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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1999
REGISTRATION NO. 333-77499
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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CHARTER COMMUNICATIONS HOLDINGS, LLC
AND
CHARTER COMMUNICATIONS HOLDINGS
CAPITAL CORPORATION
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
DELAWARE 4841 43-1843179
DELAWARE 4841 43-1843177
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (FEDERAL EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
12444 POWERSCOURT DRIVE
ST. LOUIS, MISSOURI 63131
(314) 965-0555
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF REGISTRANTS'
PRINCIPAL EXECUTIVE OFFICES)
CURTIS S. SHAW, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
12444 POWERSCOURT DRIVE
ST. LOUIS, MISSOURI 63131
(314) 965-0555
(NAME, ADDRESS, INCLUDING ZIP CODE, AND
TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
DANIEL G. BERGSTEIN, ESQ. ALVIN G. SEGEL, ESQ.
PAUL, HASTINGS, JANOFSKY & WALKER LLP IRELL & MANELLA LLP
399 PARK AVENUE 1800 AVENUE OF THE STARS, SUITE 900
NEW YORK, NEW YORK 10022 LOS ANGELES, CALIFORNIA 90067-4276
(212) 318-6000 (310) 277-1010
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED MAY 12, 1999
$3,575,000,000
OFFER TO EXCHANGE
8.250% SENIOR NOTES DUE 2007,
8.625% SENIOR NOTES DUE 2009 AND 9.920% SENIOR DISCOUNT NOTES DUE 2011
FOR ANY AND ALL OUTSTANDING
8.250% SENIOR NOTES DUE 2007,
8.625% SENIOR NOTES DUE 2009 AND 9.920% SENIOR DISCOUNT NOTES DUE 2011,
RESPECTIVELY, OF
CHARTER COMMUNICATIONS HOLDINGS, LLC
and
CHARTER COMMUNICATIONS HOLDINGS
CAPITAL CORPORATION
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Material Terms of the Exchange Offer:
- We are offering to exchange the notes we sold in a private offering for
new registered notes.
- The exchange offer expires at 5:00 p.m., New York City time, on
, 1999, unless extended.
- The terms of the new notes are substantially identical to the terms of
the original notes, except for the transfer restrictions and registration
rights relating to the original notes.
- Tenders of original notes may be withdrawn any time prior to 5:00 p.m.,
New York City time, on the expiration date of the exchange offer.
- We will exchange all original notes that are properly tendered and not
validly withdrawn.
- No public market exists for the original notes or the new notes. We do
not intend to list the new notes on any securities exchange or to seek
approval for quotation through any automated quotation system.
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SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR ORIGINAL NOTES IN THE
EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 1999.
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The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state in which the offer or sale would be unlawful.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE UNIFORM
SECURITIES ACT WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER
RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE
FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION
MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR
QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE
PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE
PROVISIONS OF THIS PARAGRAPH.
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SUMMARY
The following summary contains a general discussion of our business, the
exchange offer and summary financial information. It likely does not contain all
the information that is important to you in making a decision to tender original
notes in exchange for new notes. For a more complete understanding of the
exchange offer, we encourage you to read this entire prospectus and other
documents to which we refer.
THE COMPANY
We are the seventh largest operator of cable systems in the United States,
serving approximately 2.3 million customers. Our cable systems are managed in
seven operating regions and operate in 22 states. We offer a full range of cable
television services, including basic, expanded basic, premium and pay-per-view
television programming. We have begun to offer digital cable television services
to customers in some of our systems, and are also expanding into other
entertainment, educational and communications services, such as high-speed
Internet access and interactive services. These new services will take advantage
of the significant bandwidth of our cable systems. For the year ended December
31, 1998 pro forma for the acquisitions we completed during 1998, our revenues
were approximately $1.1 billion and our earnings before interest, taxes,
depreciation and amortization was approximately $485 million. Approximately 96%
of our equity is beneficially owned by Paul G. Allen, the co-founder of
Microsoft Corporation. The remaining equity is owned by our founders, Jerald L.
Kent, Barry L. Babcock and Howard L. Wood. Mr. Kent is the President and Chief
Executive Officer and a director of Charter Communications, Inc., our management
company and a significant equity holder of Charter Communications Holdings, LLC.
We have pursued and executed a strategy of operating, developing, acquiring
and consolidating cable systems with the primary goals of increasing our
customer base and operating cash flow by consistently emphasizing superior
customer service. During 1998, we increased the internal customer base, revenues
and earnings before interest, taxes, depreciation and amortization of the cable
systems we owned for the entire year by 4.8%, 9.5% and 11.0%, respectively. This
internal customer growth was more than twice the national average for 1998 (4.8%
versus 1.7%) and was significantly higher than the national average for 1997
(3.5% versus 2.0%).
In addition to growing our internal customer base, we have grown
significantly through acquisitions. Over the past five years, our management
team has successfully completed 22 acquisitions. Since the beginning of 1999, we
have closed two acquisitions and we have entered into six agreements to acquire
additional cable systems. These recent acquisitions and pending acquisitions
serve a total of approximately 1.3 million customers. Pro forma for the
acquisition of the cable systems of Marcus Cable Holdings, LLC on April 7, 1999,
and pro forma for the recent acquisitions and pending acquisitions described in
this prospectus as if all such acquisitions had occurred at the start of the
year, our revenues and earnings before interest, taxes, depreciation and
amortization for 1998 would have been $1.7 billion and $755 million,
respectively. We have also entered into a letter of intent to acquire cable
systems with approximately 12,000 additional customers. Pro forma for the recent
acquisitions, pending acquisitions and the acquisition currently subject to a
letter of intent, we serve approximately 3.6 million customers.
Paul G. Allen, our principal owner and one of the computer industry's
visionaries, has long believed that the broadband capabilities of cable systems
facilitate the convergence of
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cable television, computers and telecommunications. Mr. Allen believes that this
convergence, which he calls the "Wired World," will rely on the cable platform
to deliver an array of new services, such as digital video programming,
high-speed Internet access, Internet protocol telephony and electronic commerce.
Because of cable's ability to provide all of these services, we believe that
individuals and businesses will view cable as an important service.
BUSINESS STRATEGY
Our business strategy is to grow our customer base and increase our
operating cash flow by:
- maximizing customer satisfaction;
- implementing decentralized operations with centralized financial
controls;
- pursuing strategic acquisitions;
- upgrading our systems;
- emphasizing innovative marketing; and
- offering new products and services.
MAXIMIZING CUSTOMER SATISFACTION. To maximize customer satisfaction, we
operate our business to provide reliable, high-quality service offerings,
superior customer service and attractive programming choices at reasonable
rates. We have implemented stringent internal customer service standards which
we believe meet or exceed those established by the National Cable Television
Association. In 1998, J.D. Power and Associates ranked the companies then owned
by us third among major cable system operators in overall customer satisfaction.
We believe that our customer service efforts have contributed to our superior
customer growth, increased acceptance of our new and enhanced service offerings
and increased strength of the Charter brand name.
IMPLEMENTING DECENTRALIZED OPERATIONS WITH CENTRALIZED FINANCIAL
CONTROLS. Our local cable systems are organized into seven operating regions. A
regional management team oversees local system operations in each region. We
believe that a strong management presence at the local system level increases
our ability to respond to customer needs and programming preferences, improves
our customer service, reduces the need for a large centralized corporate staff,
fosters good relations with local governmental authorities and strengthens
community relations. Our regional management teams work closely with senior
management in our corporate office to develop budgets and coordinate marketing,
programming, purchasing and engineering activities. In order to attract and
retain high quality managers at the local and regional operating levels, we
provide a high degree of operational autonomy and accountability and cash and
equity-based performance compensation.
PURSUING STRATEGIC ACQUISITIONS. We intend to continue to pursue strategic
acquisitions and believe that the current consolidation activity in the cable
industry offers substantial opportunities to further our acquisition strategy.
We believe that there are significant advantages in increasing the size and
scope of our operations, including:
- improved economies of scale in management, marketing, customer service,
billing and other administrative functions;
- reduced costs for plant and infrastructure;
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- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
In addition, we recognize the benefits of "swapping" cable systems with other
cable operators to reinforce the advantages of our "clustering" strategy.
UPGRADING OUR SYSTEMS. Over the next three years, we plan to spend
approximately $900 million, or $1.2 billion pro forma for the recent
acquisitions and pending acquisitions, to upgrade our systems' bandwidth
capacity to 550 MHz or greater so that we may offer advanced cable services,
increase program offerings and permit two-way communication. Today,
approximately 55% of our customers are served by cable systems with at least 550
MHz bandwidth capacity, and approximately 37% of our customers have two-way
communication capability. By year end 2001, we expect that approximately 92% of
our customers will be served by cable systems with at least 550 MHz bandwidth
capacity and two-way communication capability. A bandwidth capacity of 550 MHz
enables us to offer our customers up to 82 channels of analog video service as
well as advanced cable services.
EMPHASIZING INNOVATIVE MARKETING. We have developed and successfully
implemented a variety of innovative marketing techniques to attract new
customers and enhance the level of service provided to our existing customers.
Successful implementation of these marketing techniques has resulted in internal
customer growth rates in excess of the cable industry averages in each year from
1995 through 1998 for the cable systems we owned prior to merging with Marcus
Cable Holdings, LLC. The cable systems we acquired upon the merger with Marcus
Cable Holdings, LLC came under common management with us in October 1998, and we
have begun to implement our marketing techniques throughout those systems.
OFFERING NEW PRODUCTS AND SERVICES. By upgrading our systems, we will be
able to expand the array of services and advanced products we can offer to our
customers. Using digital technology, we plan to offer additional channels on our
existing service tiers, create new service tiers, introduce multiplexing of
premium services and increase the number of pay-per-view channels. We also plan
to add digital music services and interactive program guides. In addition to
these expanded cable services, we also plan to provide advanced services
including high-speed Internet access and interactive services. We have entered
into agreements with several providers of high-speed Internet and other
interactive services, including EarthLink Network, Inc., High Speed Access
Corp., WorldGate Communications, Inc., Wink Communications, Inc. and At Home
Corporation.
RECENT EVENTS
RECENT ACQUISITIONS
In the second quarter of 1999, we completed two transactions in which we
acquired cable systems serving a total of approximately 195,000 customers in 4
states for a total purchase price of approximately $699.0 million. For the year
ended December 31, 1998, the cable systems we acquired in these recent
acquisitions had revenues of $57.2 million and earnings before interest, taxes,
depreciation and amortization of approximately $28.3 million.
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RECENT ACQUISITIONS
In addition to the recent acquisitions described above, since the beginning
of 1999, we have entered into definitive agreements to acquire certain
additional cable systems as described in this prospectus for a total purchase
price of approximately $3.9 billion, including the exchange of certain cable
systems, as described under the heading "Business -- Recent Events," with a fair
market value of $0.4 billion. The pending acquisitions serve, in the aggregate,
approximately 1.1 million customers in 18 states. For the year ended December
31, 1998, such systems had revenues and earnings before interest, taxes,
depreciation and amortization of approximately $464.0 million and $209.1
million, respectively. In addition, we are also in active negotiations with
several other potential acquisition candidates whose systems would further
complement our regional operating clusters. We expect to finance these
acquisitions with additional borrowings under the credit facilities described in
this prospectus and with additional equity.
MARCUS COMBINATION
On April 7, 1999, Marcus Cable Holdings, LLC, the guarantor of our
obligations under the original notes and the indentures, was merged with and
into Charter Communications Holdings, LLC the surviving entity and an issuer of
the original notes. As a result of this combination, the subsidiaries of Marcus
Cable Holdings, LLC became our subsidiaries. Under the terms of the original
notes and the indentures, upon the combination with Marcus Cable Holdings, LLC,
the guarantee of our obligations under the notes was automatically terminated.
In addition, upon the sale of the original notes, Marcus Cable Holdings, LLC
issued a senior note in favor of Charter Communications Holdings, LLC in an
amount equal to the portion of the proceeds from the sale of the original notes
that was used to repay certain outstanding senior debt of certain subsidiaries
of Marcus Cable Holdings, LLC. This senior note was secured by a pledge by
Marcus Cable Holdings, LLC of all of the membership interests of Marcus Cable
Company, L.L.C, one of its subsidiaries. Under the terms of the original notes
and the indentures, Charter Communications Holdings, LLC pledged the senior note
to the trustee under the indentures for the equal and ratable benefit of the
holders of the original notes. Under the terms of the original notes and the
indentures, upon the combination described above, the senior note was
automatically extinguished and the pledge of such collateral was released.
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ORGANIZATION
[ORGANIZATIONAL FLOW CHART]
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THE EXCHANGE OFFER
The Exchange Offer.............. We are offering to exchange $1,000 principal
amount of our outstanding 8.250% Senior
Notes due 2007, 8.625% Senior Notes due 2009
and 9.920% Senior Discount Notes due 2011
for our 8.250% Senior Notes due 2007, 8.625%
Senior Notes due 2009 and 9.920% Senior
Discount Notes due 2011, respectively, which
have been registered. As of this date, $600
million in aggregate principal amount of
8.250% Senior Notes due 2007, $1.5 billion
in aggregate principal amount of 8.625%
Senior Notes due 2009, and $1.475 billion in
aggregate principal amount at maturity of
9.920% Senior Discount Notes due 2011, are
outstanding. The original notes were issued
in a private placement.
Resales Without Further
Registration.................. We believe that the new notes issued
pursuant to the exchange offer in exchange
for original notes may be offered for
resale, resold and otherwise transferred by
you without compliance with the registration
and prospectus delivery provisions of the
Securities Act of 1933, provided that:
-- you are acquiring the new notes issued
in the exchange offer in the ordinary
course of your business;
-- you have not engaged in, do not intend
to engage in, and have no arrangement or
understanding with any person to
participate in the distribution of the
new notes issued to you in the exchange
offer; and
-- you are not our "affiliate" as defined
under Rule 405 of the Securities Act.
Each of the participating broker-dealers
that receives new notes for its own account
in exchange for original notes that were
acquired by such broker or dealer as a
result of market-making or other activities
must acknowledge that it will deliver a
prospectus in connection with the resale of
the new notes. See "Plan of Distribution."
Expiration Date................. 5:00 p.m., New York City time, on
, 1999 unless we extend the
exchange offer.
Exchange and Registration Rights
Agreements.................... You have the right to exchange the original
notes that you hold for new notes with
substantially identical terms. This exchange
offer is intended to
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satisfy these rights. Once the exchange
offer is complete, you will no longer be
entitled to any exchange or registration
rights with respect to your notes.
Accrued Interest on the New
Notes and Original Notes........ The new notes will bear interest from March
17, 1999. Holders of original notes which
are accepted for exchange will be deemed to
have waived the right to receive any payment
in respect of interest on such original
notes accrued to the date of issuance of the
new notes.
Conditions to the Exchange
Offer........................... The exchange offer is conditioned upon
certain customary conditions which we may
waive and upon compliance with securities
laws. See "The Exchange
Offer -- Conditions."
Procedures for Tendering
Original Notes.................. Each holder of original notes wishing to
accept the exchange offer must:
-- complete, sign and date the letter of
transmittal, or a facsimile thereof; or
-- arrange for the Depository Trust Company
to transmit certain required information
to the exchange agent in connection with a
book-entry transfer
You must mail or otherwise deliver such
documentation together with the original
notes to the exchange agent at the address
set forth herein under the section "The
Exchange Offer -- Exchange Agent."
Special Procedures for
Beneficial Holders.............. If you beneficially own original notes
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and you wish to tender your original
notes in the exchange offer, you should
contact such registered holder promptly and
instruct it to tender on your behalf. If you
wish to tender on your own behalf, you must,
before completing and executing the letter
of transmittal for the exchange offer and
delivering your original notes, either
arrange to have your original notes
registered in your name or obtain a properly
completed bond power from the registered
holder. The transfer of registered ownership
may take considerable time.
Guaranteed Delivery
Procedures...................... You may comply with the procedures described
in this prospectus under the heading "The
Exchange
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Offer -- Guaranteed Delivery Procedures" if
you wish to tender your original notes and:
-- time will not permit your required
documents to reach the exchange agent by
the expiration date of the exchange offer,
-- you cannot complete the procedure for
book-entry transfer on time, or
-- your original notes are not immediately
available.
