
Loss per share $ (1.94)
==============
</TABLE>
PERIOD FROM JANUARY 1, 1999 THROUGH SEPTEMBER 30, 1999
COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH SEPTEMBER 30, 1998
REVENUES. Revenues increased by $812.7 million, from $32.5 million for the first
nine months of 1998 to $845.2 million for the first nine months of 1999. The
increase in revenues primarily resulted from the acquisitions of CCA Group and
CharterComm Holdings, Sonic, Marcus Holdings and other recent acquisitions.
Additional revenues from these entities included for the period ended September
30, 1999 were $439.3 million, $26.2 million, $261.2 million and $90.7 million,
respectively.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $418.6 million, from $17.5 million for the
period from January 1, 1998 through September 30, 1998 to $436.1 million for the
period from January 1, 1999 through September 30, 1999. This increase was due
primarily to the acquisitions of the CCA Group and CharterComm Holdings, Sonic,
Marcus Holdings and other recent acquisitions. Additional operating, general and
administrative expenses from these entities included for the period ended
September 30, 1999 were $221.1 million, $13.7 million, $140.4 million and $46.8
million, respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
by $430.2 million, from $11.2 million for the period from January 1, 1998
through September 30, 1998 to $441.4 million for the period from January 1, 1999
34
<PAGE> 35
through September 30, 1999. There was a significant increase in amortization
expense resulting from the acquisitions of the CCA Group and CharterComm
Holdings, Sonic, Marcus Holdings and other recent acquisitions. Additional
depreciation and amortization expense from these entities included for the
period ended September 30, 1999 were $244.0 million, $5.3 million, $133.9
million and $47.3 million, respectively.
STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense for the
period from January 1, 1999 through September 30, 1999 was $59.3 million due to
the granting of options to employees in December 1998, February 1999 and April
1999. The exercise prices of the options are less than the estimated fair values
of the underlying membership units on the date of grant, resulting in
compensation expense accrued over the vesting period of each grant that varies
from four to five years.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate expense
charges increased by $16.8 million, from $1.5 million for the period from
January 1, 1998 through September 30, 1998 to $18.3 million for the period from
January 1, 1999 through September 30, 1999. The increase from the period from
January 1, 1998 through September 30, 1998 compared to the period from January
1, 1999 through September 30, 1999 was the result of the acquisitions of CCA
Group and CharterComm Holdings, Sonic, Marcus Holdings and other recent
acquisitions.
INTEREST INCOME. Interest income increased by $18.3 million from $23,000 for the
period from January 1, 1998 to September 30, 1998 to $18.3 million for the
period from January 1, 1999 to September 30, 1999. The increase was primarily
due to investing excess cash that resulted from required credit facilities
drawdowns.
INTEREST EXPENSE. Interest expense increased by $276.9 million, from $11.8
million for the period from January 1, 1998 through September 30, 1998 to $288.8
million for the period from January 1, 1999 through September 30, 1999. This
increase resulted primarily from interest on the notes and credit facilities
used to finance the acquisitions of CCA Group and CharterComm Holdings, Marcus
Holdings and other recent acquisitions.
MINORITY INTEREST IN LOSS OF SUBSIDIARY. Minority interest in loss of subsidiary
is $388.2 million, for the period from January 1, 1999 through September 30,
1999. The minority interest represents the ownership in Charter Holdco by
entities other than Charter. For financial reporting purposes, 50,000 of the
membership units in Charter Holdco previously issued to companies controlled by
Mr. Allen are considered held by Charter during the entire period.
NET LOSS. Net loss decreased by $9.4 million, from $9.5 million for the period
from January 1, 1998 through September 30, 1998 to $97,000 for the period from
January 1, 1999 through September 30, 1999. The decrease is primarily due to
recording minority interest in loss of subsidiary for periods ending after
December 23, 1998.
LOSS PER SHARE. Loss per share is $1.94 for the nine months ended September 30,
1999. Loss per share is computed using the 50,000 shares that are considered
outstanding during the entire period.
OUTLOOK
Our business strategy emphasizes the increase of our operating cash flow by
increasing our customer base and the amount of cash flow per customer. We
believe that there are significant advantages in increasing the size and scope
of our operations, including:
- improved economies of scale in management, marketing, customer service,
billing and other administrative functions;
- reduced costs for our cable systems and our infrastructure in general;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
We seek to "cluster" cable systems in suburban and ex-urban areas surrounding
selected metropolitan markets. We believe that such "clustering" offers
significant opportunities to increase operating efficiencies and to improve
operating margins and cash flow by spreading fixed costs over an expanding
subscriber base. In addition, we believe that by concentrating "clusters" in
markets, we will be able to generate higher growth in revenues and operating
cash flow. Through strategic acquisitions and "swaps" of cable systems, we seek
to enlarge the coverage of our current areas of operations, and, if
35
<PAGE> 36
feasible, develop "clusters" in new geographic areas within existing regions.
Swapping of cable systems allows us to trade systems that do not coincide with
our operating strategy while gaining systems that meet our objectives. Several
significant swaps have been announced. These swaps have demonstrated the
industry's trend to cluster operations. To date, Charter Holdings has
participated in one swap in connection with the InterMedia transaction. In
addition, Charter entered into a letter of intent to exchange certain of its
cable systems for cable systems owned by AT&T.
LIQUIDITY AND CAPITAL RESOURCES
Our business requires significant cash to fund acquisitions, capital
expenditures, debt service costs and ongoing operations. We have historically
funded and expect to fund future liquidity and capital requirements through cash
flows from operations, equity contributions, and borrowings under our credit
facilities and debt and equity financings.
Our historical cash flows from operating activities for the three and nine
months ended September 30, 1999 were $120 and $266 million, respectively.
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We make capital
expenditures primarily to upgrade, rebuild and expand our cable systems, as well
as for system maintenance, the development of new products and services, and
converters. Converters are set-top devices added in front of a subscriber's
television receiver to change the frequency of the cable television signals to a
suitable channel. The television receiver is then able to tune and to allow
access to premium service.
Upgrading our cable systems will enable us to offer new products and services,
including digital television, additional channels and tiers, expanded
pay-per-view options, high-speed Internet access and interactive services.
Capital expenditures for 1999, pro forma for recent acquisitions and the pending
Bresnan acquisition, are expected to be approximately $1.048 billion. For the
nine months ended September 30, 1999, we made capital expenditures, excluding
the acquisition of cable systems, of $385 million. The majority of the capital
expenditures related to rebuilding existing cable systems. Those expenditures
were funded from cash flows from operations and borrowings under our credit
facilities.
For the period from January 1, 2000 to December 31, 2002, we plan to spend
approximately $5.6 billion for capital expenditures, approximately $3.1 billion
of which will be used to upgrade and rebuild our systems to bandwidth capacity
of 550 megahertz or greater and add two-way capability, so that we may offer
advanced services. The remaining $2.5 billion will be used for extensions of
systems, development of new products and services, converters and system
maintenance. Capital expenditures for 2000, 2001 and 2002 are expected to be
approximately $1.6 billion, $2.0 billion and $2.0 billion, respectively. We
currently expect to finance approximately 80% of the anticipated capital
expenditures with cash generated from operations and approximately 20% with
additional borrowings under credit facilities. We cannot assure you that these
amounts will be sufficient to accomplish our planned system upgrade, expansion
and maintenance. This could adversely affect our ability to offer new products
and services and compete effectively, and could adversely affect our growth,
financial condition and results of operations.
FINANCING ACTIVITIES
CHARTER HOLDINGS NOTES. On March 17, 1999, Charter Holdings and Charter Capital
issued $3.6 billion principal amount of senior notes, consisting of $600 million
in aggregate principal amount of 8.250% Senior Notes due in 2007, $1.5 billion
in aggregate principal amount of 8.625% Senior Notes due in 2009 and $1.475
billion in aggregate principal amount at maturity of 9.920% Senior Discount
Notes due 2011. The net proceeds of approximately $2.99 billion, combined with
the borrowings under Charter Operating's credit facilities, were used to
consummate tender offers for publicly held debt of several of our subsidiaries,
as described below, refinance borrowings under our previous credit facilities
and for working capital purposes and to finance a number of recent acquisitions.
Semi-annual interest payments with respect to the 8.250% notes and the 8.625%
notes will be approximately $89.4 million, commencing with the first payment on
October 1, 1999. No interest on the 9.920% notes will be payable prior to April
1,
36
<PAGE> 37
2004. Thereafter, semi-annual interest payments on the three series of senior
notes will be approximately $162.6 million in the aggregate, commencing on
October 1, 2004. Charter Holdings and its wholly owned subsidiary, Charter
Communications Holdings Capital Corporation, in September 1999, completed an
offer to exchange the senior notes they issued in March 1999 for senior notes
with substantially similar terms, except that the new notes are registered and
are not subject to restrictions on transfer. With the exception of $120,000
principal amount of the 8.625% notes, all of the Charter Holdings notes were
exchanged for new notes. As of September 30, 1999, $2.1 billion was outstanding
under the 8.250% and 8.625% notes, and the accreted value of the 9.920% notes
was $954.1 million.
Concurrently with the issuance of the Charter Holdings notes, we refinanced
substantially all of our previous credit facilities and Marcus Cable Operating
Company, L.L.C.'s credit facilities with new credit facilities entered into by
Charter Operating. In February and March 1999, we commenced cash tender offers
to purchase the 14% senior discount notes issued by Charter Communications
Southeast Holdings, LLC, the 11.25% senior notes issued by Charter
Communications Southeast, LLC, the 13.50% senior subordinated discount notes
issued by Marcus Cable Operating Company, L.L.C., and the 14.25% senior discount
notes issued by Marcus Cable. All notes, except for $1.1 million in principal
amount, were paid off for an aggregate amount of $1.0 billion. The remaining
$1.1 million of such notes were repaid in September 1999.
CHARTER OPERATING CREDIT FACILITIES. Charter Operating's credit facilities
provide for two term facilities, Term A with a principal amount of $1.0 billion
that matures in September 2008, and Term B with the principal amount of $1.85
billion that matures in March 2009. The Charter Operating credit facilities also
provide for a $1.25 billion revolving credit facility with a maturity date of
September 2008. As of September 30, 1999, approximately $2.85 billion was
outstanding and $1.25 billion was available for borrowing under Charter
Operating's credit facilities. In addition, an uncommitted incremental term
facility of up to $500 million with terms similar to the terms of Charter
Operating's credit facilities is permitted under these credit facilities, but
will be conditioned on receipt of additional new commitments from existing and
new lenders. The Company borrowed $520 million under the revolving credit
facility on October 1, 1999 to complete the acquisition of the InterMedia
systems. In addition, the Company borrowed approximately $269 million in the
aggregate under the revolving credit facility to retire the Rifkin Notes and the
Helicon Notes during October 1999 and November 1999, respectively.
Amounts under Charter Operating's credit facilities bear interest at a base rate
or a Eurodollar rate, plus a margin up to 2.75%. A quarterly commitment fee of
between 0.25% and 0.375% per annum is payable on the unborrowed balance of Term
A and the revolving credit facility. The weighted average interest rate for
outstanding debt on September 30, 1999 was 7.6%. Furthermore, Charter Operating
has entered into interest rate protection agreements to reduce the impact of
changes in interest rates on our debt outstanding under its credit facilities.
RENAISSANCE NOTES. We acquired Renaissance in April 1999. The Renaissance 10%
senior discount notes due April 2008 had a $163.2 million principal amount at
maturity outstanding and $100.0 million accreted value upon issuance. The
Renaissance notes do not require the payment of interest until April 15, 2003.
From and after April 15, 2003, the Renaissance notes bear interest, payable
semi-annually in cash, on each April 15 and October 15, commencing October 15,
2003. The Renaissance notes are due on April 15, 2008. Due to the change of
control of Renaissance, an offer to repurchase the Renaissance notes was made at
101% of their accreted value, plus accrued and unpaid interest, on June 28,
1999. Of the $163.2 million face amount of Renaissance notes outstanding, $48.8
million were repurchased. As of September 30, 1999, the accreted value of the
Renaissance notes that remain outstanding was approximately $83.8 million.
HELICON NOTES. We acquired Helicon in July 1999. As of September 30, 1999,
Helicon had outstanding $115.0 million in principal amount of 11% senior secured
notes due 2003. On November 1, 1999, we redeemed all of the Helicon notes at a
purchase price equal to 103% of their principal amount, plus accrued interest,
for $124.8 million.
RIFKIN NOTES. We acquired Rifkin in September 1999. As of September 30, 1999,
Rifkin had $125.0 million outstanding in principal amount of 11 1/8% senior
subordinated notes due 2006. In September 1999, we commenced an offer to
repurchase any and all of the outstanding Rifkin notes, together with a $3.0
million promissory note payable, for cash at a premium over the principal
amounts. Notes with a total outstanding principal amount of $124.1 million were
repurchased for a total of $140.6 million, including a consent fee of $30 per
$1,000 to the holders who delivered timely consents to amend the indenture
governing those notes to eliminate substantially all of the restrictive
covenants. We repurchased the promissory note for $3.4 million.
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<PAGE> 38
FALCON DEBENTURES. Falcon has outstanding publicly held debt comprised of 8.375%
senior debentures due 2010 and 9.285% senior discount debentures due 2010. As of
September 30, 1999, $375.0 million total principal amount of 8.375% debentures
were outstanding and the accreted value of the 9.285% debentures was
approximately $315.7 million. In November 1999, we paid off all of Falcon's
11.56% subordinated notes due on 2001 for a total of $15.0 million. Interest on
the Falcon 8.375% debentures is payable semi-annually on April 15 and October 15
of each year. No interest on the Falcon 9.285% debentures will be payable prior
to April 15, 2003. From and after April 15, 2003, the issuers of the Falcon
9.285% debentures may elect to commence accrual of cash interest payment on any
date, and the interest will be payable semi-annually in cash on each April 15
and October 15 thereafter.