Withdrawal Rights............... You may withdraw your tender of original
notes at any time prior to 5:00 p.m., New
York City time, on the date the exchange
offer expires.
Failure to Exchange Will Affect
You Adversely................... If you are eligible to participate in the
exchange offer and you do not tender your
original notes, you will not have further
exchange or registration rights and your
original notes will continue to be subject
to some restrictions on transfer.
Accordingly, the liquidity of the original
notes will be adversely affected.
Certain Federal Tax
Considerations................ We believe that the exchange of original
notes for new notes pursuant to the exchange
offer will not be a taxable event for United
States federal income tax purposes. A
holder's holding period for new notes will
include the holding period for original
notes. See "Certain Federal Tax
Considerations."
Exchange Agent.................. Harris Trust Company of New York is serving
as exchange agent in connection with the
exchange offer.
Use of Proceeds................. We will not receive any proceeds from the
exchange offer. See "Use of Proceeds."
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SUMMARY OF TERMS OF NEW NOTES
The new notes are substantially identical to the original notes, with
certain exceptions. The new notes will evidence the same debt as the original
notes and will be entitled to the benefits of the indentures that exist with
respect to the original notes. See "Description of Notes."
Issuers......................... Charter Communications Holdings, LLC and
Charter Communications Holdings Capital
Corporation.
Notes Offered................... $600,000,000 in principal amount of 8.250%
Senior Notes due 2007.
$1,500,000,000 in principal amount of 8.625%
Senior Notes due 2009.
$1,475,000,000 in principal amount at
maturity of 9.920% Senior Discount Notes due
2011.
The form and terms of the new notes will be
the same as the form and terms of the
outstanding notes except that:
- the new notes will bear a different CUSIP
number from the original notes,
- the new notes will have been registered
under the Securities Act of 1933 and,
therefore, will not bear legends
restricting their transfer, and
- you will not be entitled to any exchange
or registration rights with respect to the
new notes.
The new notes will evidence the same debt as
the original notes, will be entitled to the
benefits of the indentures governing the
original notes and will be treated under the
indentures as a single class with the
original notes.
Maturity Date................... 8.250% Senior Notes due 2007: April 1, 2007.
8.625% Senior Notes due 2009: April 1, 2009.
9.920% Senior Discount Notes due 2011: April
1, 2011.
Issue Price..................... 8.250% Senior Notes due 2007: 99.733%, plus
accrued interest, if any, from March 17,
1999.
8.625% Senior Notes due 2009: 99.695%, plus
accrued interest, if any, from March 17,
1999.
9.920% Senior Discount Notes due 2011:
61.394%, with original issue discount to
accrete from March 17, 1999.
Interest........................ Annual rate for 8.250% Senior Notes due
2007: 8.250%.
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Annual rate for 8.625% Senior Notes due
2009: 8.625%.
Payment frequency for 8.250% Senior Notes
due 2007 and 8.625% Senior Notes due 2009:
Every six months on April 1 and October 1.
First payment on the 8.250% Senior Notes and
8.625% Senior Notes due 2009: October 1,
1999.
The 9.920% Senior Discount Notes due 2011
will be issued at a discount to their
aggregate principal amount at maturity. For
a discussion of the United States federal
income tax treatment of the new senior
discount notes under the original issue
discount rules, please refer to the section
of this prospectus entitled "Certain Federal
Tax Considerations." We will not make a cash
interest payment on the new senior discount
notes prior to October 1, 2004. The new
senior discount notes will accrete at a rate
of 9.920% per year to an aggregate amount of
$1.475 billion by April 1, 2004 and,
thereafter, will pay cash interest.
Payment frequency for 9.920% Senior Discount
Notes due 2011 after April 1, 2004: Every
six months on April 1 and October 1,
commencing October 1, 2004.
Ranking......................... The new notes are senior debts. They rank
equally with the current and future
unsecured and unsubordinated debt (including
trade payables) of Charter Communications
Holdings, LLC, which is a holding company
and conducts all of its operations through
its subsidiaries. If it defaults, your right
to payment under the new notes will be
structurally subordinated to all existing
and future liabilities (including trade
payables) of its subsidiaries.
Optional Redemption............. We will not have the right to redeem the
8.250% Senior Notes due 2007 prior to their
maturity date on April 1, 2007.
Before April 1, 2002, we may redeem up to
35% of the 8.625% Senior Notes due 2009 and
the 9.920% Senior Discount Notes due 2011
with the proceeds of certain offerings of
equity securities at the price listed in the
"Description of Notes" section under the
heading "Optional Redemption."
On or after April 1, 2004, we may redeem
some or all of the 8.625% Senior Notes due
2009 and the 9.920% Senior Discount Notes
due 2011 at any
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time at the redemption prices listed in the
"Description of Notes" section under the
heading "Optional Redemption."
Mandatory Offer to Repurchase... If we experience certain changes of control,
we must offer to repurchase any then issued
notes at 101% of their principal amount or
accreted value, as applicable in each class
of notes, plus accrued and unpaid interest.
Basic Covenants of Indentures... The indentures governing the notes, among
other things, restrict our ability and the
ability of certain of our subsidiaries to:
- borrow money;
- create certain liens;
- pay dividends on stock or repurchase
stock;
- make investments;
- sell all or substantially all of our
assets or merge with or into other
companies;
- sell assets;
- in the case of our restricted
subsidiaries, create or permit to
exist dividend or payment
restrictions with respect to us; and
- engage in certain transactions with
affiliates.
These covenants are subject to important
exceptions. See "Description of
Notes -- Certain Covenants."
RISK FACTORS
You should carefully consider all of the information in this prospectus. In
particular, you should evaluate the specific risk factors under "Risk Factors"
for a discussion of certain risks involved with an investment in the new notes.
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UNAUDITED SUMMARY PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Summary Pro Forma Financial Statements are based on
the financial statements of Charter Communications Holdings, LLC, CCA Group
(consisting of CCA Holdings, LLC, CCT Holdings, LLC and Charter Communications
Long Beach, LLC), and CharterComm Holdings, L.P., as adjusted to illustrate the
estimated effects of the following transactions as if such transactions had
occurred on January 1, 1998 for the Statement of Operations and Other Financial
Data, and on December 31, 1998 for the Balance Sheet Data and Operating Data:
(i) the acquisition of our then owned companies effective December 23,
1998 by Paul G. Allen;
(ii) the acquisition of Sonic Communications, Inc. by one of our
subsidiaries on May 20, 1998;
(iii) the acquisition of Marcus Cable Company, L.L.C. on April 22,
1998 by Paul G. Allen;
(iv) the acquisitions and dispositions by Marcus Cable Company, L.L.C.
during 1998;
(v) the combination of Charter Communications Holdings, LLC and Marcus
Cable Holdings, LLC;
(vi) all recent acquisitions and pending acquisitions; and
(vii) the refinancing of all our debt through the issuance of the
original notes and funding under our credit facilities. The
Unaudited Summary Pro Forma Financial Statements reflect the
application of the principles of purchase accounting to the
transactions listed in items (i) through (iv) and (vi) of the
preceding sentence. The allocation of the purchase price is
based, in part, on preliminary information, which is subject to
adjustment upon obtaining complete valuation information with
respect to each acquisition and the net assets acquired.
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The Unaudited Summary Pro Forma Financial Statements do not purport to be
indicative of what our financial position or results of operations would
actually have been had the transactions described above been completed on the
dates indicated or to project our results of operations for any future date. See
"Unaudited Pro Forma Financial Statements."
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
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RECENT
AND
PENDING REFINANCING
CHARTER MARCUS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
--------- --------- ---------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
Revenues............................... $ 611,690 $ 448,192 $1,059,882 $ 597,441 $ -- $1,657,323
--------- --------- ---------- --------- -------- ----------
Operating expenses:
Operating, general and
administrative..................... 310,100 231,050 541,150 306,209 -- 847,359
Corporate expenses(a)................ 16,493 17,042 33,535 6,759 -- 40,294
Depreciation and amortization........ 375,899 252,855 628,754 327,731 -- 956,485
Management fees...................... -- -- -- 14,672 -- 14,672
--------- --------- ---------- --------- -------- ----------
Total operating expenses........... 702,492 500,947 1,203,439 655,371 -- 1,858,810
--------- --------- ---------- --------- -------- ----------
Loss from operations................... (90,802) (52,755) (143,557) (57,930) -- (201,487)
Interest expense....................... (207,468) (137,953) (345,421) (203,500) 4,200 (544,721)
Other income (expense)................. 518 -- 518 (5,862) -- (5,344)
--------- --------- ---------- --------- -------- ----------
Net loss............................... $(297,752) $(190,708) $ (488,460) $(267,292) $ 4,200 $ (751,552)
========= ========= ========== ========= ======== ==========
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------
RECENT
AND
PENDING REFINANCING
CHARTER MARCUS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ---------- ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
OTHER FINANCIAL DATA:
Operating cash flow(b).............. $ 301,590 $ 217,142 $ 518,732 $ 291,232 $ -- $ 809,964
EBITDA(c)........................... 285,097 200,100 485,197 269,801 -- 754,998
EBITDA margin(d).................... 46.6% 44.6% 45.8% 45.2% 45.6%
Cash interest expense............... $ 428,132
Capital expenditures................ $ 213,353 $ 224,723 $ 438,076 $ 93,107 -- 531,183
Total debt to operating cash flow... 7.9x
Total debt to EBITDA................ 8.5
EBITDA to cash interest expense..... 1.8
EBITDA to interest expense.......... 1.4
Deficiency of earnings to cover
fixed charges(e).................. $ 751,552
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets........................ $7,235,656 -- $7,235,656 $4,350,744 $125,000 $11,711,400
Total debt.......................... 3,523,201 -- 3,523,201 2,750,800 144,964 6,418,965
Members' equity..................... 3,429,291 -- 3,429,291 1,482,019 (19,964) 4,891,346
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YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------
RECENT
AND
PENDING REFINANCING
CHARTER MARCUS SUBTOTAL ACQUISITIONS ADJUSTMENTS TOTAL
---------- ---------- ---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
OPERATING DATA (AT END OF PERIOD,
EXCEPT FOR AVERAGES):
Homes passed........................ 2,149,000 1,743,000 3,892,000 1,795,000 5,687,000
Basic customers..................... 1,255,000 1,062,000 2,317,000 1,300,000 3,617,000
Basic penetration(f)................ 58.4% 60.9% 59.5% 72.4% 63.6%
Premium units....................... 845,000 411,000 1,256,000 811,000 2,067,000
Premium penetration(g).............. 67.3% 38.7% 54.2% 62.4% 57.1%
Average monthly revenue per basic
customer(h)....................... NM NM $ 38.12 $ 38.30 $ 38.18
- -------------------------
(a) Charter Communications, Inc. provided corporate management and consulting
services on behalf of Charter Communications Holdings, LLC for 1998 and on
behalf of Marcus Cable Holdings, LLC beginning in October 1998. See "Certain
Relationships and Related Transactions."
(b) Operating cash flow means EBITDA, as defined below, before corporate
expenses and management fees.
(c) EBITDA represents income (loss) before interest expense, income taxes,
depreciation, amortization, gain (loss) on sale of assets and other income
(expense). EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service indebtedness. However, EBITDA
should not be considered as an alternative to income from operations or to
cash flows from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as an
indication of a company's operating performance or as a measure of
liquidity.
(d) EBITDA margin represents EBITDA as a percentage of revenues.
(e) Earnings include net income (loss) plus fixed charges. Fixed charges consist
of interest expense and an estimated interest component of rent expense.
(f) Basic penetration represents basic customers as a percentage of homes
passed.
(g) Premium penetration represents premium units as a percentage of basic
customers.
(h) Average monthly revenue per basic customer represents revenues divided by
the number of months in the period divided by the number of basic customers
at December 31, 1998.
See "Notes to the Unaudited Pro Forma Financial Statements."
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UNAUDITED SUMMARY HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
The Unaudited Summary Historical Combined Financial and Operating Data for
the years ended December 31, 1996, 1997 and 1998 have been derived from the
separate financial statements of Charter Communications Holdings, LLC, CCA Group
(consisting of CCA Holdings, LLC, CCT Holdings, LLC and Charter Communications
Long Beach, LLC) and CharterComm Holdings, LLC, which have been audited by
Arthur Andersen LLP, independent public accountants, and are included elsewhere
in this prospectus. The combined financial and operating data represent the sum
of the results of each of our operating subsidiaries. Each of the companies was
managed by Charter Communications, Inc. under the terms of its respective
management agreement with such company during the presented periods. Since our
operating subsidiaries were under common management, we believe presenting
combined financial information of these companies is informative.
As a result of our acquisition by Paul G. Allen, we have applied push-down
accounting which had the effect of increasing total assets, total debt and
members' equity as of December 23, 1998. In addition, we have retroactively
restated our financial statements to include the results of operations of Marcus
Cable Company, L.L.C. for the period from December 24, 1998, through December
31, 1998, and the balance sheet of Marcus Cable Company, L.L.C. as of December
31, 1998. As a result of our acquisition by Paul G. Allen and our combination
with Marcus Cable Holdings, LLC, we believe that the periods on or prior to
December 23, 1998 are not comparable to the periods after December 23, 1998.
COMBINED CHARTER COMPANIES
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT CUSTOMER DATA)
COMBINED STATEMENT OF OPERATIONS:
Revenues.................................................... $ 368,553 $ 484,155 $ 594,414
---------- ---------- ----------
Operating expenses:
Operating, general and administrative..................... 190,084 249,419 301,107
Depreciation and amortization............................. 154,273 198,718 254,105
Management fees/corporate expense charges(a).............. 15,094 20,759 39,114
---------- ---------- ----------
Total operating expenses............................... 359,451 468,896 594,326
---------- ---------- ----------
Income from operations...................................... $ 9,102 $ 15,259 $ 88
========== ========== ==========
OTHER FINANCIAL DATA:
Operating cash flow(b)...................................... $ 178,469 $ 236,099 $ 293,307
EBITDA(c)................................................... 163,375 215,340 268,597
EBITDA margin(d)............................................ 44.3% 44.5% 45.2%
Capital expenditures........................................ $ 110,291 $ 162,607 $ 438,076
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets................................................ $1,660,242 $2,002,181 $7,235,656
Total debt.................................................. 1,195,899 1,846,159 3,523,201
Members' equity............................................. 26,099 (80,505) 3,429,291
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COMBINED CHARTER COMPANIES
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT CUSTOMER DATA)
OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES):
Homes passed................................................ 1,546,000 1,915,000 3,892,000
Basic customers............................................. 902,000 1,086,000 2,317,000
Basic penetration(e)........................................ 58.3% 56.7% 59.5%
Premium units............................................... 517,000 629,000 1,256,000
Premium penetration(f)...................................... 57.3% 57.9% 54.2%
- -------------------------
(a) Charter Communications, Inc. provided corporate management and consulting
services to us. CCA Group (consisting of CCA Holdings, LLC, CCT Holdings,
LLC, and Charter Communications Long Beach, LLC) and CharterComm Holdings,
LLC paid fees to Charter Communications, Inc. as compensation for such
services and recorded management fee expense. See "Certain Relationships and
Related Transactions." Charter Communications Holdings, LLC recorded charges
for actual corporate expenses incurred by Charter Communications, Inc. on
behalf of Charter Communications Holdings, LLC. Management fees/corporate
expense charges for the year ended December 31, 1998 include $14.4 million
of Appreciation Rights Plan costs related to our acquisition by Paul G.
Allen that were paid by Charter Communications, Inc. and not subject to
reimbursement by us but were allocated to us for financial reporting
purposes.
(b) Operating cash flow means EBITDA, as defined below, before management
fees/corporate expense charges.
(c) EBITDA represents income (loss) before interest expense, income taxes,
depreciation, amortization, other income (expense), gain (loss) on sale of
assets and Appreciation Rights Plan costs. EBITDA is presented because it is
a widely accepted financial indicator of a company's ability to service
indebtedness. However, EBITDA should not be considered as an alternative to
income from operations or to cash flows from operating activities (as
determined in accordance with generally accepted accounting principles) and
should not be construed as an indication of a company's operating
performance or as a measure of liquidity.