On December 10, 1999, we commenced the Falcon Change of Control Offers and have
offered to repurchase the Falcon debentures at purchase prices of 101% of
principal amount, plus unpaid and accrued interest, or accreted value, ass
applicable. Because the Falcon debentures are trading at or near the change of
control repurchase prices we expect that the Falcon debentures will be put to
us. The Falcon Change of Control Offers will remain open until February 3, 2000.
We intend to finance the Falcon Change of Control Offers with a portion of the
proceeds of the anticipated issuance additional notes by Charter Holdings and
Charter Capital in early 1999.
FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, we have
amended and restated, the existing Falcon credit facilities providing for
available borrowing capacity of $1.25 billion. As of November 30, 1999, $846.8
million was outstanding and $405.2 million was available for borrowing under
these credit facilities.
AVALON NOTES. Avalon has 11.875% senior discount notes due 2008 and 9.375%
senior subordinated notes due 2008. As of September 30, 1999, the accreted value
of the Avalon 11.875% senior discount notes was $121.6 and $150.0 million in
total principal 9 3/8% senior subordinated notes remained outstanding. Before
December 1, 2003, there will be no payments of cash interest on the 11 7/8%
senior discount notes. After December 1, 2003, cash interest on the 11 7/8%
senior discount notes will be payable semi-annually on June 1 and December 1 of
each year, commencing June 1, 2004. Interest on the 9 3/8% senior subordinated
notes is payable semi-annually on June 1 and December 1 of each year.
On December 3, 1999, we commenced the Avalon Change of Control Offer with
respect to the Avalon 9.375% notes and a change of control repurchase offer with
respect to the Avalon 11.875% notes at purchase prices of 101% of principal
amount or accreted value, as applicable. Because the Avalon 9.375% senior
subordinated notes are trading at or near the change of control repurchase price
we expect these notes to be put to us. Because the Avalon 11.875% notes have
been trading above the change of control repurchase price, we do not expect
these notes to be put to us. These change of control repurchase offers will
remain open until January 26, 2000. We intend to finance the Avalon Change of
Control Offer with a portion of the proceeds of the anticipated issuance
additional notes by Charter Holdings and Charter Capital in early 1999.
AVALON CREDIT FACILITIES. The Avalon credit facilities have maximum borrowings
of $300.0 million, consisting of a revolving facility in the amount of $175.0
million and a term loan B in the amount of $125.0 million. We borrowed $165.0
million under the Avalon credit facilities to fund a portion of the Avalon
purchase price.
FANCH CREDIT FACILITIES. The Fanch credit facilities have maximum borrowings of
$1.2 billion of which we used $850.0 million to fund a portion of the Fanch
purchase price.
BRESNAN NOTES. Bresnan has 8% senior notes due 2009 and 9 1/4% senior discount
notes due 2009. As of September 30, 1999, $170.0 million in total principal 8%
Bresnan senior notes was outstanding and the accreted value of the Bresnan 9
1/4% senior discount notes was $185.9 million. Interest on the 8% senior notes
is payable semi-annually on February 1 and August 1 of each year. On and after
August 1, 2004, interest on the 9 1/4% senior discount notes will be payable
semi-annually in cash on February 1 and August 1 of each year. Our acquisition
of Bresnan will trigger change of control provisions under the Bresnan notes
that will require us to make an offer to repurchase these notes at a price equal
to 101% of the outstanding principal amounts plus accrued interest. We expected
the Bresnan notes will be tendered and that we will repurchase the Bresnan notes
with additional debt financing that has not yet been arranged.
BRESNAN CREDIT FACILITIES. Bresnan has credit facilities providing for
borrowings of up to $650.0 million. As of November 30, 1999, $512.0 million was
outstanding and $138.0 million was available for borrowing under the Bresnan
credit facilities. Because our acquisition of Bresnan will trigger change of
control and other provisions under the Bresnan credit
38
<PAGE> 39
facilities, we intend to amend and assume these credit facilities. If we cannot
amend and assume these facilities, we will be required to repay all outstanding
borrowings thereunder.
ACQUISITIONS
In the second and third quarters of 1999, we acquired the Renaissance, American
Cable, Greater Media, Helicon, Vista, Cable Satellite and Rifkin cable systems.
The total purchase price for these acquisitions was $4.3 billion, including $354
million of assumed debt. We financed the cash portion of the purchase prices for
these acquisitions through excess cash from the issuance of the Charter Holdings
senior notes, borrowings under the Charter Operating credit facilities, capital
contributions by Mr. Allen through Vulcan Cable III Inc.
In the fourth quarter of 1999, we acquired the InterMedia, Fanch, Falcon, and
Avalon cable systems. The total purchase price for these acquisitions was $7.6
billion, including assumed debt of $2.0 billion and equity of $550 million. We
financed the cash portion of the purchase prices for these acquisitions with net
proceeds from the initial public offering of the common stock, an equity
contribution to Charter Holdco by Mr. Allen through Vulcan Cable, borrowings
under credit facilities and, in the case of InterMedia, through a swap of cable
systems valued at $331.8 million and a commitment to transfer an additional
cable system valued at $88.2 million.
In August 1999, Vulcan Cable III Inc. contributed to Charter Holdings $500
million in cash and, in September 1999, an additional $825 million, of which
approximately $644.3 million was in cash and approximately $180.7 million was in
the form of equity interests acquired by Vulcan Cable III Inc. in connection
with the Rifkin acquisition. In connection with two of these acquisitions,
Charter Holdco issued equity interests totaling $133.3 million and a subsidiary
of Charter Holdings issued preferred equity interests totaling $25 million to
the sellers.
We expect that the Bresnan purchase price will be paid with a portion of the net
proceeds from Charter's initial public offering, $1.0 billion of equity of
Charter Holdco to be issued to specified sellers in the acquisition, assumed
debt (comprised of the existing Bresnan credit facilities and publicly held
notes) and borrowings under credit facilities. We cannot ensure you that the
Bresnan acquisition will be completed.
We expect to assume and amend the existing Bresnan credit facilities and
increase the borrowing availability thereunder. We expect to borrow
approximately $635.0 million under these credit facilities in connection with
the closing of the Bresnan acquisition. In addition, we expect that we will have
to repurchase outstanding Bresnan notes at prices equal to 101% of their
principal amount, plus accrued and unpaid interest, or their accreted value, as
applicable, as required by change of control offers for these notes. As of the
anticipated closing date of the Bresnan acquisition, the total amount of
principal and accreted value of the Bresnan notes will be $362.3 million. We
have not yet arranged for debt and/or equity financing to fund the repurchase of
these notes.
On December 1, 1999, Charter and AT&T entered into a non-binding letter of
intent to exchange certain of our cable systems for certain cable systems owned
by AT&T. As part of this transaction, we will be required to pay AT&T
approximately $108 million in cash.
We cannot assure that we will be able to raise the financing necessary to
satisfy the obligations described above. If we are unable to raise the necessary
financing to satisfy any or all of these obligations, we could be in default
under one or more other obligations.
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and uncertainties that
could materially impact our business, results of operations and financial
condition.
SUBSTANTIAL LEVERAGE. As of September 30, 1999, our total debt was approximately
$6.4 billion, minority interest was approximately $4.4 billion and our total
stockholders' equity was approximately $0.8 million. We anticipate incurring
substantial additional debt in the future to fund the expansion, maintenance and
the upgrade of our cable systems.
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<PAGE> 40
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 that are beyond our control. There can
be no assurance that our business will generate sufficient cash flow from
operations, or that future borrowings will be available to us under our existing
credit facilities, new facilities or from other sources of financing in an
amount sufficient to enable us to repay our debt, to grow our business or to
fund our other liquidity and capital needs.
VARIABLE INTEREST RATES. A significant portion of our debt bears interest at
variable rates that are linked to short-term interest rates. In addition, a
significant portion of our assumed debt or debt we expect to arrange in
connection with our pending acquisitions will bear interest at variable rates.
If interest rates rise, our costs relative to those obligations will also rise.
See later discussion in "Interest Rate Risk".
RESTRICTIVE COVENANTS. Our debt and credit facilities contain a number of
significant covenants that, among other things, restrict the ability of our
subsidiaries to:
- pay dividends 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.
IMPORTANCE OF GROWTH STRATEGY AND RELATED RISKS. We expect that a substantial
portion of any of our future growth will be achieved through revenues from
additional services and the acquisition of additional cable systems. We cannot
assure you that we will be able to offer new services successfully to our
customers or that those new services will generate revenues. In addition, the
acquisition of additional cable systems may not have a positive net impact on
our operating results. Acquisitions involve a number of special risks, including
diversion of management's attention, failure to retain key acquired personnel,
risks associated with unanticipated events or liabilities and difficulties in
assimilation of the operations of the acquired companies, some or all of which
could have a material adverse effect on our business, results of operations and
financial condition. If we are unable to grow our cash flow sufficiently, we may
be unable to fulfill our obligations or obtain alternative financing.
MANAGEMENT OF GROWTH. As a result of the acquisition of the Charter companies by
Mr. Allen, our merger with Marcus Holdings and our recent acquisitions, we have
experienced and will continue to experience rapid growth that has placed and is
expected to continue to place a significant strain on our management, operations
and other resources. Our future success will depend in part on our ability to
successfully integrate the operations acquired and to be acquired and to attract
and retain qualified personnel. Historically, acquired entities have had minimal
employee benefit related costs and all benefit plans have been terminated with
acquired employees transferring to our 401(k) plan. No significant severance
cost is expected in conjunction with the recent acquisitions. The failure to
retain or obtain needed personnel or to implement management, operating or
financial systems necessary to successfully integrate acquired operations or
otherwise manage growth when and as needed could have a material adverse effect
on our business, results of operations and financial condition.
In connection with our recent acquisitions, we have formed multi-disciplinary
teams to formulate plans for establishing customer service centers, identifying
property, plant and equipment requirements and possible reduction of headends.
Headends are the control centers of a cable system, where incoming signals are
amplified, converted, processed and combined for transmission to customers.
These teams also determine market position and how to attract "talented"
40
<PAGE> 41
personnel. Our goals include rapid transition in achieving performance
objectives and implementing "best practice" procedures.
REGULATION AND LEGISLATION. Cable systems are extensively regulated at the
federal, state, and local level. These regulations have increased the
administrative and operational expenses of cable systems and affected the
development of cable competition. Rate regulation of cable systems has been in
place since passage of the Cable Television Consumer Protection and Competition
Act of 1992, although the scope of this regulation recently was sharply
contracted. Since March 31, 1999, rate regulation exists only with respect to
the lowest level of basic cable service and associated equipment. Basic cable
service is the service that cable customers receive for a threshold fee. This
service usually includes local television stations, some distant signals and
perhaps one or more non-broadcast services. This change affords cable operators
much greater pricing flexibility, although Congress could revisit this issue if
confronted with substantial rate increases.
Cable television operators also face significant regulation of their channel
capacity. They currently can be required to devote substantial capacity to the
carriage of programming that they would not carry voluntarily, including certain
local broadcast signals, local public, educational and government access users,
and unaffiliated commercial leased access programmers. This carriage burden
could increase in the future, particularly if the Federal Communications
Commission were to require cable systems to carry both the analog and digital
versions of local broadcast signals or if it were to allow unaffiliated Internet
service providers seeking direct cable access to invoke commercial leased access
rights originally devised for video programmers. The Federal Communications
Commission is currently conducting proceedings in which it is considering both
of these channel usage possibilities.
There is also uncertainty whether local franchising authorities, the Federal
Communications Commission, or the U.S. Congress will impose obligations on cable
operators to provide unaffiliated Internet service providers with access to
cable plant on non-discriminatory terms. If they were to do so, and the
obligations were found to be lawful, it could complicate our operations in
general, and our Internet operations in particular, from a technical and
marketing standpoint. These access obligations could adversely impact our
profitability and discourage system upgrades and the introduction of new
products and services.
POSSIBLE RESCISSION LIABILITY. The Rifkin and Falcon sellers who acquired
Charter Holdco membership units in connection with the respective Rifkin and
Falcon acquisitions, the Bresnan sellers who will acquire Charter Holdco
membership units connection with the Bresnan acquisition and the Helicon sellers
who acquired shares of Class A common stock in Charter may have rescission
rights against Charter or Charter Holdco, as the case may be, arising out of
possible violations of Section 5 of the Securities Act in connection with the
offers and sales of these equity interests. If all of these equity holders
successfully exercise their possible rescission rights and Charter or Charter
Holdco became obligated to repurchase all such equity interests, the total
repurchase obligations could be up to approximately $1.7 billion. We cannot
assure you that Charter or Charter Holdco would be able to obtain capital
sufficient to fund any required repurchases. This could adversely affect our
financial condition and results of operations.
INTEREST RATE RISK
The use of interest rate risk management instruments, such as interest rate
exchange agreements, interest rate cap agreements and interest rate collar
agreements, is required under the terms of Charter Operating's credit
facilities. Our policy is to manage interest costs using a mix of fixed and
variable rate debt. Using interest rate swap agreements, we agree to exchange,
at specified intervals, the difference between fixed and variable interest
amounts calculated by reference to an agreed-upon notional principal amount.
Interest rate cap agreements are used to lock in a maximum interest rate should
variable rates rise, but enable us to otherwise pay lower market rates. Collars
limit our exposure to and benefits from interest rate fluctuations on variable
rate debt to within a certain range of rates.