(d) EBITDA margin represents EBITDA as a percentage of revenues.
(e) Basic penetration represents basic customers as a percentage of homes
passed.
(f) Premium penetration represents premium units as a percentage of basic
customers.
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RISK FACTORS
You should carefully consider the risk factors set forth below, as well as
the other information in this prospectus, before tendering original notes in
exchange for new notes.
SUBSTANTIAL DEBT -- WE HAVE SUBSTANTIAL EXISTING DEBT AND WILL INCUR SUBSTANTIAL
ADDITIONAL DEBT WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND PREVENT US
FROM FULFILLING OUR OBLIGATIONS UNDER THE NOTES.
We have a significant amount of debt. As of December 31, 1998, pro forma
for the refinancing of our previous credit facilities and other outstanding
debt, the combination with Marcus Cable Holdings, LLC and our recent
acquisitions and pending acquisitions, our total indebtedness would have been
approximately $6.4 billion, our total members' equity would have been
approximately $4.9 billion, and the deficiency of our earnings available to
cover fixed charges would have been approximately $752 million. Our substantial
debt could have important consequences to you. For example, it could:
- make it more difficult for us to satisfy our obligations to you with
respect to the notes and to satisfy our obligations under our credit
facilities;
- increase our vulnerability to general adverse economic and cable industry
conditions, including interest rate fluctuations;
- require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, which will reduce our funds
available for working capital, capital expenditures, acquisitions of
additional systems and other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and the cable industry generally;
- place us at a competitive disadvantage compared to our competitors that
have proportionately less debt;
- limit our ability to borrow additional funds, if we need it, due to
applicable financial and restrictive covenants in such indebtedness; and
- increase our interest expenses above current levels due to increases in
interest rates, since much of our borrowings are and will continue to be
at variable rates of interest.
We anticipate incurring substantial additional debt in the future to
finance additional acquisitions and to fund the expansion, maintenance and the
upgrade of our systems. If new debt is added to our current debt levels, the
related risks that we and you now face could intensify. For more information
regarding our debt see "Description of the Credit Facilities" and "Description
of Notes."
SIGNIFICANT CASH FLOW REQUIREMENTS -- OUR ABILITY TO GENERATE THE SIGNIFICANT
AMOUNT OF CASH NEEDED TO SERVICE OUR DEBT AND GROW OUR BUSINESS DEPENDS ON MANY
FACTORS BEYOND OUR CONTROL.
Our ability to make payments on our debt, including the notes, and to fund
planned capital expenditures will depend on our ability to generate cash and
secure financing in the future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. If our business does not generate sufficient cash flow
from operations, and sufficient future borrowings are not
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21
available to us under our credit facilities or from other sources of financing,
we may not be able to repay our indebtedness, including the notes, to grow our
business or to fund our other liquidity needs.
RESTRICTIONS IMPOSED ON US BY OUR CREDIT FACILITIES -- OUR CREDIT FACILITIES
CONTAIN RESTRICTIONS AND LIMITATIONS WHICH COULD SIGNIFICANTLY IMPACT OUR
ABILITY TO OPERATE OUR BUSINESS AND REPAY THE NOTES.
Our credit facilities contain a number of significant covenants that, among
other things, restrict the ability of our subsidiaries to:
- distribute funds to service principal and interest payments on the notes;
- pay dividends;
- pledge assets;
- dispose of assets or merge;
- incur additional indebtedness;
- issue equity;
- repurchase or redeem equity interests and indebtedness;
- create liens; and
- make certain investments or acquisitions.
In addition, our credit facilities contain, among other covenants,
requirements that Charter Communications Operating, LLC, one of our subsidiaries
and the borrower on a consolidated basis with our other subsidiaries, maintain
specified financial ratios. 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 our credit facilities. In the event of a default under
our credit facilities, lenders could elect to declare all amounts borrowed,
together with accrued and unpaid interest and other fees, to be due and payable.
Additionally, if the amounts outstanding under our credit facilities are
accelerated, thereby causing an acceleration of amounts outstanding under the
notes, we may not be able to repay such amounts or the notes. If the 8.250%
Senior Notes due 2007 are not refinanced at least six months prior to the date
of their maturity, the entire amount due under our credit facilities shall
become due and payable. See "Description of the Credit Facilities."
LIMITED OPERATING HISTORY AND RAPID GROWTH -- WE HAVE A LIMITED HISTORY OF
OPERATING OUR CURRENT SYSTEMS, WHICH MAKES IT DIFFICULT FOR YOU TO COMPLETELY
EVALUATE OUR PERFORMANCE.
We commenced active operations in 1994 and have grown rapidly since then
through acquisitions of cable systems. Our merger with Marcus Cable Holdings,
LLC on April 7, 1999 nearly doubled the number of customers serviced by systems
under common management with us. Additionally, our recent acquisitions and
pending acquisitions will increase the number of customers served by systems
under our management by approximately 56%. As a result, historical financial
information about us may not be indicative of the future or of results that can
be achieved by us in managing the cable systems which will be under our control.
Although we have experienced internal customer growth, recent growth in revenue
and growth in income (loss) before interest, taxes, depreciation and
amortization, gain (loss) on sale of assets and other income (expense)
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22
(EBITDA), there can be no assurance that growth or profitability will continue
to be achieved within the combined systems or other systems we may acquire in
the future.
NET LOSSES -- WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO
EXPERIENCE NET LOSSES.
We have had a history of net losses and expect to continue to report net
losses for the foreseeable future. We reported net losses from continuing
operations, before extraordinary items, of $157 million and $200 million,
respectively, for the years ended December 31, 1997 and 1998. The companies we
acquired through our merger with Marcus Cable Holdings, LLC reported net losses
from continuing operations, before extraordinary items, of $109 million and $248
million, respectively, for the same periods. The principal reasons for our prior
and anticipated net losses include the depreciation and amortization expenses
associated with our acquisitions, the capital expenditures related to
construction and upgrading of our systems, and interest costs on borrowed money.
We cannot predict what impact, if any, continued losses will have on our ability
to finance our operations in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RISKS ASSOCIATED WITH FUTURE CAPITAL REQUIREMENTS. WE MAY NOT BE ABLE TO OBTAIN
ADDITIONAL CAPITAL WHICH WOULD BE REQUIRED IF OUR CAPITAL INVESTMENT PROGRAM
DOES NOT GENERATE PROJECTED RESULTS.
We intend to upgrade a significant portion of our cable systems over the
coming years and make other capital investments. Over the next three years, we
plan to spend approximately $900 million, or $1.2 billion pro forma for our
recent acquisitions and pending acquisitions, to upgrade our existing systems.
We also plan to spend an additional $900 million, or $1.3 billion pro forma for
our recent acquisitions and pending acquisitions, to maintain and expand our
existing systems. As we make additional acquisitions, we expect that our need to
make additional capital expenditures will increase. We may not, however, be able
to fund these planned increases in capital expenditures. Moreover, we cannot
assure you that completing these upgrades will allow us to compete effectively
with competitors. If we cannot obtain the funds we need in order to complete the
upgrades discussed above, our financial condition, the results of our
operations, and our competitive position could all suffer materially.
SUBORDINATION/HOLDING COMPANY STRUCTURE -- THE NOTES ARE THE OBLIGATIONS OF A
HOLDING COMPANY WHICH HAS NO OPERATIONS AND DEPENDS ON ITS OPERATING
SUBSIDIARIES FOR CASH, WHICH SUBSIDIARIES MAY BE LIMITED IN THEIR ABILITY TO
MAKE FUNDS AVAILABLE.
As a holding company, Charter Communications Holdings, LLC does not hold
substantial assets other than its direct or indirect investments in and advances
to our operating subsidiaries. Consequently, our subsidiaries conduct all of our
consolidated operations and own substantially all of our consolidated assets. As
a result, our cash flow and our ability to meet our debt service obligations on
the notes will depend upon the cash flow of our subsidiaries and the payment of
funds by our subsidiaries to us in the form of loans, equity distributions or
otherwise. Our subsidiaries are not obligated to make funds available to us for
payment on the notes or otherwise. In addition, our subsidiaries' ability to
make any such loans or distributions to us will depend on their earnings, the
terms of their indebtedness, business and tax considerations and legal
restrictions.
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23
Because of our holding company structure described above, the notes will be
subordinate to all liabilities of our subsidiaries. Our lenders under our credit
facilities will consequently have the right to be paid before you from any cash
received or held by our subsidiaries. In the event of bankruptcy, liquidation or
dissolution of a subsidiary, following payment by the subsidiary of its
liabilities, such subsidiary may not have sufficient assets remaining to make
payments to us as a shareholder or otherwise.
RISKS OF GROWTH STRATEGY -- IF WE ARE UNSUCCESSFUL IN IMPLEMENTING OUR GROWTH
STRATEGY, WE MAY BE UNABLE TO FULFILL OUR OBLIGATIONS UNDER THE NOTES.
We expect that a substantial portion of 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. If we are unable to grow our
cash flow sufficiently, we may be unable to fulfill our obligations to you under
the notes or obtain alternative financing.
RISKS ASSOCIATED WITH INTEGRATING NEW SYSTEMS -- WE MAY NOT HAVE THE ABILITY TO
INTEGRATE THE NEW SYSTEMS AND CUSTOMERS OBTAINED IN CONNECTION WITH OUR RECENT,
PENDING AND FUTURE ACQUISITIONS.
Upon the completion of our recent acquisitions and pending acquisitions, we
will own and operate cable systems serving approximately 3.6 million customers,
as compared to the cable systems we currently own serving approximately 2.3
million customers at year end 1998. In addition, we expect to acquire more cable
systems in the future. This strategy poses the following risks:
- The integration of these new systems and customers will place significant
demands on our management and our operational, financial and marketing
resources. Our current operating and financial systems and controls may
not be adequate, and any steps taken to improve these systems and
controls may not be sufficient.
- Acquired businesses sometimes result in unexpected liabilities and
contingencies which could be expensive and might hinder our growth.
- Our continued growth will also increase our need for qualified personnel.
We may not be able to hire such additional qualified personnel.
Potentially successful acquisitions may initially be a material drain on
our cash and other resources while we integrate them with our other systems. We
cannot assure you that we will successfully integrate any acquired systems into
our operations.
RISK THAT PENDING ACQUISITIONS WILL NOT BE CONSUMMATED -- THE FAILURE TO OBTAIN
NECESSARY REGULATORY APPROVALS, OR TO SATISFY OTHER CLOSING CONDITIONS, COULD
IMPEDE THE CONSUMMATION OF A PENDING ACQUISITION, THEREBY PREVENTING OR DELAYING
OUR STRATEGY TO EXPAND OUR BUSINESS AND INCREASE REVENUES.
Our pending acquisitions are subject to regulatory approvals, including the
approval of the relevant public utilities commission in the state of the cable
systems to be acquired. No assurance can be given that the necessary approvals
will be received. These pending acquisitions are also subject to certain other
closing conditions, and there can be no assurance as to when, or if, each such
acquisition will be consummated. Any delay, prohibition or modification could
adversely affect the terms of a pending acquisition or
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24
could require us to abandon an otherwise attractive opportunity. Failure to
consummate a pending acquisition will not have any effect on our historical
financial statements, however, you should see the Unaudited Pro Forma Financial
Statements included elsewhere in this prospectus to determine the impact the
failure to consummate a pending acquisition may have on our financial
statements.
ABSENCE OF A PUBLIC MARKET -- AN ACTIVE MARKET MAY NOT DEVELOP FOR THE NOTES
CAUSING DIFFICULTIES FOR YOU IF YOU TRY TO RESELL THE NOTES.
The new notes will be new securities for which there is currently no public
market. We do not intend to list the new notes on any national securities
exchange or quotation system, but the original notes are eligible for trading in
the Private Offerings, Resales and Trading through Automated Linkages (PORTAL)
market. There can be no assurance as to the development of any market or
liquidity of any market that may develop for the new notes. If a trading market
does not develop or is not maintained, you may experience difficulty in
reselling new notes, or you may be unable to sell them at all. To the extent
that original notes are tendered and accepted in the exchange offer, the
aggregate principal amount of original notes outstanding will decrease, with a
resulting decrease in the liquidity of the market therefor.
CONSEQUENCES OF FAILURE TO EXCHANGE -- THE ORIGINAL NOTES WILL REMAIN SUBJECT TO
RESTRICTIONS ON TRANSFER.
Holders of original notes who do not exchange their original notes for new
notes pursuant to the exchange offer will continue to be subject to the
restrictions on transfer of the original notes set forth in the legend thereon
as a consequence of the issuance of the original notes pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act of 1933. In general, original notes may not be offered or sold,
unless registered under the Securities Act of 1933, except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act of 1933
and applicable state securities laws. We do not anticipate that we will register
the original notes under the Securities Act of 1933.
COMPETITION IN THE CABLE INDUSTRY -- WE OPERATE IN A VERY COMPETITIVE BUSINESS
ENVIRONMENT WHICH CAN AFFECT OUR BUSINESS AND OPERATIONS.
The industry in which we operate is highly competitive and in many
instances we compete against companies with fewer regulatory burdens, easier
access to financing, greater personnel resources, greater brand name recognition
and long-standing relationships with regulatory authorities. Mergers, joint
ventures and alliances among cable television operators, Regional Bell Operating
Companies, long distance service providers, competitive local exchange carriers,
wireless service providers and others may result in providers capable of
offering cable television and other telecommunications services in direct
competition with us. Additionally, the Federal Communications Commission and
Congress are considering proposals to enhance the ability of direct broadcast
satellite providers to gain access to additional programming, and to authorize
them to transmit local broadcast signals to local markets on a broader basis
than permitted under current law. If they gain permission and are able to
deliver local or regional broadcast signals more broadly, cable system operators
will lose a competitive advantage over direct broadcast satellite providers.
Additionally, our cable systems are operated under non-exclusive franchises
granted by local authorities. These franchises are subject to renewal and
renegotiation from time to time. Franchising authorities and other government or
government-related entities are also
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25
allowed to operate cable systems in their communities without obtaining
franchises. Competing operators may build systems in areas in which we hold
franchises (referred to as "overbuilds"). We are aware of overbuild situations
in six of our systems and potential overbuild situations in four of our systems
representing a total of approximately 45,000 customers. See
"Business -- Competition."
We also face competition within the subscription television industry from
non-cable technologies for distributing television broadcast signals. Current
and potential competitors include:
- direct broadcast satellite providers, which include high-power and
medium-power digital satellite providers,
- multichannel multipoint distribution systems or "wireless cable", and
- operators of satellite master antenna television systems.
Electric utilities also have the potential to become significant
competitors in the video marketplace, as many of them already possess fiber
optic transmission lines in certain of the areas they serve. In the last year,
several utilities have announced, commenced, or moved forward with ventures
involving multichannel video programming distribution.
The Telecommunications Act of 1996 exempts some of our competitors from
regulation as cable systems. This exemption may give these entities a
competitive advantage over us. There can be no assurance that we will be able to
continue to compete effectively with such entities in the cable television
business.
We face competition from other communications and entertainment media,
including conventional off-air television and radio broadcasting services,
newspapers, movie theaters, the Internet, live sports events and home video
products. Other new technologies may also soon compete with our latest
non-entertainment services, along with our traditional cable television
services. As we expand and introduce new and enhanced services, including
additional telecommunications services, we will be subject to competition from
other telecommunications providers. For example, several companies compete with
us to provide high-speed Internet access, using digital subscriber line
technology. Advances in communications technology and changes in the marketplace
and the regulatory and legislative environment are constantly occurring. We
cannot predict the specific effect ongoing or future developments might have on
us or the general effect these developments might have on the cable television
industry. We also cannot predict the extent to which this competition may affect
our business and operations in the future. For more information, see
"Business -- Competition."
INCREASES IN PROGRAMMING COSTS -- OUR PROGRAMMING COSTS ARE INCREASING AND WE
MAY NOT HAVE THE ABILITY TO PASS THESE INCREASES ON TO OUR CUSTOMERS, WHICH
WOULD ADVERSELY AFFECT OUR REVENUES AND CASH FLOW.