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<PAGE> 42
The table set forth below summarizes the fair values and contract terms of
financial instruments subject to interest rate risk maintained by us as of
December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
FAIR VALUE AT
EXPECTED MATURITY DATE DECEMBER 31,
----------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
---- ---- ---- ---- ---- ---------- ----- ----
DEBT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate................ -- -- -- -- -- $ 271,799 $ 271,799 $ 271,799
Average Interest Rate.. -- -- -- -- -- 13.5% 13.5%
Variable Rate............. $ 10,450 $ 21,495 $ 42,700 $113,588 $157,250 $1,381,038 $1,726,521 $1,726,521
Average Interest Rate.. 6.0% 6.1% 6.3% 6.5% 7.2% 7.6% 7.2%
INTEREST RATE
INSTRUMENTS
Variable to Fixed Swaps... $130,000 $255,000 $180,000 $320,000 $370,000 $ 250,000 $1,505,000 $ (28,977)
Average Pay Rate....... 4.9% 6.0% 5.8% 5.5% 5.6% 5.6% 5.6%
Average Receive Rate... 5.0% 5.0% 5.2% 5.2% 5.4% 5.4% 5.2%
Caps ..................... $ 15,000 -- -- -- -- -- $ 15,000 --
Average Cap Rate....... 8.5% -- -- -- -- -- 8.5%
Collar.................... -- $195,000 $ 85,000 $ 30,000 -- -- $ 310,000 $ (4,174)
Average Cap Rate....... -- 7.0% 6.5% 6.5% -- -- 6.8%
Average Floor Rate..... -- 5.0% 5.1% 5.2% -- -- 5.0%
</TABLE>
The notional amounts of interest rate instruments, as presented in the above
table, are used to measure interest to be paid or received and do not represent
the amount of exposure to credit loss. The estimated fair value approximates the
proceeds (costs) to settle the outstanding contracts. Interest rates on variable
debt are estimated using the average implied forward London Interbank Offering
Rate (LIBOR) rates for the year of maturity based on the yield curve in effect
at December 31, 1998. While swaps, caps and collars represent an integral part
of our interest rate risk management program, their incremental effect on
interest expense for the years ended December 31, 1998, 1997, and 1996 was not
significant.
In March 1999, substantially all existing long-term debt, excluding borrowings
of our previous credit facilities, was extinguished, and all previous credit
facilities were refinanced with the Charter Operating credit facilities. The
following table sets forth the fair values and contract terms of the long-term
debt maintained by us as of September 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
FAIR VALUE AT
EXPECTED MATURITY DATE SEPTEMBER 30,
----------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1999
---- ---- ---- ---- ---- ---------- ----- ----
DEBT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate................. -- -- -- -- $115,000 $ 3,817,413 $3,932,413 $3,206,520
Average Interest Rate... -- -- -- -- 11% 9.0% 9.0%
Variable Rate.............. -- -- -- $88,875 $156,000 $ 2,605,125 $2,850,000 $2,850,000
Average Interest Rate... -- -- -- 6.7% 6.8% 7.0% 7.0%
</TABLE>
Interest rates on variable debt are estimated using the average implied forward
LIBOR rates for the year of maturity based on the yield curve in effect at
September 30, 1999.
YEAR 2000 ISSUES
GENERAL. Many existing computer systems and applications, and other control
devices and embedded computer chips use only two digits, rather than four, to
identify a year in the date field, failing to consider the impact of the
upcoming change in the century. Computer chips are the physical structure upon
which integrated circuits are fabricated as components of systems, such as
telephone systems, computers and memory systems. As a result, such systems,
applications, devices, and chips could create erroneous results or might fail
altogether unless corrected to properly interpret data related to the year 2000
and beyond. These errors and failures may result, not only from a date
recognition problem in the particular part of a system failing, but may also
result as systems, applications, devices and chips receive erroneous or improper
data from
42
<PAGE> 43
third-parties suffering from the year 2000 problem. In addition, two interacting
systems, applications, devices or chips, each of which has individually been
fixed so that it will properly handle the year 2000 problem, could nonetheless
result in a failure because their method of dealing with the problem is not
compatible.
These problems are expected to increase in frequency and severity as the year
2000 approaches. This issue impacts our owned or licensed computer systems and
equipment used in connection with internal operations, including:
- information processing and financial reporting systems;
- customer billing systems;
- customer service systems;
- telecommunication transmission and reception systems; and
- facility systems.
THIRD PARTIES. We also rely directly and indirectly, in the regular course of
business, on the proper operation and compatibility of third party systems. The
year 2000 problem could cause these systems to fail, err, or become incompatible
with our systems.
If we or a significant third party on which we rely fails to become year 2000
ready, or if the year 2000 problem causes our systems to become internally
incompatible or incompatible with such third party systems, our business could
suffer from material disruptions, including the inability to process
transactions, send invoices, accept customer orders or provide customers with
our cable services. We could also face similar disruptions if the year 2000
problem causes general widespread problems or an economic crisis. We cannot now
estimate the extent of these potential disruptions.
STATE OF READINESS. We have conducted a three-stage process addressing the year
2000 problem and its impact on our internal operations, which consisted of:
(1) conducting an inventory and evaluation of our systems,
components, and other significant infrastructure to identify
those elements that we reasonably believe could be expected to
be affected by the year 2000 problems. This stage has been
completed;
(2) remediating or replacing equipment that, based upon such
inventory and evaluation, we believe may fail to operate
properly in the year 2000. This stage is substantially
complete; and
(3) testing of the remediation and replacement conducted in stage
two. This stage is substantially complete.
Much of our assessment efforts in stage one have involved, and depend on,
inquiries to third party service providers, suppliers and vendors of various
parts or components of our systems. We have obtained certifications from third
party service providers, suppliers and vendors as to the readiness of mission
critical elements and we are in the process of obtaining certifications of
readiness as to non-mission critical elements. Certain of these third parties
that have certified the readiness of their products will not certify their
interoperability within our fully integrated systems. We cannot assure you that
these technologies of third parties, on which we rely, will be year 2000 ready
or timely converted into year 2000 compliant systems compatible with our
systems. Moreover, because a full test of our systems, on an integrated basis,
would require a complete shut down of our operations, it is not practicable to
conduct such testing. However, we have utilized a third party, in cooperation
with other cable operators, to test a "mock-up" of our major billing and plant
components, including pay-per-view systems, as an integrated system. We are
utilizing another third party to also conduct comprehensive testing on our
advertising related scheduling and billing systems. In addition, we have
evaluated the potential impact of third party failure and integration failure on
our systems in developing our contingency plans.
RISKS AND REASONABLY LIKELY WORST CASE SCENARIOS. The failure to correct a
material year 2000 problem could result in system failures leading to a
disruption in, or failure of certain normal business activities or operations,
for example, a failure of our major billing systems and plant components such as
our pay-per-view systems. Such failures could materially and adversely affect
our results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the year 2000 problem, resulting in part from the
uncertainty of the year 2000 readiness of third-party suppliers and customers,
we are unable to determine at this time whether the consequences of year 2000
failures will have a material impact on our results of operations, liquidity or
financial condition. However, the year 2000 taskforce has significantly reduced
our level
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<PAGE> 44
of uncertainty about the year 2000 problem and, in particular, about the year
2000 compliance and readiness of our material vendors.
CONTINGENCY AND BUSINESS CONTINUATION PLAN. The year 2000 plan calls for
suitable contingency planning for our at-risk business functions. We normally
make contingency plans in order to avoid interrupted service providing video,
voice and data products to our customers. We have distributed detailed
guidelines outlining remedial actions for the failure of any component of our
systems which is critical to the transport of our signal. This includes a
communications plan for informing key personnel across the country in the event
of such a failure to accelerate remediation actions throughout the company.
COST. We have redeployed internal resources and have selectively engaged outside
vendors to meet the goals of our year 2000 program. We currently estimate the
total cost of our year 2000 remediation programs to be approximately $9.8
million, primarily all of which has been expended to date.
OPTIONS
In accordance with an employment agreement between Charter Investment. and
Jerald L. Kent, the President and Chief Executive Officer of Charter Investment
and a related option agreement between Charter Holdco and Mr. Kent, an option to
purchase 3% of the equity value of all cable systems managed by Charter
Investment on the date of the grant, or 7,044,127 membership units, were issued
to Mr. Kent. The option vests over a four-year period from the date of grant and
expires ten years from the date of grant.
In February 1999, Charter Holdings adopted an option plan, which was assumed by
Charter Holdco in May 1999, providing for the grant of options to purchase up to
25,009,798 Charter Holdco membership units. The option plan provides for grants
of options to employees and consultants of Charter Holdco and its affiliates.
Options granted will be fully vested after five years from the date of grant.
Options not exercised accumulate and are exercisable, in whole or in part, in
any subsequent period, but not later than ten years from the date of grant.
Membership units received upon exercise of options are automatically exchanged
for shares of Class A common stock of Charter Communications, Inc. on a
one-for-one basis.
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
--------------------------------------------------------------- -----------
REMAINING NUMBER
NUMBER OF EXERCISE TOTAL CONTRACT LIFE OF
OPTIONS PRICE DOLLARS (IN YEARS) OPTIONS
--------- -------- ------- ------------- -------
<S> <C> <C> <C> <C>
Outstanding as of
January 1, 1999 (1)........ 7,044,127 $20.00 $ 140,882,540 9.2 (3) 1,761,032
Granted:
February 9, 1999 (2)....... 9,111,681 20.00 182,233,620 130,000
April 5, 1999 (2).......... 473,000 20.73 9,805,290 --
November 8, 1999 (2)....... 4,741,400 19.00 90,086,600 200,000
Cancelled....................... (607,000) 20.00-20.73 (12,160,852) --
------------- ----------- ---------------- -------- -------------
Outstanding as of
December 3, 1999........... 20,763,208 $ 19.79 (3) $ 410,847,198 9.4 (3) 2,091,032
============= =========== ================ ======== =============
</TABLE>
(1) Granted to Jerald L. Kent pursuant to his employment agreement and
related option agreement.
(2) Granted pursuant to the option plan.
(3) Weighted average.
We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" to account for the option plans. We recorded stock option
compensation expense of $845,000 for the year ended December 31, 1998 and $59.3
million for the nine months ended September 30, 1999, in the financial
statements since the exercise prices are less than the estimated fair values of
the underlying membership units on the date of grant. The estimated fair value
was determined using the valuation inherent in Mr. Allen's acquisition of
Charter and valuations of public companies in the cable
44
<PAGE> 45
television industry adjusted for factors specific to us. Compensation expense is
accrued over the vesting period of each grant that varies from four to five
years. As of September 30, 1999, deferred compensation remaining to be
recognized in future periods totaled $104 million.
SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL DATA
The following Supplemental Unaudited Pro Forma Financial Data are based on the
financial data of Charter Holdco. Since January 1, 1999, Charter Holdco and
Charter Holdings have closed numerous acquisitions. In addition, Charter
Holdings merged with Marcus Holdings in April 1999. Our financial data, on a
consolidated basis, are adjusted on a pro forma basis to illustrate the
estimated effects of the Bresnan acquisition and acquisitions closed since
September 30, 1999 (recent acquisitions) as if such transactions had occurred on
September 30, 1999 for the unaudited pro forma balance sheet data and to
illustrate the estimated effects of the following transactions as if they had
occurred on January 1, 1998 for the unaudited pro forma statements of operations
data.
(1) the acquisition of Charter Communications Holding Company on
December 23, 1998 by Mr. Allen;
(2) the acquisition of certain cable systems from Sonic
Communications Inc. on May 20, 1998 by Charter communications
Holding Company for an aggregate purchase price net of cash
acquired, of $228.4 million, comprised of $167.5 million in cash
and $60.9 million in a note payable to the seller;
(3) the acquisition of Marcus Cable by Mr. Allen and Marcus Holdings'
merger with and into Charter Holdings effective March 31, 1999;
(4) the acquisitions and dispositions during 1998 by Marcus Cable;
(5) Charter Holdco and its subsidiaries' acquisitions completed since
January 1, 1999;
(6) the refinancing of all the debt of our subsidiaries through the
issuance of the Existing Charter Holdings' Notes and funding
under our credit facilities;
(7) the Fanch Transfer, the Avalon Transfer, the Falcon Transfer, the
Bresnan Acquisition, and the Bresnan Transfer have been
completed; and
(8) specified sellers in the Bresnan Acquisition have received $1.0
billion of their purchase price in Charter Communications Holding
Company membership units.
The Supplemental Unaudited Pro Forma Financial Data reflect the application of
the principles of purchase accounting to the transactions listed in items (1)
through (5) above. The allocation of certain purchase prices is based, in part,
on preliminary information, which is subject to adjustment upon obtaining
complete valuation information of intangible assets. We believe that
finalization of the purchase price will not have a material impact on our
results of operations or financial position.
The unaudited pro forma adjustments are based upon available information and
certain assumptions that we believe are reasonable. In particular, the pro forma
adjustments assume the following:
- We will transfer to InterMedia the Indiana cable system that was
retained at the time of the InterMedia closing pending receipt of
the necessary regulatory approvals.
- The holders of Avalon 11.875% senior discount notes will not
require us to repurchase these notes and debentures as required
by change of control provisions in the indentures for these notes
and debentures. We will repurchase the Falcon debentures and the
Avalon 9.375% senior subordinated notes at a price equal to 101%
of the aggregate principal amount, plus accrued and unpaid
interest, or accreted value, as applicable.
We will need to raise approximately $997.3 million by borrowing under credit
facilities at Bresnan that have not yet been arranged and/or by issuing debt or
equity securities of Charter or Charter Holdco to:
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<PAGE> 46
- fund approximately $512.0 million in borrowings outstanding under
Bresnan credit facilities that we would have to repay if we are
unable to amend and/or assume the existing Bresnan credit
facilities and fund a portion of the Bresnan purchase with an
additional $123.0 million in borrowings under the Bresnan credit
facilities; and
- repurchase approximately $362.3 million in Bresnan notes that we
expect to be put to us in connection with required change of
control offers for these notes.