Programming has been and is expected to continue to be our largest single
expense item. Programming costs were equal to approximately 21% of revenues in
1998 with respect to the cable systems owned by us during that year. In recent
years the cable industry has experienced a rapid escalation in the cost of
programming, in particular, sports programming. Programming costs for the
services carried on the basic and expanded basic levels of service increased by
approximately 12%, on a per customer basis, from 1997 to 1998. This escalation
may continue and we may not be able to pass programming cost increases on to our
customers. In addition, as we upgrade the channel capacity of our systems and
add programming to our basic and "preferred basic" tiers, and reposition
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premium services to the basic tier, we may face additional market constraints on
our ability to pass programming costs on to our customers. The inability to pass
these increases on to our customers will affect our revenues and cash flow.
RISKS ASSOCIATED WITH REGULATION OF THE CABLE INDUSTRY -- OUR BUSINESS IS
SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND REGULATION. THE APPLICABLE
LEGISLATION AND REGULATIONS AND CHANGES TO THEM COULD ADVERSELY AFFECT OUR
BUSINESS.
The cable industry is subject to extensive regulation at the federal, local
and, in some instances, state levels. The Federal Communications Commission has
principal regulatory responsibility. Many aspects of such regulation are
currently the subject of judicial proceedings and administrative or legislative
proposals, including a proposal which would require cable operators to provide
access to their broadband cable networks to other Internet service providers.
Legislation and regulations change, and we cannot predict the impact of future
developments on the cable television industry, in general, or on us, in
particular. See "Regulation and Legislation."
FEDERAL LAW AND REGULATION. Regulations on the cable industry have
increased the administrative and operational expenses of cable systems and have
resulted in additional oversight by the Federal Communications Commission and
local or state franchise authorities. Cable operators are subject to, among
other things:
- rate regulations;
- requirements that, under certain circumstances, a cable system carry a
local broadcast station or obtain consent to carry a local or distant
broadcast station;
- rules for franchise renewals and transfers; and
- other requirements covering a variety of operational areas such as equal
employment opportunity, technical standards and customer service
requirements.
Cable operators are also subject to certified local franchising authorities
who have the power 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, we have refunded an aggregate amount of
approximately $300,000 since our inception. We may be required to refund
additional amounts in the future.
As of March 31, 1999, the cable programming service tier for all cable
operators was deregulated. Nevertheless, the Federal Communications Commission
and Congress continue to be concerned that rates for cable programming services
are rising at a rate exceeding inflation. It is therefore possible that either
Congress or the Federal Communications Commission will further restrict the
ability of cable television operators to implement desired rate increases.
STATE AND LOCAL REGULATION. Our cable systems generally operate pursuant
to non-exclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Franchises generally are granted for
fixed terms and in many cases are terminable if the franchisee fails to comply
with material provisions. In addition to the franchise document, cable
authorities have also adopted in some jurisdictions cable regulatory ordinances
that further regulate the operation of the cable systems. 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. In the event that a state government agency certifies and
regulates basic rates, the agency must
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adopt and administer regulations with respect to the rates for the basic service
tier that are consistent with the regulations prescribed by the Federal
Communications Commission. As state governmental agencies are required to follow
rules of the Federal Communications Commission when prescribing rate regulation,
state regulation of our rates is not allowed to be more restrictive than the
federal or local regulation. There are ongoing efforts to amend or expand the
state and local regulation of some of our cable systems. We expect further such
efforts, but cannot predict whether any of the states in which we now operate
will expand regulation of our cable systems in the future or how they will do
so.
For more information, see "Regulation and Legislation."
RISKS ASSOCIATED WITH OFFERING TELECOMMUNICATIONS SERVICES -- IF WE OFFER
TELECOMMUNICATIONS SERVICES, WE MAY BE SUBJECT TO ADDITIONAL REGULATORY BURDENS
CAUSING US TO INCUR ADDITIONAL COSTS.
If we enter the business of offering telecommunications services, we may be
required to obtain federal, state and local licenses or other authorizations to
offer such services. We may not be able to obtain such authorizations in a
timely manner, if at all, and conditions could be imposed upon such licenses or
authorizations that may not be favorable to us. Furthermore, telecommunications
companies generally are subject to significant regulation as well as higher fees
for pole attachments. In particular, cable operators who provide
telecommunications services and cannot reach agreement with local utilities over
pole attachment rates in states that do not regulate pole attachment rates will
be subject to a methodology prescribed by the Federal Communications Commission
for determining the rates, which rates may be higher than those paid by cable
operators who do not provide telecommunications services. The rate increases are
to be phased in over a five-year period beginning on February 8, 2001. If we
become subject to telecommunications regulation or higher pole attachment rates,
we may incur additional costs which may be material to our business. See
"Regulation and Legislation."
RISKS OF FRANCHISES AND FRANCHISE RENEWALS -- OUR FRANCHISES ARE SUBJECT TO
NON-RENEWAL OR TERMINATION IN CERTAIN CIRCUMSTANCES WHICH COULD HAVE AN ADVERSE
AFFECT ON OUR ABILITY TO OPERATE OUR BUSINESS.
Our cable systems are operated under non-exclusive franchises issued by
state or local government franchising authorities. Our business is dependent on
our ability to obtain and renew our franchises. A franchise is generally granted
for a fixed term, but in many cases is terminable if the franchisee fails to
comply with the material provisions thereof. Consequently, our franchises are
subject to non-renewal or termination under certain circumstances. In addition,
the franchise authorities often demand certain concessions or other commitments
as a condition to renewal, which have been and may continue to be costly to us.
In certain cases, franchises have not been renewed at expiration, and we have
operated under either temporary operating agreements or without a license while
negotiating renewal terms with the franchising authorities. You should be aware
that the process of renewing these franchises increases our cost of doing
business. We cannot assure you that we will be able to renew these franchises. A
sustained and material failure to renew a franchise could adversely affect our
business in the affected metropolitan area. See "Business -- Franchises."
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RAPID TECHNOLOGICAL ADVANCES -- WE MAY NOT BE ABLE TO FUND THE CAPITAL
EXPENDITURES NECESSARY TO KEEP PACE WITH TECHNOLOGICAL DEVELOPMENTS OR OUR
CUSTOMERS' DEMAND FOR NEW PRODUCTS OR SERVICES. THIS COULD LIMIT OUR ABILITY TO
COMPETE EFFECTIVELY.
The cable business is characterized by rapid technological change and the
introduction of new products and services. There can be no assurance that we
will be able to fund the capital expenditures necessary to keep pace with
technological developments or that we will successfully anticipate the demand of
our customers for products or services requiring new technology. Our inability
to provide enhanced services in a timely manner or to anticipate the demands of
the market place could have a material adverse effect on our ability to compete
and, consequently, on our business, results of operations and financial
condition. See "Business -- Competition."
CONTROL BY PRINCIPAL EQUITY HOLDER; RISKS ASSOCIATED WITH POTENTIAL CONFLICTS OF
INTEREST -- OUR PRINCIPAL EQUITY HOLDER MAY HAVE INTERESTS ADVERSE TO YOUR
INTERESTS, AND OUR MANAGEMENT MAY BE RESPONSIBLE FOR MANAGING OTHER CABLE
OPERATIONS AND MAY NOT BE ABLE TO DEVOTE THEIR FULL TIME TO OUR OPERATIONS WHICH
COULD IMPAIR OUR OPERATING RESULTS.
Paul G. Allen beneficially owns approximately 96% of our outstanding equity
interests on a fully diluted basis. Accordingly, Mr. Allen has the ability to
control fundamental corporate transactions requiring equity holder approval,
including without limitation, election of directors, approval of merger
transactions involving us and sales of all or substantially all of our assets.
Mr. Allen may make decisions which are adverse to your interests. There can be
no assurance that the interests of either Mr. Allen or his affiliates will not
conflict with the interests of the holders of the Notes.
In addition, it is possible that Mr. Allen may, from time to time, acquire
cable systems in addition to those owned or acquired by us. If he does so,
Charter Communications, Inc., of which Mr. Allen is the majority owner, as well
as some of the officers of Charter Communications, Inc. may have a substantial
role in managing these outside systems. Charter Communications, Inc. and its
officers and employees now devote substantially all of their time to managing
our systems. However, if such persons began to manage outside cable systems as
well, they might have to limit the management time devoted to managing our
systems, which could impair our results of operations. Moreover, allocating
managers' time and other resources of Charter Communications, Inc. between our
systems and outside systems held by Mr. Allen could give rise to conflicts of
interest. Charter Communications, Inc. does not have or plan to create formal
procedures for determining whether and to what extent outside cable television
systems described above will receive priority with respect to personnel
requirements.
DEPENDENCE ON KEY PERSONNEL -- THE LOSS OF CERTAIN KEY EXECUTIVES COULD
ADVERSELY AFFECT OUR ABILITY TO MANAGE OUR BUSINESS.
Our operations are managed by Charter Communications, Inc. which, in turn,
is managed by a small number of key executive officers, including Jerald L.
Kent. The loss of the services of these individuals, and, in particular, of Mr.
Kent, could have an adverse affect on our ability to manage our business which,
in turn, could have an adverse affect on our financial condition and results of
operations.
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FINANCING A CHANGE OF CONTROL OFFER -- WE MAY NOT HAVE THE ABILITY TO RAISE THE
FUNDS NECESSARY TO FULFILL OUR OBLIGATIONS UNDER THE NOTES FOLLOWING A CHANGE OF
CONTROL OFFER.
Under the indentures governing the notes, upon the occurrence of certain
specific kinds of change of control events, we will be required to offer to
repurchase all outstanding notes. However, we may not have sufficient funds at
the time of the change of control to make the required repurchase of the notes.
In addition, restrictions in our credit facilities may not allow such
repurchases. Our failure to make or complete an offer to repurchase the notes
would give the trustee under the indenture the rights described in "Description
of Notes -- Events of Default." The exercise of such rights by the trustee could
materially and adversely affect our ability to maintain sufficient cash flow to
conduct our business, and may create various other problems. See "Description of
Notes -- Repurchase at the Option of Holders -- Change of Control."
ORIGINAL ISSUE DISCOUNT -- HOLDERS OF 9.920% SENIOR DISCOUNT NOTES DUE 2011 WILL
GENERALLY BE REQUIRED TO INCLUDE AMOUNTS IN GROSS INCOME FOR FEDERAL INCOME TAX
PURPOSES IN ADVANCE OF RECEIVING CASH.
The 9.920% Senior Discount Notes due 2011 will be issued at a substantial
discount from the stated principal amount thereof and, as a result, purchasers
thereof generally will be required to include the accrued portion of such
discount in gross income, as interest, for federal tax purposes in advance of
the receipt of cash payments of such interest. In addition, if a bankruptcy case
is commenced by or against us under the United States Bankruptcy Code after the
issuance of such notes, the claim of a holder of such notes with respect to the
principal amount thereof may be limited to an amount equal to the sum of: (i)
the initial offering price; and (ii) that portion of the original issue discount
which is not deemed to constitute "unmatured interest" for purposes of the
United States Bankruptcy Code. Any original issue discount that was not
amortized as of any such bankruptcy filing would constitute "unmatured
interest." See "Certain Federal Tax Considerations" for a more detailed
discussion of certain U.S. federal income tax consequences to the holders of the
notes of the purchase, ownership and disposition of the notes.
YEAR 2000 IMPACT -- THE YEAR 2000 PROBLEM COULD SIGNIFICANTLY DISRUPT OUR
OPERATIONS, CAUSING A DECLINE IN CASH FLOW AND REVENUES AND OTHER DIFFICULTIES.
The Year 2000 problem 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.
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, fails to become year 2000 ready, or if
the Year 2000 problem causes our systems to become internally incompatible or
incompatible with key
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third party systems, our business could suffer material disruptions, including
inability to process transactions, send invoices, accept customer orders or
provide customers with products and 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. We cannot assure you that our efforts to date and our ongoing
efforts to prepare for the Year 2000 problem will be sufficient to prevent a
material disruption of our operations, particularly with respect to systems we
may acquire prior to December 31, 1999. Any such disruption could have a
material adverse effect on our operations causing a decline in cash flow and
revenues.
NONRECOURSE TO EQUITY HOLDERS -- HOLDERS OF NOTES WILL NOT HAVE RECOURSE AGAINST
OUR EQUITY HOLDERS OR THEIR AFFILIATES OR OTHER HOLDINGS.
The notes will be issued solely by Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation. None of our equity holders,
directors, officers, employees or affiliates, including Paul G. Allen, will be
an obligor or guarantor under the notes, and the indentures governing the notes
expressly provide that these parties will not have any liability for our
obligations under the notes or the indentures or any claim based on, in respect
of, or by reason of, such obligations, and that by accepting the notes, each
holder of the notes waives and releases all such liability as consideration for
issuance of the notes. Our equity holders, including Mr. Allen, will also be
free to hold investments in or manage other entities, including other cable
companies, and holders of notes will have no recourse against those other
entities or their assets. There should be no expectation that Mr. Allen or our
other equity holders will, in the future, fund our operations or deficits. See
"Description of Notes -- No Personal Liability of Directors, Officers,
Employees, Members and Stockholders."
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements regarding, among other
things, our plans, strategies and prospects, both business and financial.
Although we believe that our plans, intentions and expectations reflected in or
suggested by these forward-looking statements are reasonable, we cannot assure
you that we will achieve or realize these plans, intentions or expectations.
Forward-looking statements are inherently subject to risks, uncertainties and
assumptions. Important factors that could cause actual results to differ
materially from the forward-looking statements we make in this prospectus are
set forth under the caption "Risk Factors" and elsewhere in this prospectus. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by those cautionary statements. We
will not update these forward-looking statements even though our situation will
change in the future.
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USE OF PROCEEDS
This exchange offer is intended to satisfy certain of our obligations under
the exchange and registration rights agreements entered into in connection with
the offering of the original notes. We will not receive any proceeds from the
exchange offer. In consideration for issuing the new notes contemplated in this
prospectus, we will receive original notes in like original principal amount at
maturity, the form and terms of which are the same as the form and terms of the
new notes (which replace the original notes), except as otherwise described in
this prospectus. The original notes surrendered in exchange for new notes will
be retired and canceled and cannot be reissued. Accordingly, the issuance of the
new notes will not result in any increase in our outstanding debt.
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CAPITALIZATION
The following table sets forth our historical capitalization: (i) as of
December 31, 1998, including the effects of our combination with Marcus Cable
Holdings, LLC ("Marcus Holdings"); (ii) as adjusted to give effect to the sale
of the original notes, the refinancing of our previous credit facilities and
other outstanding indebtedness, the consummation of certain tender offers (the
"Tender Offers") (as described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- The Refinancing")
(collectively, the "Refinancing") as if such transactions had occurred on that
date; and (iii) as further adjusted to give effect to additional borrowings
under our credit facilities and an additional equity contribution in connection
with the recent and pending acquisitions, as if such transactions had occurred
on that date. This table should be read in conjunction with the Unaudited Pro
Forma Financial Statements and the financial statements included elsewhere in
this prospectus.
AS OF DECEMBER 31, 1998
---------------------------------------
AS AS FURTHER
HISTORICAL ADJUSTED ADJUSTED
---------- ---------- -----------
(DOLLARS IN THOUSANDS)
CHARTER COMMUNICATIONS HOLDINGS, LLC:
Cash and cash equivalents(a)........................ $ 10,386 $1,213,143 $ 29,117
========== ========== ===========
Credit Facilities................................... $2,534,500 $1,850,000 $ 3,282,103
Notes............................................... -- 2,999,385 2,999,385
Existing notes(b)................................... 988,701 1,110 1,110
10% Senior discount notes -- Renaissance(c)......... -- -- 111,369
10% Note payable -- Helicon(d)...................... -- -- 25,000
---------- ---------- -----------
Total long-term debt (including current
maturities).................................... 3,523,201 4,850,495 6,418,967
Members' equity(e).................................. 3,429,291 3,409,807 4,891,344
---------- ---------- -----------
Total capitalization............................. $6,952,492 $8,260,302 $11,310,311
========== ========== ===========
- -------------------------
(a) We presented cash and cash equivalents As Adjusted of $1.2 billion since we
must draw the full amount of the Tranche B term loan facility, and
therefore, Charter Communications Holdings, LLC will have cash available
pending application of such amounts to future acquisitions, capital
expenditures and other working capital purposes.