We cannot assure you that we will be able to raise the financing necessary to
consummate the Bresnan acquisition and to satisfy the obligations described
above. If we are unable to raise the financing necessary to satisfy any or all
of these obligations, we may be unable to close the Bresnan acquisition and
could be in default under one or more other obligations. In any such case, the
relevant sellers or creditors could initiate legal proceedings against us,
including under bankruptcy and reorganization laws, for any damages they suffer
as a result of our non-performance. Any such action could trigger defaults under
our other obligations, including our credit facilities and debt instruments.
The Supplemental Unaudited Pro Forma Financial Data do not purport to be
indicative of what our financial position or results of operations would
actually have been had the transactions described above been completed on the
dates indicated or to project our results of operations for any future date.
<TABLE>
<CAPTION>
SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL DATA
NINE MONTHS ENDED SEPTEMBER 30, 1999
CHARTER
COMMUNICATIONS, RECENT BRESNAN
INC. ACQUISITIONS ACQUISITION TOTAL
-------------- ------------ ----------- -----
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C>
Revenues $970,362 $973,470 $217,370 $2,161,202
Operating, general and administrative
expenses 505,041 480,611 121,089 1,106,741
OTHER FINANCIAL DATA:
EBITDA (a) 387,389 436,524 85,210 909,123
EBITDA margin (b) 39.9% 44.8% 39.2% 42.1%
Adjusted EBITDA (c) $ 465,321 $ 492,859 $96,281 $1,054,461
BALANCE SHEET DATA (at end of period):
Total assets $11,235,191 $7,448,980 $3,141,547 $21,825,718
Total debt 6,244,632 3,446,169 1,060,228 10,751,029
OPERATING DATA (AT END OF PERIOD,
EXCEPT FOR AVERAGES):
Homes passed (d) 5,541,000 3,183,000 1,060,000 9,784,000
Basic customers (e) 3,426,000 2,074,000 687,000 6,187,000
Basic penetration (f) 61.8% 65.2% 64.8% 63.2%
Premium units (g) 2,039,000 785,000 314,000 3,138,000
Premium penetration (h) 59.5% 37.8% 45.7% 50.7%
Average monthly revenue per basic
customer (i) $ 38.81
</TABLE>
(a) EBITDA represents earnings (loss) before extraordinary item before
interest, income taxes, depreciation, 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
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<PAGE> 47
from operating, investing or financing activities, as determined in
accordance with generally accepted accounting principles. EBITDA should
also not be construed as an indication of a company's operating
performance or as a measure of liquidity. Management's discretionary
use of funds depicted by EBITDA may be limited by working capital, debt
service and capital expenditure requirements and by restrictions
related to legal requirements, commitments and uncertainties.
(b) EBITDA margin represents EBITDA as a percentage of revenues
(c) Adjusted EBITDA means EBITDA before stock option compensation expense,
corporate expenses, 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.
Pro forma revenues and adjusted EBITDA for the first three
quarters of 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Adjusted
Three Months Ended Revenues EBITDA
------------------ ------------ -------------
<S> <C> <C> <C>
March 31, 1999 $ 711,190 $ 345, 973
June 30, 1999 720,858 348,061
September 30, 1999 729,154 360,427
------------- -------------
Total $2,161,202 $1,054,461
============= =============
</TABLE>
(d) Homes passed are the number of living units, such as single residence
homes, apartments and condominium units, passed by the cable television
distribution network in a given cable system service area.
(e) Basic customers are customers who receive basic cable service.
(f) Basic penetration represents basic customers as a percentage of homes
passed.
(g) Premium units represent the total number of subscriptions to premium
channels.
(h) Premium penetration represents premium units as a percentage of basic
customers.
(i) 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.
47
<PAGE> 48
The following tables set forth certain operating results and statistics for the
three months ended September 30, 1999 compared to the three months ended
September 30, 1998. The following dollar amounts are in thousands.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------------
CHARTER
CHARTER MANAGED
SYSTEMS ACQUIRED SYSTEMS AS OF MARCUS
ON OR BEFORE 7/1/98 7/1/98 (A) SUBTOTAL HOLDINGS TOTAL
--------------- ---------- --------- --------- ---------
(PREDECESSOR)
<S> <C> <C> <C> <C> <C>
Revenues $17,403 $136,148 $153,551 $117,575 $271,126
Operating, general and
administrative expenses 9,121 69,712 78,833 63,467 142,300
--------------- ---------- --------- --------- ---------
Adjusted EBITDA $8,282 $66,436 $74,718 $54,108 $128,826
=============== ========== ========= ========= =========
Adjusted EBITDA margin 47.6% 48.8% 48.7% 46.0% 47.5%
Operating Data, at end of period:
Homes passed 269,000 1,870,000 2,139,000 1,755,000 3,894,000
Basic subscribers 165,000 1,079,000 1,244,000 1,069,000 2,313,000
Basic penetration 61.3% 57.7% 58.2% 60.9% 59.4%
Premium subscribers 89,000 768,000 857,000 436,000 1,293,000
Monthly revenue per subscriber $35.16 $42.06 $41.14 $36.66 $39.07
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------------------------------------------
CHARTER SYSTEMS CHARTER
ACQUIRED ON MANAGED ACQUISITIONS
OR BEFORE SYSTEMS AS MARCUS AFTER CHARTER
7/1/98 OF 7/1/98 (A) SUBTOTAL HOLDINGS TOTAL 7/1/98 HOLDINGS
-------------- ------------ -------- -------- ----- ------------ --------
(PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $18,931 $149,682 $168,613 $133,010 $301,623 $74,566 $376,189
Operating, general and
administrative expenses 9,841 75,635 85,476 70,858 156,334 38,382 194,716
----------- --------- --------- --------- -------- ------- ---------
Adjusted EBITDA $9,090 $74,047 $83,137 $62,152 $145,289 $36,184 $181,473
=========== ========= ========= ========= ======== ======= =========
Adjusted EBITDA margin 48.0% 49.5% 49.3% 46.7% 48.2% 48.5% 48.2%
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data, at end of period:
Homes passed 275,000 1,891,000 2,166,000 1,851,000 4,017,000 810,000 4,827,000
Basic subscribers 168,000 1,125,000 1,293,000 1,085,000 2,378,000 584,000 2,962,000
Basic penetration 61.1% 59.5% 59.7% 58.6% 59.2% 72.1% 61.4%
Premium subscribers 97,000 866,000 963,000 517,000 1,480,000 324,000 1,804,000
Monthly revenue per
subscriber $37.56 $43.94 $43.46 $40.86 $42.09 $43.35 $42.34
</TABLE>
- --------------
(a) CCA Group and CharterComm Holdings cable systems.
48
<PAGE> 49
RESULTS OF OPERATIONS - SUPPLEMENTAL ANALYSIS FOR THE QUARTER ENDED SEPTEMBER
30, 1999 VERSUS THE QUARTER ENDED SEPTEMBER 30, 1998 (FOR THE SYSTEMS OPERATED
ON OR BEFORE JULY 1, 1998)
The following discussion is provided to show the results of operations on a
comparable basis for only those systems managed by Charter Investment during the
three months ended September 30, 1999 versus the three months ended September
30, 1998. Specifically, this analysis excludes systems acquired by the Company
after July 1, 1998. Further, this analysis excludes the Marcus systems as
Charter Investment did not begin to manage these systems until October 1998.
Revenues increased by $15.1 million or 9.8% when comparing the revenues for the
quarter ended September 30, 1999 to the results for the comparable systems for
the quarter ended September 30, 1998. This increase is due to a net gain of
approximately 49,000 or 3.9% basic subscribers between quarters and retail rate
increases implemented in certain of the Company's systems. In addition, the
Company has increased its ratio of premium subscriptions to basic subscribers
from .70 to 1.00 to .75 to 1.00 as a result of marketing multiple premium
subscriptions in a packaged format at a discounted retail rate.
Operating, general and administrative expenses increased approximately $6.6
million or 8.4% when comparing the operating expenses for the quarter ended
September 30, 1999 to the results for the comparable systems for the quarter
ended September 30, 1998. This increase is primarily due to increases in license
fees paid for programming as a result of additional subscribers, new channels
launched and increases in the rates paid to the programming services. The
Company believes that the growth in programming expense is consistent with
industry-wide increases.
The Company experienced growth in adjusted EBITDA, as defined, of approximately
$8.4 million or 11.3% when comparing adjusted EBITDA for the quarter ended
September 30, 1999 to the results for the comparable systems for the quarter
ended September 30, 1999. Adjusted EBITDA margin increased from 48.7% to 49.3%
when comparing the similar periods, primarily as a result of the increase in
revenues.
NEW PRODUCTS AND SERVICES
We offer our customers a full array of traditional cable television services and
programming and we have begun to offer new and advanced high bandwidth services
such as high-speed Internet access. We plan to continually enhance and upgrade
these services, including adding new programming and other telecommunications
services, and will continue to position cable television as an essential
service.
A variety of emerging technologies and the rapid growth of Internet usage have
presented us with substantial opportunities to provide new or expanded products
and services to our customers and to expand our sources of revenue. The desire
for such new technologies and the use of the Internet by businesses in
particular have triggered a significant increase in our market penetration. As a
result, we are in the process of introducing a variety of new or expanded
products and services beyond the traditional offerings of analog television
programming for the benefit of both our residential and commercial customers.
These new products and services in the following:
- Digital television and its related enhancements;
- High-speed Internet access via cable modems;
- Internet access through television access service; and
- Dial-up Internet access.
49
<PAGE> 50
Information is not presented for September 30, 1998 as this information is not
meaningful due to the start-up nature of the operations of these new products
and services at September 30, 1998.
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
------------- -----------
<S> <C> <C>
DIGITAL TELEVISION
Homes Passed 897,578 728,090
Digital Customers 28,615 10,929
Digital Penetration 3.2% 1.5%
CABLE MODEM-BASED INTERNET ACCESS
Homes Passed 1,932,487 1,730,978
Commercial Customers 252 162
Residential Customers 19,175 13,467
Penetration 1.0% 0.8%
TV-BASED INTERNET ACCESS
Homes Passed 460,277 414,695
Customers 6,196 4,296
Penetration 1.3% 1.0%
DIAL-UP INTERNET ACCESS
Homes Passed 656,534 357,286
Customers 2,476 2,107
Penetration 0.4% 0.6%
</TABLE>
ACCOUNTING STANDARD NOT YET IMPLEMENTED
In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133,
"Accounting for Derivatives Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either as asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivatives gains and
losses to offset related results on the hedged items in the income statement,
and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133--An Amendment of FASB Statement No.
133" has delayed the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. We have not yet quantified the impact of adopting SFAS No.
133 on our consolidated financial statements nor have we determined the timing
or method of our adoption of SFAS No. 133. However, SFAS No. 133 could increase
volatility in earnings (losses).
50
<PAGE> 51
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See disclosure under Interest Rate Risk.
PART II -OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Change in Securities
The issuers of the original Charter Holdings notes exchanged these
notes for new Charter Holdings notes with substantially similar terms
except that the new Charter Holdings notes are registered under the
Securities Act and, therefore, do not bear legends restricting their
transfer.
Item 3. Defaults on Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule (supplied for the information of
the Commission)
(b) Reports on Form 8-K
On November 29, 1999, the Registrants filed a current report on
Form 8-K related to the acquisition of cable systems of Fanch
Cablevision L.P. and affiliates on November 12, 1999 and the
acquisition of Avalon Cable LLC on November 15, 1999, reported in
Part I, Item 2 thereof, as follows:
(a) Charter Holdco, acquired certain equity interests and assets
of cable systems serving approximately 538,000 customers for
a aggregate purchase price of $2.4 billion
(b) Charter Holdco, completed its acquisition of Avalon for an
aggregate purchase price of $845 million including assumed
debt of approximately $273.3 million.
On November 29, 1999, the Registrants filed a current report on
Form 8-K related to the acquisition of Falcon Communications, L.P.
and affiliates on November 12, 1999, reported in Part I, Item 2
thereof, as follows:
(a) Charter Holdco, acquired certain equity interests and assets
of cable systems serving approximately 1,004,000 customers in
exchange for cash of approximately $1.2 billion, $550 million
of equity in Charter Holdco and $1.7 billion of assumed debt.
On October 18, 1999, the Registrants filed a current report on
Form 8-K related to the acquisition of cable systems from
InterMedia Partners Southeast and its affiliates on October 1,
1999, reported in Part I, Item 2 thereof, as follows:
(a) Charter Holdings through certain of its subsidiaries,
acquired certain equity interests and assets of cable systems
serving approximately 413,000 customers in exchange for cash
of approximately $873 million and cable systems serving
approximately 142,000 customers.
51
<PAGE> 52
On September 29, 1999, the Registrants filed a current report on Form 8-K
related to the acquisition of Rifkin Acquisition Partners, L.L.L.P. and
InterLink Communications Partners, LLLP on September 14, 1999 reported in
Part I, Item 2 thereof, as follows:
(a) Charter Communications Operating, LLC, a wholly owned
subsidiary of Charter Holdings completed its acquisition of
Rifkin for an aggregate purchase price of $1.46 billion,
consisting of $1.2 billion in cash, $133.3 million in equity
interests of Charter Holdco, parent of Charter Holdings, and
$125.0 million in assumed debt.
Pursuant to Article 3 of Regulation S-X, unaudited pro forma financial
information related to the these acquisitions was not required to be filed.
52
<PAGE> 53
CHARTER COMMUNICATIONS, INC.
FOR QUARTER ENDED SEPTEMBER 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHARTER COMMUNICATIONS, INC, registrant
Dated December 22, 1999 By: /s/ Kent D. Kalkwarf
---------------------------------------
Name: Kent D. Kalkwarf
Title: Senior Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
53
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