(b) Notes As Adjusted and As Further Adjusted represent the notes of certain
subsidiaries of Marcus Cable Holdings, LLC not tendered in connection with
the Tender Offers.
(c) Represents debt assumed in our acquisition of Renaissance Media Group LLC.
(d) Represents a note payable to the owners of Helicon Partners I, L.P. issued
in conjunction with our acquisition of Helicon Partners I, L.P.
(e) Members' equity As Adjusted is reduced by $19.5 million, the price paid in
excess of the carrying value of the notes in connection with the Tender
Offers. Members' equity As Further Adjusted is increased by $1.5 billion,
the additional equity that is expected in connection with our recent
acquisitions and pending acquisitions.
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UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Pro Forma Financial Statements are based on the
financial statements of Charter Communications Holdings, LLC ("Charter
Holdings"), CCA Group (consisting of CCA Holdings, LLC, CCT Holdings, LLC and
Charter Communications Long Beach, LLC ("CCA Group")), and CharterComm Holdings,
LLC ("CharterComm Holdings") as adjusted to illustrate the estimated effects of
the following transactions (the "Transactions") as if they had occurred on
January 1, 1998 for the Statement of Operations and Other Financial Data and on
December 31, 1998 for the Balance Sheet Data and Operating Data: (i) our
acquisition, effective December 23, 1998 by Paul G. Allen (the "Charter
Acquisition"); (ii) the acquisition of Sonic Communications, Inc. by us on May
20, 1998 (the "Sonic Acquisition"); (iii) the acquisition of Marcus Cable
Company, L.L.C. ("Marcus") on April 22, 1998 by Paul G. Allen; (iv) the
acquisitions and dispositions by Marcus during 1998; (v) the merger of Marcus
Holdings with and into Charter Holdings, (the "Marcus Combination"); (vi) our
recent acquisitions and pending acquisitions; and (vii) the refinancing of all
the debt of the subsidiaries of Charter Holdings (the "Charter Companies") and
the subsidiaries of Marcus (the "Marcus Companies") through the issuance of the
original notes and funding under our credit facilities. The Unaudited Pro Forma
Financial Statements reflect the application of the principles of purchase
accounting to the transactions listed in items (i) through (iv) and (vi) of the
preceding sentence. The allocation of purchase price is based, in part, on
preliminary information which is subject to adjustment upon obtaining complete
valuation information with respect to each acquisition and the net assets
acquired.
The unaudited pro forma adjustments are based upon available information
and certain assumptions that we believe are reasonable. The Unaudited Pro Forma
Financial Statements and accompanying notes should be read in conjunction with
the historical financial statements and other financial information appearing
elsewhere in this prospectus, including "Capitalization" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Unaudited Pro Forma Financial Statements do not purport to be
indicative of what our financial position or results of operations would
actually have been had the Transactions been completed on the dates indicated or
to project our results of operations for any future date.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------
RECENT AND
PENDING REFINANCING
CHARTER MARCUS ACQUISITIONS ADJUSTMENTS
(NOTE A) (NOTE B) SUBTOTAL (NOTE C) (NOTE D) TOTAL
---------- ---------- ---------- ---------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
Revenues............................ $ 611,690 $ 448,192 $1,059,882 $ 597,441 $ -- $1,657,323
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Operating, general and
administrative.................. 310,100 231,050 541,150 306,209 -- 847,359
Corporate expense charges
(Note E)........................ 16,493 17,042 33,535 6,759 -- 40,294
Depreciation and amortization..... 375,899 252,855 628,754 327,731 -- 956,485
Management fees................... -- -- -- 14,672 -- 14,672
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses........ 702,492 500,947 1,203,439 655,371 -- 1,858,810
---------- ---------- ---------- ---------- ---------- ----------
Loss from operations................ (90,802) (52,755) (143,557) (57,930) -- (201,487)
Interest expense.................... (207,468) (137,953) (345,421) (203,500) 4,200 (544,721)
Other income (expense).............. 518 -- 518 (5,862) -- (5,344)
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................... $ (297,752) $ (190,708) $ (488,460) $ (267,292) $ 4,200 $ (751,552)
========== ========== ========== ========== ========== ==========
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UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------
RECENT AND
PENDING REFINANCING
CHARTER MARCUS ACQUISITIONS ADJUSTMENTS
(NOTE A) (NOTE B) SUBTOTAL (NOTE C) (NOTE D) TOTAL
---------- ---------- ---------- ---------------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT CUSTOMER DATA)
OTHER FINANCIAL DATA:
Operating cash flow (Note F)........ $ 301,590 $ 217,142 $ 518,732 $ 291,232 $ -- $ 809,964
EBITDA (Note G)..................... 285,097 200,100 485,197 269,801 -- 754,998
EBITDA margin (Note H).............. 46.6% 44.6% 45.8% 45.2% 45.6%
Cash interest expense............... $ 428,132
Capital expenditures................ $ 213,353 $ 224,723 $ 438,076 $ 93,107 -- 531,183
Total debt to operating cash
flow.............................. 7.9x
Total debt to EBITDA................ 8.5
EBITDA to cash interest
expense........................... 1.8
EBITDA to interest expense.......... 1.4
Deficiency of earnings to cover
fixed charges (Note I)............ $ 751,552
OPERATING DATA (AT END OF PERIOD,
EXCEPT FOR AVERAGES):
Homes passed........................ 2,149,000 1,743,000 3,892,000 1,795,000 5,687,000
Basic customers..................... 1,255,000 1,062,000 2,317,000 1,300,000 3,617,000
Basic penetration (Note J).......... 58.4% 60.9% 59.5% 72.4% 63.6%
Premium units....................... 845,000 411,000 1,256,000 811,000 2,067,000
Premium penetration (Note K)........ 67.3% 38.7% 54.2% 62.4% 57.1%
Average monthly revenue per basic
customer (Note L)................. NM NM $ 38.12 $ 38.30 $ 38.18
See "Notes to the Unaudited Pro Forma Financial Statements."
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NOTES TO THE UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS
NOTE A: Operating results for Charter, pro forma for the Sonic
Acquisition, consist of the following (dollars in thousands):
12/24/98 1/1/98
THROUGH THROUGH
1/1/98 THROUGH 12/23/98 12/31/98 5/20/98
-------------------------------------- -------- -------
CCA CHARTERCOMM
GROUP HOLDINGS, L.P. CHARTER ELIMINATIONS SUBTOTAL SONIC
--------- -------------- ------------------- ------------ --------- -------
Revenues.......................... $ 324,432 $196,801 $ 49,731 $23,450 $ -- $ 594,414 $17,276
--------- -------- -------- ------- ------- --------- -------
Operating expenses:
Operating, general and
administrative................ 164,145 98,331 25,952 12,679 -- 301,107 8,993
Depreciation and amortization... 136,689 86,741 16,864 13,811 -- 254,105 2,279
Management fees/corporate
expense charges............... 17,392 14,780 6,176 766 -- 39,114 --
--------- -------- -------- ------- ------- --------- -------
Total operating expenses...... 318,226 199,852 48,992 27,256 -- 594,326 11,272
--------- -------- -------- ------- ------- --------- -------
Income (loss) from operations..... 6,206 (3,051) 739 (3,806) -- 88 6,004
Interest expense.................. (113,824) (66,121) (17,277) (5,051) 1,900(c) (200,373) (2,624)
Other income (expense)............ 4,668 (1,684) (684) 133 (1,900)(c) 533 (15)
--------- -------- -------- ------- ------- --------- -------
Income (loss) before income
taxes........................... (102,950) (70,856) (17,222) (8,724) -- (199,752) 3,365
Provision for income taxes........ -- -- -- -- -- -- 1,346
--------- -------- -------- ------- ------- --------- -------
Income (loss) before extraordinary
item............................ $(102,950) $(70,856) $(17,222) $(8,724) $ -- $(199,752) $ 2,019
========= ======== ======== ======= ======= ========= =======
PRO FORMA
--------------------------
ADJUSTMENTS TOTAL
----------- ---------
Revenues.......................... $ -- $ 611,690
--------- ---------
Operating expenses:
Operating, general and
administrative................ 310,100
Depreciation and amortization... 119,515(a) 375,899
Management fees/corporate
expense charges............... (22,621)(b) 16,493
--------- ---------
Total operating expenses...... 96,894 702,492
--------- ---------
Income (loss) from operations..... (96,894) (90,802)
Interest expense.................. (4,471)(d) (207,468)
Other income (expense)............ -- 518
--------- ---------
Income (loss) before income
taxes........................... (101,365) (297,752)
Provision for income taxes........ (1,346)(e) --
--------- ---------
Income (loss) before extraordinary
item............................ $(100,019) $(297,752)
========= =========
- -------------------------
(a) Represents additional amortization of franchises as a result of the Charter
Acquisition. The excess of purchase price over the net tangible assets
acquired ($3.6 billion) was recorded in franchises (amortized over 15
years).
(b) Reflects the reduction in corporate expense charges of approximately $8.2
million to reflect the actual costs incurred. Management fees charged to CCA
Group and CharterComm Holdings, companies not controlled by Charter
Communications, Inc. ("CCI"), exceeded the allocated costs incurred by CCI
on behalf of those companies by $8.2 million. Also reflects the elimination
of approximately $14.4 million of Appreciation Rights Plan costs related to
the Charter Acquisition that were paid by CCI and not subject to
reimbursement by us but were allocated to us for financial reporting
purposes. The Appreciation Rights Plan was terminated in connection with the
Charter Acquisition and these costs will not recur.
(c) Represents the elimination of intercompany interest on the note payable from
Charter to CCA Group.
(d) Reflects additional interest expense on borrowings used to finance the Sonic
Acquisition (using a 7.4% interest rate).
(e) Reflects the elimination of provision for income taxes as Charter Holdings
will operate as a limited liability company and all income taxes will flow
through to the members.
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NOTE B: Pro forma operating results for Marcus consist of the following
(dollars in thousands):
JANUARY 1, APRIL 23,
1998 1998
THROUGH THROUGH PRO FORMA
APRIL 22, DECEMBER 23, ------------------------------------------------------------
1998 1998 ACQUISITIONS(A) DISPOSITIONS(B) ADJUSTMENTS TOTAL
---------- ------------ --------------- --------------- ----------- ---------
Revenues................. $ 157,763 $ 332,320 $2,620 $(44,511) $ -- $ 448,192
--------- --------- ------ -------- --------- ---------
Operating expenses:
Operating, general and
administrative...... 84,746 181,347 1,225 (20,971) (15,297)(c) 231,050
Corporate expenses..... -- 17,042(c) 17,042
Depreciation and
amortization........ 64,669 174,968 -- -- 13,218(d) 252,855
Management fees........ -- 3,048 -- -- (3,048)(c) --
Transaction and
severance costs..... 114,167 16,034 -- -- (130,201)(e) --
--------- --------- ------ -------- --------- ---------
Total operating
expenses.......... 263,582 375,397 1,225 (20,971) (118,286) 500,947
--------- --------- ------ -------- --------- ---------
Income (loss) from
operations............. (105,819) (43,077) 1,395 (23,540) 118,286 (52,755)
Interest expense......... (49,905) (93,103) -- -- 5,055(d) (137,953)
Other income (expense)... 43,662 -- -- (43,662) -- --
--------- --------- ------ -------- --------- ---------
Income (loss) before
extraordinary item..... $(112,062) $(136,180) $1,395 $(67,202) $ 123,341 $(190,708)
========= ========= ====== ======== ========= =========
- -------------------------
(a) Represents the results of operations of acquired cable systems prior to
their acquisition in 1998 by Marcus.
(b) Represents the elimination of the operating results and corresponding gain
on sale of cable systems sold by Marcus during 1998.
(c) Represents a reclassification to reflect the expenses totaling $15.3 million
from operating, general and administrative to corporate expenses. Also
reflects the elimination of management fees and the addition of corporate
expense charges of $1.7 million for actual costs incurred by CCI on behalf
of Marcus. Management fees charged to Marcus exceeded the costs incurred by
CCI by $1.3 million.
(d) As a result of the acquisition of Marcus by Paul G. Allen, the excess of
purchase price over the net tangible and identifiable intangible assets
($2.5 billion) was recorded as franchises (amortized over 15 years). This
resulted in additional amortization for the period from January 1, 1998
through April 22, 1998. Additionally, the carrying value of outstanding debt
was recorded at estimated fair value, resulting in a debt premium that is to
be amortized as an offset to interest expense over the term of the debt.
This resulted in a reduction in interest expense for the period from January
1, 1998 through April 22, 1998.
(e) As a result of the acquisition of Marcus by Paul G. Allen, Marcus recorded
transaction costs of approximately $114.2 million, comprised of
approximately $90.2 million paid to employees of Marcus in settlement of
specially designated Class B units and approximately $24.0 million of
transaction fees paid to certain equity partners for investment banking
services. In addition, Marcus recorded costs related to employee and officer
stay-bonus and severance arrangements of approximately $16 million.
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NOTE C: Pro forma operating results for our recent acquisitions and
pending acquisitions consist of the following (dollars in thousands):
HISTORICAL -- YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------------------------
GMI INTERMEDIA OTHER TOTAL
SYSTEMS RENAISSANCE SYSTEMS HELICON RIFKIN(A) ACQUISITIONS HISTORICAL
------- -------------- ---------- -------- ---------- ------------ ----------
Revenues.................... $78,635 $ 41,524 $176,062 $ 75,577 $124,382 $25,021 $ 521,201
------- -------- -------- -------- -------- ------- ---------
Operating expenses:
Operating, general and
administrative........... 48,852 21,037 86,753 40,179 63,815 12,059 272,695
Corporate expense
charges.................. -- -- -- -- -- -- --
Depreciation and
amortization............. 8,612 19,107 85,982 24,290 47,657 9,578 195,226
Management fees............ -- -- 3,147 3,496 4,106 471 11,220
------- -------- -------- -------- -------- ------- ---------
Total operating
expenses............... 57,464 40,144 175,882 67,965 115,578 22,108 479,141
------- -------- -------- -------- -------- ------- ---------
Income from operations...... 21,171 1,380 180 7,612 8,804 2,913 42,060
Interest expense............ (535) (14,358) (25,449) (27,634) (30,482) (6,876) (105,334)
Interest income............. 158 341 93 -- 122 714
Other income (expense)...... (493) -- 23,030 -- 44,959 3 67,499
------- -------- -------- -------- -------- ------- ---------
Income (loss) before income
tax expense (benefit)...... 20,143 (12,820) (1,898) (19,929) 23,281 (3,838) 4,939
Income tax (benefit)
expense.................... 7,956 135 1,623 -- (4,178) -- 5,536
------- -------- -------- -------- -------- ------- ---------
Income (loss) before
extraordinary item......... $12,187 $(12,955) $ (3,521) $(19,929) $ 27,459 $(3,838) $ (597)
======= ======== ======== ======== ======== ======= =========
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------
TOTAL
PRO FORMA RECENT AND
TOTAL ----------------------------------------------- PENDING
HISTORICAL(B) ACQUISITIONS(A) DISPOSITIONS(C) ADJUSTMENTS ACQUISITIONS
------------- --------------- --------------- ----------- ------------
Revenues................... $ 521,201 $145,948 $(69,708) $ -- $ 597,441
--------- -------- -------- --------- ---------
Operating expenses:
Operating, general and
administrative......... 272,695 75,844 (35,571) (6,759)(d) 306,209
Corporate expense
charges................ -- -- -- 6,759(d) 6,759
Depreciation and
amortization........... 195,226 38,514 (40,812) 134,803(e) 327,731
Management fees.......... 11,220 4,388 (936) -- 14,672
--------- -------- -------- --------- ---------
Total operating
expenses............. 479,141 118,746 (77,319) 134,803 655,371
Income (loss) from
operations............... 42,060 27,202 7,611 (134,803)(f) (57,930)
Interest expense........... (105,334) (34,646) 19,544 (83,064)(h) (203,500)
Interest income............ 714 331 (9) -- 1,036
Other income (expense)..... 67,499 403 (380) (74,420)(g) (6,898)
--------- -------- -------- --------- ---------
Income (loss) before income
tax expense (benefit).... 4,939 (6,710) 26,766 (292,287) (267,292)
Income tax expense
(benefit)................ 5,536 2,118 310 (7,964)(h) --
--------- -------- -------- --------- ---------
Income (loss) before
extraordinary item....... $ (597) $ (8,828) $ 26,456 $(284,323) $(267,292)
========= ======== ======== ========= =========
35
39
- -------------------------
(a) Includes the results of operations of Rifkin Acquisition Partners, L.L.L.P.,
Rifkin Cable Income Partners, L.P., Indiana Cable Associates, Ltd and R/N
South Florida Cable Management Limited Partnership.
(b) Represents the historical results of operations for the period from January
1, 1998 through the date of acquisition for acquisitions completed by
Renaissance (as defined below), the InterMedia Systems (as defined below),
Helicon (as defined below) and Rifkin (as defined below) and for the period
from January 1, 1998 through December 31, 1998, for acquisitions to be
completed in 1999.
(c) Represents the elimination of the operating results primarily related to the
cable systems to be transferred to the InterMedia Systems as part of a swap
of cable systems, and related to the sale of several smaller cable systems.
(d) Reflects a reclassification of expenses representing corporate expenses that
would have occurred at CCI.
(e) Represents additional amortization of franchises as a result of our recent
acquisitions and pending acquisitions. The excess of purchase price over the
net tangible assets acquired ($3.6 billion) is expected to be recorded in
franchises (amortized over 15 years).
(f) Reflects additional interest expense on borrowings which will be used to
finance the acquisitions (using a 7.4% interest rate).
(g) Represents the elimination of gain (loss) on the sale of assets.
(h) Reflects the elimination of income tax expense as a result of being acquired
by a limited liability corporation.
NOTE D: We have refinanced substantially all of our long-term debt and
plan to incur additional debt in connection with our recent acquisitions and
pending acquisitions. See "Capitalization." The refinancing adjustment of lower
interest expense consists of the following (dollars in thousands):
INTEREST
DESCRIPTION EXPENSE
- ----------- ---------
Notes (at blended rate of 9.0%)............................. $ 269,000
Credit Facilities (at blended rate of 7.4%)................. 243,000
Amortization of debt issuance costs......................... 15,600
Commitment fee on unused portion of Credit Facilities ($818
at 0.375%)................................................ 3,100
10% Senior discount notes -- Renaissance.................... 11,000
10% note payable -- Helicon................................. 3,000
---------
Total pro forma interest expense.......................... 544,700
Less -- interest expense (Charter, Marcus and Pending
Acquisitions).......................................... (548,900)
---------
Adjustment............................................. $ (4,200)
=========
NOTE E: CCI provided corporate management and consulting services on
behalf of the Charter Companies for 1998 and for the Marcus Companies beginning
in October 1998. See "Certain Relationships and Related Transactions."
36
40
NOTE F: Operating cash flow means EBITDA, as defined below, before
corporate expense charges and management fees.
NOTE G: EBITDA represents income (loss) before interest expense, income
taxes, depreciation, amortization, gain (loss) on sale of assets and other
income (expense). EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service indebtedness. However, EBITDA should
not be considered as an alternative to income from operations or to cash flows
from operating activities (as determined in accordance with generally accepted
accounting principles) and should not be construed as an indication of a
company's operating performance or as a measure of liquidity.
NOTE H: EBITDA margin represents EBITDA as a percentage of revenues.
NOTE I: Earnings include net income (loss) plus fixed charges. Fixed
charges consist of interest expense and an estimated component of rent expense.
NOTE J: Basic penetration represents basic customers as a percentage of
homes passed.
NOTE K: Premium penetration represents premium units as a percentage of
basic customers.
NOTE L: Average monthly revenue per basic customer represents revenues
divided by the number of months in the period divided by the number of basic
customers at December 31, 1998.
37
41
UNAUDITED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1998
-----------------------------------------------------
RECENT AND
PENDING REFINANCING
HISTORICAL ACQUISITIONS ADJUSTMENTS PRO FORMA
CHARTER (NOTE A) (NOTE B) TOTAL
---------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET
Cash and cash equivalents..... $ 10,386 $ 18,731 $ -- $ 29,117
Accounts receivable, net...... 31,163 23,983 -- 55,146
Prepaid expenses and other.... 8,613 14,927 -- 23,540
---------- ---------- -------- -----------
Total current assets..... 50,162 57,641 -- 107,803
Property, plant and
equipment................... 1,473,727 604,562 -- 2,078,289
Franchises.................... 5,705,420 3,603,834 -- 9,309,254
Other assets.................. 6,347 84,707 125,000 216,054
---------- ---------- -------- -----------
Total assets............. $7,235,656 $4,350,744 $125,000 $11,711,400
========== ========== ======== ===========
Current maturities of
long-term debt.............. $ 87,950 $ -- $(87,950) $ --
Accounts payable and accrued
expenses.................... 199,831 107,501 -- 307,332
Payables to related party..... 20,000 -- -- 20,000
Payables to manager of cable
television systems.......... 7,675 -- -- 7,675
---------- ---------- -------- -----------
Total current
liabilities............ 315,456 107,501 (87,950) 335,007
Long-term debt................ 3,435,251 2,750,802 232,914 6,418,967
Deferred management fees...... 15,561 -- -- 15,561
Other long-term liabilities... 40,097 10,424 -- 50,521
Members' equity............... 3,429,291 1,482,017 (19,964) 4,891,344
---------- ---------- -------- -----------
Total liabilities and
equity................. $7,235,656 $4,350,744 $125,000 $11,711,400
========== ========== ======== ===========
38
42
NOTE A: Pro Forma balance sheet for our recent acquisitions and pending
acquisitions consists of the following (dollars in thousands):
HISTORICAL--AS OF DECEMBER 31, 1998
-----------------------------------------------------------------------------------
GMI INTERMEDIA TOTAL
SYSTEMS RENAISSANCE SYSTEMS HELICON RIFKIN OTHER HISTORICAL
------- ----------- ---------- --------- -------- ---------- ----------
Cash and cash equivalents........... $3,815 $ 8,482 $ -- $ 5,131 $ 4,334 $ 2,975 $ 24,737
Accounts receivable, net............ 3,154 1,310 14,425 1,632 11,840 2,392 34,753
Receivable from related party....... -- -- 5,623 -- -- -- 5,623
Prepaid expenses and other.......... 1,921 490 773 3,469 5,905 1,729 14,287
------- -------- -------- --------- -------- ---------- ----------
Total current assets............... 8,890 10,282 20,821 10,232 22,079 7,096 79,400
Property, plant and equipment....... 57,055 63,952 218,465 86,737 221,397 23,373 670,979
Franchises.......................... 2,671 225,016 255,356 13,101 374,898 203,510 1,074,552
Deferred income tax assets.......... -- -- 12,598 -- -- -- 12,598
Other assets........................ 77 16,500 2,804 81,776 74,640 3,000 178,797
------- -------- -------- --------- -------- ---------- ----------
Total assets....................... $68,693 $315,750 $510,044 $ 191,846 $693,014 $ 236,979 $2,016,326
======= ======== ======== ========= ======== ========== ==========
Accounts payable and accrued
expenses........................... $7,091 $ 8,712 $ 19,230 $ 14,188 $ 53,498 $ 5,761 $ 108,480
Current deferred revenue............ 1,918 -- 11,104 -- -- 1,014 14,036
Note payable to related party....... -- -- 3,158 -- -- -- 3,158
------- -------- -------- --------- -------- ---------- ----------
Total current liabilities.......... 9,009 8,712 33,492 14,188 53,498 6,775 125,674
Deferred revenue.................... -- 608 -- -- -- -- 608
Deferred income taxes............... -- -- -- -- 7,942 -- 7,942
Long-term debt...................... -- 209,874 -- 283,388 413,075 157,941 1,064,278
Note payable to related party,
including accrued interest......... -- 135 396,579 5,247 -- -- 401,961
Other long-term liabilities,
including redeemable preferred
shares............................. 3,632 800 18,229 16,254 -- -- 38,915
Equity.............................. 56,052 95,621 61,744 (127,231) 218,499 72,263 376,948
------- -------- -------- --------- -------- ---------- ----------
Total liabilities and equity....... $68,693 $315,750 $510,044 $ 191,846 $693,014 $ 236,979 $2,016,326
======= ======== ======== ========= ======== ========== ==========
39
43
AS OF DECEMBER 31, 1998
--------------------------------------------------------------------------
TOTAL
HISTORICAL ACQUISITIONS(A) DISPOSITIONS(B) ADJUSTMENTS PRO FORMA
---------- --------------- --------------- ----------- ----------
Cash and cash equivalents... $ 24,737 $ 6,632 $ (209) $ (12,429)(c) $ 18,731
Accounts receivable, net.... 34,753 399 (2,069) (9,100)(d) 23,983
Receivable from related
party..................... 5,623 -- -- (5,623)(c) --
Prepaid expenses and
other..................... 14,287 1,312 (672) -- 14,927
Deferred income tax asset... -- 15,575 -- (15,575)(e) --
---------- --------- --------- ---------- ----------
Total current assets...... 79,400 23,918 (2,950) (42,727) 57,641
Property, plant and
equipment................. 670,979 25,235 (91,652) -- 604,562
Franchises.................. 1,074,552 37,731 (334,210) 2,825,761(f) 3,603,834
Deferred income tax
assets.................... 12,598 -- -- (12,598)(e) --
Other assets................ 178,797 1,648 (459) (95,279)(g) 84,707
---------- --------- --------- ---------- ----------
Total assets.............. $2,016,326 $ 88,532 $(429,271) $2,675,157 $4,350,744
========== ========= ========= ========== ==========
Accounts payable and accrued
expenses.................. $ 108,480 $ 7,706 $ (8,685) $ -- $ 107,501
Current deferred revenue.... 14,036 452 -- (14,488)(d) --
Note payable to related
party..................... 3,158 -- -- (3,158)(f) --
---------- --------- --------- ---------- ----------
Total current
liabilities............. 125,674 8,158 (8,685) (17,646) 107,501
Deferred revenue............ 608 179 -- (787)(d) --
Deferred income taxes....... 7,942 5,528 -- (13,470)(e) --
Long-term debt.............. 1,064,278 200,852 (420,529) 1,906,201(h) 2,750,802
Note payable to related
party, including accrued
interest.................. 401,961 1,708 -- (403,669)(i) --
Other long-term
liabilities............... 38,915 -- (57) (28,434)(i) 10,424
Equity...................... 376,948 (127,893) -- 1,232,962(j) 1,482,017
---------- --------- --------- ---------- ----------
Total liabilities and
equity.................. $2,016,326 $ 88,532 $(429,271) $2,675,157 $4,350,744
========== ========= ========= ========== ==========
- -------------------------
(a) Represents the historical balance sheets as of December 31, 1998, of those
companies to be acquired in 1999.
(b) Represents the historical assets and liabilities as of December 31, 1998, of
the cable systems to be transferred to the InterMedia Systems as part of a
swap of cable systems.
(c) Reflects assets retained by the seller.
(d) Represents the offset of advance billings against deferred revenue to be
consistent with Charter Holdings' accounting policy and the elimination of
deferred revenue.
(e) Represents the elimination of deferred income tax assets and liabilities.
(f) Reflects the excess purchase price over the amounts assigned to net tangible
assets (amortized over 15 years).
(g) Represents the elimination of deferred debt issuance costs and a reduction
in carrying value of various intangible assets including goodwill,
subscriber lists, noncompete agreements and organization costs, based on
estimated fair values.
40
44
(h) Represents the following:
Adjustment to record debt assumed at fair value........ $ 4,000
Long-term debt not assumed............................. (737,601)
Additional borrowings under our credit facilities...... 2,614,802
10% note payable -- Helicon............................ 25,000
----------
$1,906,201
==========
(i) Represents liabilities retained by the seller.
(j) Represents the following:
Elimination of historical equity....................... $ (249,055)
Additional contributions............................... 1,482,017
----------
$1,232,962
==========
NOTE B: We have refinanced substantially all of our long-term debt and
plan to incur additional debt in connection with our recent acquisitions and
pending acquisitions See "Capitalization." The aggregate sources and uses
related to the refinancing and expected additional borrowings are estimated as
follows (dollars in millions):
SOURCES
-------
Notes......................... $2,999
Credit Facilities............. 3,282
10% Senior discount notes --
Renaissance................. 111
10% Note payable -- Helicon... 25
Equity contribution........... 1,482
------
$7,899
======
USES
----
Tender Offers................. $1,007
Retire previous credit
facilities.................. 2,534
Rifkin/Helicon tenders
offers...................... 259
Recent and Pending
Acquisitions................ 3,974
Fees and expenses............. 125
------
$7,899
======
The refinancing adjustments include an increase in other assets and
long-term debt for the fees and expenses related to the offering and refinancing
totaling $125 million, an increase in debt and decrease in equity related to the
redemption price, including fees, of tender offers in excess of the carrying
value of the debt totaling $20 million, and an increase in long-term debt and
decrease in current maturities of long-term debt of $88 million to reflect the
maturities of the refinanced debt.
41
45
UNAUDITED SELECTED HISTORICAL COMBINED FINANCIAL AND OPERATING DATA
The Unaudited Selected Historical Combined Financial and Operating Data for
the years ended December 31, 1996, 1997 and 1998 have been derived from the
separate financial statements of Charter Holdings, CCA Group and CharterComm
Holdings, which have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this prospectus. The combined
financial and operating data represent the sum of the results of each of the
Charter Companies. Each of the companies was managed by CCI in accordance with
its respective management agreement during the presented periods. Since the
Charter Companies were under common management, we believe presenting combined
financial information of these companies is informative.
As a result of the Charter Acquisition, we have applied push-down
accounting which had the effect of increasing total assets, total debt and
members' equity as of December 23, 1998. In addition, we have retroactively
restated our financial statements to include the results of operations of Marcus
for the period from December 24, 1998, through December 31, 1998, and the
balance sheet of Marcus as of December 31, 1998. As a result of the Charter
Acquisition and the Marcus Combination, we believe that the periods on or prior
to December 23, 1998 are not comparable to the periods after December 23, 1998.
COMBINED CHARTER COMPANIES
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
CUSTOMER DATA)
COMBINED STATEMENT OF OPERATIONS:
Revenues................................... $ 368,553 $ 484,155 $ 594,414
---------- ---------- ----------
Operating expenses:
Operating, general and administrative.... 190,084 249,419 301,107
Depreciation and amortization............ 154,273 198,718 254,105
Management fees/corporate expense
charges(a)............................ 15,094 20,759 39,114
---------- ---------- ----------
Total operating expenses.............. 359,451 468,896 594,326
---------- ---------- ----------
Income from operations..................... $ 9,102 $ 15,259 $ 88
========== ========== ==========
OTHER FINANCIAL DATA:
Operating cash flow(b)..................... $ 178,469 $ 236,099 $ 293,307
EBITDA(c).................................. 163,375 215,340 268,597
EBITDA margin(d)........................... 44.3% 44.5% 45.2%
Capital expenditures....................... $ 110,291 $ 162,607 $ 438,076
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................... $1,660,242 $2,002,181 $7,235,656
Total debt................................. 1,195,899 1,846,159 3,523,201
Members' equity............................ 26,099 (80,505) 3,429,291
42
46
COMBINED CHARTER COMPANIES
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT
CUSTOMER DATA)
OPERATING DATA (AT END OF PERIOD, EXCEPT
FOR AVERAGES):
Homes passed............................... 1,546,000 1,915,000 3,892,000
Basic customers............................ 902,000 1,086,000 2,317,000
Basic penetration(e)....................... 58.3% 56.7% 59.5%
Premium units.............................. 517,000 629,000 1,256,000
Premium penetration(f)..................... 57.3% 57.9% 54.2%
- -------------------------
(a) CCI provided corporate management and consulting services to the Charter
Companies. CCA Group and CharterComm Holdings paid fees to CCI as
compensation for such services and recorded management fee expense. See
"Certain Relationships and Related Transactions." Charter Holdings recorded
actual corporate expense charges incurred by CCI on behalf of the Company.
Management fees and corporate expenses for the year ended December 31, 1998
include $14.4 million of ARP costs related to the Charter Acquisition that
were paid by CCI and not subject to reimbursement by us but were allocated
to us for financial reporting purposes.
(b) Operating cash flow means EBITDA, as defined below, before management fees
and corporate expense charges.
(c) EBITDA represents income (loss) before interest expense, income taxes,
depreciation, amortization, other income (expense), gain (loss) on sale of
assets and ARP costs. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service indebtedness. However,
EBITDA should not be considered as an alternative to income from operations
or to cash flows from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as an
indication of a company's operating performance or as a measure of
liquidity.
(d) EBITDA margin represents EBITDA as a percentage of revenues.
(e) Basic penetration represents basic customers as a percentage of homes
passed.
(f) Premium penetration represents premium units as a percentage of basic
customers.
43
47
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data below as of and for the years ended
December 31, 1996 and 1997 and for the periods from January 1, 1998, through
December 23, 1998 and from December 24, 1998 through December 31, 1998 have been
derived from the consolidated financial statements of Charter Holdings, which
have been audited by Arthur Andersen LLP, independent public accountants, and
are included elsewhere in this prospectus. The selected historical financial
data for the period from October 1, 1995 through December 31, 1995, have been
derived from Charter's unaudited financial statements and are not included
elsewhere herein. The selected historical financial data for the year ended
December 31, 1994 and for the period from January 1, 1995 through September 30,
1995 are derived from the unaudited financial statements of Charter's
predecessor business and are not included elsewhere herein. The information
presented below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements of Charter and related notes included elsewhere in this
prospectus.
PREDECESSOR OF CHARTER CHARTER
---------------------- ----------------------------------------------------
YEAR ENDED
YEAR ENDED 1/1/95 10/1/95 DECEMBER 31, 1/1/98 12/24/98
DECEMBER 31, THROUGH THROUGH ----------------- THROUGH THROUGH
1994 9/30/95 12/31/95 1996 1997 12/23/98 12/31/98
------------ ------- -------- ------- ------- -------- ----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS:
Revenues....................... $ 6,584 $ 5,324 $ 1,788 $14,881 $18,867 $ 49,731 $ 23,450
Operating Expenses:
Operating, general and
administrative............ 3,247 2,581 931 8,123 11,767 25,952 12,679
Depreciation and
amortization.............. 2,508 2,137 648 4,593 6,103 16,864 13,811
Management fees/corporate
expense charges........... 106 224 54 446 566 6,176 766
-------- ------- ------- ------- ------- -------- ----------
Total operating
expenses................ 5,861 4,942 1,633 13,162 18,436 48,992 27,256
-------- ------- ------- ------- ------- -------- ----------
Income (loss) from
operations................... 723 382 155 1,719 431 739 (3,806)
Interest expense............... -- -- (691) (4,415) (5,120) (17,277) (5,051)
Interest income................ 26 -- 5 20 41 44 133
Other income (expense)......... -- 38 -- (47) 25 (728) --
-------- ------- ------- ------- ------- -------- ----------
Net income (loss).............. $ 749 $ 420 $ (531) $(2,723) $(4,623) $(17,222) $ (8,724)
======== ======= ======= ======= ======= ======== ==========
Deficiency of earnings to cover
fixed charges(a)............. NM NM $ 531 $ 2,723 $ 4,623 $ 17,222 $ 8,724
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets................... $ 25,511 $26,342 $31,572 $67,994 $55,811 $281,969 $7,235,656
Total debt..................... 10,194 10,480 28,847 59,222 41,500 274,698 3,523,201
Members' equity (deficit)...... (14,822) 15,311 971 2,648 (1,975) (8,397) 3,429,291
- -------------------------
(a) Earnings include net income (loss) plus fixed charges. Fixed charges consist
of interest expense and an estimated interest component of rent expense.
44
48
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Because of recently consummated and pending significant corporate events,
including the Charter Acquisition, the Marcus Combination, the Recent
Acquisitions (as defined below) and the Pending Acquisitions (as defined below)
and the Refinancing, we do not believe that our historical financial condition
and results of operations are accurate indicators of future results. Provided
below is a discussion of (i) the operation and development of the Charter
Companies prior to the Charter Acquisition, (ii) the Charter Acquisition, (iii)
the Marcus Combination and (iv) the Recent Acquisitions and the Pending
Acquisitions.
Prior to the Charter Acquisition, CCI owned a minority interest in, and
managed, each of CCA Holdings, LLC, CCT Holdings, LLC, and Charter
Communications Long Beach, LLC and CharterComm Holdings. During that time, CCI
was the parent of Charter Communications Properties, LLC ("CCP"). Through CCP,
CCI pursued and executed a strategy of operating, developing, acquiring and
consolidating cable systems, including the Sonic Acquisition for approximately
$228.4 million. Because CCI was only a minority equity holder in the CCA Group
and CharterComm Holdings, the financial statements of these entities were not
consolidated with CCI prior to the Charter Acquisition.
The Charter Acquisition became effective on December 23, 1998 through a
series of transactions in which Paul G. Allen acquired approximately 94% of CCI
for an aggregate purchase price, net of debt assumed, of $2.2 billion.
Subsequently, CCP was contributed to Charter Communications Operating, LLC
("Charter Operating"), a direct wholly owned subsidiary of Charter Holdings, and
such contribution was accounted for as a reorganization under common control.
Accordingly, the accompanying financial statements for periods prior to December
24, 1998 include the accounts of CCP. In conjunction with the Charter
Acquisition, CCI acquired the controlling interests of the CCA Group and
CharterComm Holdings and in February 1999 transferred these companies to Charter
Operating. Charter Holdings accounted for the acquisitions of the CCA Group and
CharterComm Holdings in accordance with purchase accounting, and accordingly,
the financial statements for periods after December 23, 1998 include the
accounts of CCP, the CCA Group and CharterComm Holdings.
The Marcus Combination closed on April 7, 1999, at which time Marcus
Holdings merged with and into Charter Holdings. In April 1998, Paul G. Allen
purchased substantially all of the outstanding interests in Marcus. Beginning in
October 1998, CCI began to manage the cable operations of Marcus. In conjunction
with the Marcus Combination, Paul G. Allen purchased the remaining interests in
Marcus. The Marcus Combination was accounted for as a reorganization under
common control similar to a pooling of interests because of Paul G. Allen's
controlling interests in Marcus and Charter Holdings. As such, the accounts of
Charter Holdings and Marcus have been consolidated since December 23, 1998.
Since the beginning of 1999, CCI and/or subsidiaries of CCI have purchased
Renaissance and American Cable Entertainment, LLC (the "Recent Acquisitions")
and
45
49
have entered into definitive agreements to purchase the following (collectively
referred to as the "Pending Acquisitions"):
(i) certain cable systems of Greater Media Cablevision Inc. (the "GMI
Systems"),
(ii) Helicon Partners I, L.P. ("Helicon"),
(iii) certain cable systems of InterMedia Capital Partners IV, L.P.,
InterMedia Partners and their affiliates (the "InterMedia Systems"),
(iv) Rifkin Acquisition Partners, L.L.L.P. ("Rifkin")
(v) Vista Broadband Communications, LLC ("Vista") and
(vi) certain cable systems of Cable Satellite of South Miami, Inc. ("Cable
Satellite" and, together with Vista, the "Other Acquisitions").
The systems to be acquired pursuant to the Recent Acquisitions and the
Pending Acquisitions serve, in the aggregate, approximately 1.3 million
customers. All such definitive agreements entered into by CCI have been assigned
to us. In addition, CCI is also in active negotiations with several other
potential acquisition candidates whose systems would further complement our
regional operating clusters. We expect to finance these acquisitions with
additional borrowings under the Credit Facilities (as defined below) and with
additional equity.
OVERVIEW
We generate substantially all of our revenues from monthly customer fees
for basic tier, expanded basic tier, premium, pay-per-view programming and other
cable television services (such as the rental of converters and remote control
devices and installation charges). We have generated increases in revenues in
each of the past three fiscal years, primarily through internal customer growth
and acquisitions including the Sonic Acquisition.
Pursuant to a series of management agreements with our operating
subsidiaries, CCI provides our subsidiaries with management and consulting
services. In exchange for these services, CCI receives management fees from 3.0%
to 5.0% of gross revenues of all of the systems owned by the subsidiaries, plus
certain expenses. The Credit Facilities limit management fees to 3.5% of gross
revenues. See "Certain Relationships and Related Transactions."
The following discusses concerns the financial condition and results of
operations for (i) CCP for the period from January 1, 1998 through December 23,
1998, and for the years ended December 31, 1997 and 1996 and (ii) for Charter
Holdings for the period from December 24, 1998 through December 31, 1998, which
results are comprised of CCP, the CCA Group, CharterComm Holdings and Marcus.
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RESULTS OF OPERATIONS
YEAR ENDED
DECEMBER 31,
----------------- 1/1/98 TO 12/24/98 TO
1996 1997 12/23/98 12/31/98
------- ------- --------- -----------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS:
Revenues................................. $14,881 $18,867 $ 49,731 $23,450
------- ------- -------- -------
Operating expenses:
Operating, general and
administrative...................... 8,123 11,767 25,952 12,679
Depreciation and amortization.......... 4,593 6,103 16,864 13,811
Management fees/corporate expense
charges............................. 446 566 6,176 766
------- ------- -------- -------
Total operating expenses............ 13,162 18,436 48,992 27,256
------- ------- -------- -------
Income (loss) from operations............ 1,719 431 739 (3,806)
Interest expense......................... (4,415) (5,120) (17,277) (5,051)
Interest income.......................... 20 41 44 133
Other income (expense)................... (47) 25 (728) --
------- ------- -------- -------
Net loss................................. $(2,723) $(4,623) $(17,222) $(8,724)
======= ======= ======== =======
PERIOD FROM DECEMBER 24, 1998, THROUGH DECEMBER 31, 1998
This period is not comparable to any other period presented. The financial
statements represent eight days of operations. This period not only contains the
results of operations of CCP, but also the results of operations of those
entities purchased as part of the Charter Acquisition and the acquisition of
Marcus. As a result, no comparison of the operating results for this eight-day
period is presented.
PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998
COMPARED TO 1997
REVENUES. Revenues increased by $30.8 million, or 163.6%, from $18.9
million in 1997 to $49.7 million for the period from January 1, 1998 through
December 23, 1998. The increase in revenues primarily resulted from the Sonic
Acquisition.
Revenues of CCP, excluding the activity of any other systems acquired or
disposed of during the periods, increased by $0.3 million, or 1.6%, from $18.5
million in 1997 to $18.8 million for the period from January 1, 1998 through
December 23, 1998.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $14.2 million, or 120.5%, from $11.8
million in 1997 to $26.0 million for the period from January 1, 1998 through
December 23, 1998. This increase was due primarily to the Sonic Acquisition
offset by the loss of $1.3 million on the sale of a cable system in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $10.8 million, or 176.3%, from $6.1 million in 1997 to $16.9
million for the period from January 1, 1998 through December 23, 1998. There was
a significant increase in amortization resulting from the Sonic Acquisition.
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CORPORATE EXPENSE CHARGES Corporate expense charges increased by $5.6
million, or 991.2% from $0.6 million in 1997 to $6.2 million for the period from
January 1, 1998 through December 23, 1998. The increase from 1997 compared to
the period from January 1, 1998 through December 23, 1998 was the result of
additional CCI charges related to the Charter Appreciation Rights Plan of $3.8
million for the period from January 1, 1998 through December 23, 1998 and an
increase in management services provided by CCI as a result of the Sonic
Acquisition.
INTEREST EXPENSE. Interest expense increased by $12.2 million, or 237.4%,
from $5.1 million in 1997 to $17.3 million for the period from January 1, 1998
through December 23, 1998. This increase resulted primarily from the additional
indebtedness incurred in connection with the Sonic Acquisition.
NET LOSS. Net loss increased by $12.6 million, or 272.5%, from $4.6
million in 1997 to $17.2 million for the period from January 1, 1998 through
December 23, 1998.
The increase in revenues that resulted from cable television customer
growth was not sufficient to offset the significant costs related to the Sonic
Acquisition, resulting in a substantial increase in interest expense due to
increased borrowings.
1997 COMPARED TO 1996
REVENUES. Revenues increased by $4.0 million, or 26.8%, from $14.9 million
in 1996 to $18.9 million in 1997.
Revenues of CCP, excluding the activity of any other systems acquired
during the periods, increased by $0.7 million, or 8.9%, from $7.9 million in
1996 to $8.6 million in 1997.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $3.6 million, or 44.9%, from $8.1 million
in 1996 to $11.8 million in 1997. This increase was primarily due to the
acquisitions of several cable systems in 1996 and the loss of $1.3 million on
the sale of a cable system in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $1.5 million, or 32.9%, from $4.6 million in 1996 to $6.1 million
in 1997. There was a significant increase in amortization resulting from the
acquisitions of several cable systems in 1996. In connection with such
acquisitions, the acquired franchises were recorded at fair market value, which
resulted in a stepped-up basis upon acquisition.
CORPORATE EXPENSE CHARGES. Corporate expense charges increased by $0.1
million, or 26.9%, from $0.4 million in 1996 to $0.6 million in 1997. These fees
were 3.0% of revenues in both 1996 and 1997.
INTEREST EXPENSE. Interest expense increased by $0.7 million, or 16.0%,
from $4.4 million in 1996 to $5.1 million in 1997. This increase resulted
primarily from the additional indebtedness incurred in connection with the
acquisitions of several cable systems in 1996.
NET LOSS. Net loss increased by $1.9 million, or 69.8%, from $2.7 million
in 1996 to $4.6 million in 1997. The increase in net loss is primarily related
to the $1.4 million loss on the sale of a cable system.
COMBINED CHARTER COMPANIES OPERATING RESULTS
The following discusses the combined revenues and expenses of Charter
Holdings, CCA Group and CharterComm Holdings, for the years ended December 31,
1996, 1997,
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and 1998. The combined revenues and expenses represent the sum of the revenues
and expenses of each of the companies managed by CCI during all periods
presented. Since the Charter Companies were under common management, we believe
presenting combined financial information of those companies is informative.
Other expenses, such as interest expense, are not presented as such information
was not considered meaningful. The combined revenues and expenses do not reflect
any pro forma adjustments related to acquisitions made by the Charter Companies
or related to the Charter Acquisition. The combined revenues and expenses for
the year ended December 31, 1998 include the revenues and expenses for Marcus
for the period from December 24, 1998 through December 31, 1998.
COMBINED CHARTER COMPANIES
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
COMBINED STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $368,553 $484,155 $594,414
-------- -------- --------
Operating expenses:
Operating, general and administrative........... 190,084 249,419 301,108
Depreciation and amortization................... 154,273 198,718 254,105
Management fees/corporate expense charges....... 15,094 20,759 39,114
-------- -------- --------
Total operating expenses........................ 359,451 468,896 594,327
-------- -------- --------
Income from operations............................ $ 9,102 $ 15,259 $ 87
======== ======== ========
1998 COMPARED TO 1997
REVENUES. Revenues increased by $110.3 million, or 22.8%, from $484.2
million in 1997 to $594.4 million in 1998. This increase in revenues resulted
from the Sonic Acquisition and Marcus Combination in 1998 and acquisitions made
during 1997 and an internally generated increase in basic subscribers and an
increase in premium service subscriptions.
We have grown our subscriber base internally as a result of management's
marketing efforts to add new customers, increased efforts to retain existing
customers and a limited amount of new-build construction to increase the
coverage area of its systems.
Premium subscriptions have increased as a result of the Sonic Acquisition,
Marcus Combination and the Company's marketing efforts.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $53.1 million, or 21.4%, from $248.1
million in 1997 to $301.1 million in 1998. This increase was due primarily to
the Sonic Acquisition and Marcus Combination in 1998 and acquisitions made
during 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$55.4 million, or 27.9% from $198.7 million in 1997 to $254.1 million in 1998.
There was a significant increase in amortization resulting from the Sonic
Acquisition and other acquisitions made by CharterComm Holdings and CCA Group.
The increase is also attributed to the continued increases in capital
expenditures.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $18.4 million, or 88.4% from $20.8 million in 1997
to $39.1 million in
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1998. The increase from 1997 compared to 1998 was primarily the result of
additional CCI charges related to the Charter Appreciation Rights Plan of $14.4
million for fiscal 1998.
1997 COMPARED TO 1996
REVENUES. Revenues increased by $115.6 million, or 31.4%, from $368.6
million in 1996 to $484.2 million in 1997. This increase was due to acquisitions
of cable systems in 1996 and 1997 as well as an increase in the average monthly
revenue per basic customer from $34.05 in 1996 to $37.15 in 1997.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $58.0 million, or 30.5%, from $190.1
million in 1996 to $248.1 million in 1997. This increase was primarily due to
the acquisitions acquired in 1996 and 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$44.4 million, or 28.8%, from $154.3 million in 1996 to $198.7 in 1997. There
was a significant increase in amortization resulting from the acquisitions of
several cable systems in 1996 and 1997. In connection, with such acquisitions,
the acquired franchises were recorded at fair market value, which resulted in a
stepped-up basis upon acquisition. The increase is also attributed to the
continued increases in capital expenditures.
MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate
expense charges increased by $5.7 million, or 37.5%, from $15.1 million in 1996
to $20.8 million in fiscal 1997. This increase is primarily the result of an
increase in revenues from 1996 and 1997 and additional costs incurred by CCI to
provide the management services.
LIQUIDITY AND CAPITAL RESOURCES
The cable television business has substantial ongoing capital requirements
for the construction, expansion and maintenance of plant. Expenditures are
primarily made to rebuild and upgrade our existing plants. We also spend capital
on plant extensions, new services, converters and system maintenance.
Historically, we have been able to meet our capital requirements through our
cash flows from operations, equity contributions, debt financings and available
borrowings under our existing credit facilities.
Over the next three years, we plan to spend $1.8 billion for capital
expenditures, approximately $900 million of which will be used to upgrade our
systems to bandwidth capacity of 550 MHz or greater so that we may offer
advanced cable service, and the remaining $900 million will be used for plant
extensions, new services, converters and system maintenance. Pro forma for the
Recent Acquisitions and the Pending Acquisitions, over the next three years, we
plan to spend an additional $700 million for capital expenditures, approximately
$300 million of which will be used to upgrade our systems to bandwidth capacity
of 550 MHz or greater so that we may offer advanced cable service and the
remaining $400 million will be used for plant extensions, new services,
converters and system maintenance. We expect to finance the anticipated capital
expenditures with distributions generated from operations and additional
borrowings under the Credit Facilities. See "Description of the Credit
Facilities."
Subject to the availability of sufficient financing, we intend to continue
to pursue our business strategy, which includes selective strategic
acquisitions. We anticipate that future acquisitions could be financed through
borrowings, either presently available under the current facilities or as a
result of amending the facilities to allow for expanded borrowing capacity or
additional equity contributions or both. Although to date we have been able to
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obtain financing on satisfactory terms, there can be no assurance that this will
continue to be the case in the future.
We manage risks arising from fluctuation in interest rates through the use
of interest rate swaps and cap agreements required under the terms of our credit
facilities. Interest rate swaps and cap agreements are accounted for by us as a
hedge of the related debt obligations. As a result, the net settlement amount of
any such swap or cap agreement is recorded as an adjustment to interest expense
in the period incurred. The effects of our hedging practices on weighted average
borrowing rate and on reported interest were not material for the years December
31, 1996 and December 31, 1997 and for the period from January 1, 1998 to
December 23, 1998.
We have insurance covering risks incurred with in the ordinary course of
business, including general liability, property and business interruption
coverage. As is typical in the cable television industry, we do not maintain
insurance covering our underground plant. We believe that our coverage is
adequate.
THE REFINANCING
In connection with the offering of the original notes, we consummated the
Tender Offers and we refinanced our previous credit facilities with the Credit
Facilities. On February 10, 1999, we commenced cash tender offers to purchase
any and all of (i) the 14% notes due 2007 issued by Charter Communications
Southeast Holdings, LLC and the 11.25% notes due 2006 issued by Charter
Communications Southeast, LLC (the "Charter Tender Offers") and (ii) the 13.50%
notes due 2004 issued by Marcus Cable Operating Company, L.L.C. and the 14.25%
notes due 2005 issued by Marcus Cable Company, L.L.C. (the "Marcus Tender
Offers" and, together with the Charter Tender Offers, the "Tender Offers"). All
notes except for $1.1 million were paid off by March 17, 1999.
In conjunction with each of the Tender Offers, we also solicited consents
to certain proposed amendments to the indentures governing the notes we were
seeking to purchase. These amendments eliminated substantially all of the
restrictive covenants and modify certain other provisions of the indentures.
Concurrently with the offering of the original notes, we entered into the
Credit Facilities to refinance our previous credit facilities. Borrowing
availability under the Credit Facilities totals $4.1 billion. Pro forma for the
Transactions, we have approximately $791 million of borrowing availability under
the Credit Facilities. In addition, an uncommitted incremental term facility of
up to $500 million with terms similar to the terms of the Credit Facilities is
permitted under the Credit Facilities, but will be conditioned on receipt of
additional new commitments from existing and new lenders. See "Description of
the Credit Facilities."
INTEREST RATE RISK
The use of interest rate risk management instruments, such as interest rate
exchange agreements ("Swaps"), interest rate cap agreements ("Caps") and
interest rate collar agreements ("Collars"), is required under the terms of the
Credit Facilities. Our policy is to manage interest costs using a mix of fixed
and variable rate debt. Using Swaps, 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. Caps 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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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):
EXPECTED MATURITY DATE FAIR VALUE AT
1999 2000 2001 2002 2003 THEREAFTER TOTAL DECEMBER 31, 1998
-------- -------- -------- -------- -------- ---------- ---------- -----------------
DEBT
Fixed Rate........... -- -- -- -- -- $ 896,239 $ 896,239 $ 974,327
Average Interest
Rate............. -- -- -- -- -- 13.5% 13.5%
Variable Rate........ $ 87,950 $110,245 $148,950 $393,838 $295,833 $1,497,738 $2,534,554 $2,534,533
Average Interest
Rate............. 6.0% 6.1% 6.3% 6.5% 7.2% 7.6% 7.2%
INTEREST RATE
INSTRUMENTS
Variable to Fixed
Swaps.............. $130,000 $255,000 $180,000 $320,000 $370,000 $ 250,000 $1,505,000 $ (28,977)
Average Pay Rate... 4.9% 6.0% 5.8% 5.5% 5.6% 5.6% 5.6%
Average Receive
Rate............. 5.0% 5.0% 5.2% 5.2% 5.4% 5.4% 5.2%
Caps................. $ 15,000 -- -- -- -- -- $ 15,000 --
Average Cap Rate... 8.5% -- -- -- -- -- 8.5%
Collar............... -- $195,000 $ 85,000 $ 30,000 -- -- $ 310,000 $ (4,174)
Average Cap Rate... -- 7.0% 6.5% 6.5% -- -- 6.8%
Average Floor
Rate............. -- 5.0% 5.1% 5.2% -- -- 5.0%
In March 1999, substantially all of the long-term debt as of December 31,
1998, was refinanced. (See previous section, "The Refinancing.")
The notional amounts of interest rate instruments, as presented in the
above table, are used to measure interest to be paid or received and do not
represent the amount of exposure to credit loss. The estimated fair value
approximates the proceeds (costs) to settle the outstanding contracts. Interest
rates on variable debt are estimated using the average implied forward LIBOR
rates for the year of maturity based on the yield curve in effect at December
31, 1998 plus the borrowing margin in effect for each credit facility at
December 31, 1998. While Swaps, Caps and Collars represent an integral part of
our interest rate risk management program, their incremental effect on interest
expense for the years ended December 31, 1998, 1997, and 1996 was not
significant.
YEAR 2000 ISSUES
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. 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 (the "Year 2000 Problem").
These errors and failures may result, not only from a date recognition problem
in the particular part of a system failing, but may also result as systems,
applications, devices and chips receive erroneous or improper data from
third-parties suffering from the Year 2000 Problem. In addition, two interacting
systems, applications, devices or chips, each of which has individually been
fixed so that it will
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properly handle the Year 2000 Problem, could nonetheless suffer "integration
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.
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.
We are addressing the Year 2000 Problem with respect to our internal
operations in three stages: (1) inventory and evaluation of our systems,
components and other significant infrastructure to identify those elements that
reasonably could be expected to be affected by the Year 2000 Problem, (2)
remediation and replacement to address problems identified in stage one and (3)
testing of the remediation and replacement carried out in stage two. With
respect to the Charter Systems, we formed an executive Year 2000 Taskforce at
the beginning of 1998, have completed stage one, and anticipate that we will
complete stages two and three by August 1999. With respect to the Marcus
Systems, we have substantially completed stage one and elements of stage two. We
plan to complete all stages for our existing systems by August 1999, but we have
not yet determined when such stages would be completed in connection with
systems we may acquire in the near future.
Much of our assessment efforts in stage one have involved, and depend on,
inquiries to third party service providers, who are the suppliers and vendors of
various parts or components of our systems. Certain of these third parties that
have certified the readiness of their products will not certify their
interoperability within our fully integrated systems. We cannot assure you that
these technologies of third parties, on which we rely, will be year 2000 ready
or timely converted into year 2000 compliant systems compatible with our
systems. Moreover, because a full test of our systems, on an integrated basis,
would require a complete shut down of our operations, it is not practicable to
conduct such testing. We have been advised that a plan has been developed to
utilize a third party, in cooperation with other cable operators, to begin
testing a "mock-up" of our major billing and plant components (including
pay-per-view systems) as an integrated system. We are also evaluating the
potential impact of third party failure and integration failure on our systems.
We have incurred only immaterial costs to date directly related to
addressing the Year 2000 Problem. We have redeployed internal resources and have
selectively engaged outside
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vendors to meet the goals of our year 2000 program. We currently estimate the
total cost of our year 2000 remediation program to be approximately $6 million.
Although we will continue to make substantial capital expenditures in the
ordinary course of meeting our telecommunications system upgrade goals through
the year 2000, we will not specifically accelerate those expenditures to
facilitate year 2000 readiness, and accordingly those expenditures are not
included in the above estimate.
ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. We have not yet
quantified the impacts of adopting SFAS No. 133 on our consolidated financial
statements nor have we determined the timing or method of our adoption of SFAS
No. 133. However, SFAS No. 133 could increase volatility in earnings (loss).
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
GENERAL
We sold the original notes on March 17, 1999 (the "Issue Date") in a
transaction exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"). The Initial Purchasers (as defined
below) subsequently resold the original notes to qualified institutional buyers
in reliance on Rule 144A and under Regulation S under the Securities Act.
In connection with the sale of original notes to the Initial Purchasers
pursuant to the Purchase Agreement, dated March 12, 1999, among us and Goldman,
Sachs & Co., Chase Securities Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Bear, Stearns & Co. Inc., NationsBanc Montgomery Securities LLC,
Salomon Smith Barney Inc., Credit Lyonnais Securities (USA), Inc., First Union
Capital Markets Corp., Prudential Securities Incorporated, TD Securities (USA)
Inc., CIBC Oppenheimer Corp. and Nesbitt Burns Securities Inc. (collectively,
the "Initial Purchasers"), the holders of the original notes became entitled to
the benefits of the Exchange and Registration Rights Agreements dated March 17,
1999, among us and the Initial Purchasers (the "Registration Rights
Agreements").
Under the Registration Rights Agreements, the Issuers became obligated to
(a) file a registration statement (the "Exchange Offer Registration Statement")
in connection with an exchange offer within 90 days after the Issue Date, and
(b) cause the Exchange Offer Registration Statement to become effective within
150 days after the Issue Date. The exchange offer being made hereby, if
consummated within the required time periods, will satisfy our obligations under
the Registration Rights Agreements. This prospectus, together with the Letter of
Transmittal, is being sent to all such beneficial holders known to the Issuers.
Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying Letter of Transmittal, the Issuers will accept all
original notes properly tendered and not withdrawn prior to the expiration date.
The Issuers will issue $1,000 principal amount of new notes in exchange for each
$1,000 principal amount of outstanding original notes accepted in the exchange
offer. Holders may tender some or all of their original notes pursuant to the
exchange offer.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in Morgan Stanley & Co. Incorporated,
SEC No-Action Letter (available June 5, 1991) (the "Morgan Stanley Letter"),
Exxon Capital Holdings Corporation, SEC No-Action Letter (available May 13,
1988) (the "Exxon Capital Letter") and similar letters, we believe that new
notes issued pursuant to the exchange offer in exchange for original notes may
be offered for resale, resold and otherwise transferred by any person who
received such new notes, whether or not such person is the holder (other than
any such holder or other person which is (i) a broker-dealer that receives new
notes for its own account in exchange for original notes, where such original
notes were acquired by such broker-dealer as a result of market-making or other
trading activities, or (ii) an "affiliate" of ours within the meaning of Rule
405 under the Securities Act (collectively, "Restricted Holders")) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such new notes are acquired in the ordinary course
of such holder's or other person's business, neither such holder nor such other
person is engaged in or intends to engage in any distribution of the
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59
new notes and such holders or other persons have no arrangement or understanding
with any person to participate in the distribution of such new notes.
If any person were to be participating in the exchange offer for the
purpose of participating in a distribution of the new notes in a manner not
permitted by the interpretations by the staff of the Commission, such person (a)
could not rely upon the Morgan Stanley Letter, the Exxon Capital Letter or
similar letters and (b) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction.
Each broker-dealer that receives new notes for its own account in exchange
for original notes, where such original notes were acquired by such
broker-dealer as a result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such new notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of new notes received in exchange for
original notes where such original notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities. We have agreed
that, for a period of 180 days after consummation of the exchange offer, we will
make this prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
We will not receive any proceeds from the exchange offer. See "Use of
Proceeds." We have agreed to bear the expenses of the exchange offer pursuant to
the Registration Rights Agreements. No underwriter is being used in connection
with the exchange offer.
We shall be deemed to have accepted validly tendered original notes when,
as and if we have given oral or written notice thereof to the Exchange Agent (as
defined below). The Exchange Agent will act as agent for the tendering holders
of original notes for the purposes of receiving the new notes from the Issuers
and delivering new notes to such holders.
If any tendered original notes are not accepted for exchange because of an
invalid tender or the occurrence of certain conditions set forth herein under
"-- Conditions" without waiver by us, certificates for any such unaccepted
original notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders of original notes who tender in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
original notes, pursuant to the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes in connection with the Exchange
Offer. See "-- Fees and Expenses."
In the event the exchange offer is consummated, we will not be required to
register the original notes. In such event, holders of original notes seeking
liquidity in their investment would have to rely on exemptions to registration
requirements under the securities laws, including the Securities Act. See "Risk
Factors -- Consequences of Failure to Exchange."
SHELF REGISTRATION STATEMENT
If applicable law or interpretations of the staff of the Commission are
changed so that the new notes received by holders who make all of the necessary
representations in the
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Letter of Transmittal are not or would not be, upon receipt, transferrable by
each such holder without restriction under the Securities Act, we will, at our
cost:
- file a shelf registration statement covering resales of the original
notes,
- use our reasonable best efforts to cause the shelf registration statement
to be declared effective under the Securities Act at the earliest
possible time, but no later than 90 days after the time such obligation
to file arises, and
- use our reasonable best efforts to keep effective the shelf registration
statement until the earlier of two years after the date as of which the
Commission declares such shelf registration statement effective or as of
which the shelf registration otherwise becomes effective, or the time
when all of the applicable original notes are no longer outstanding.
We will, if and when we file the shelf registration statement, provide to
each holder of the original notes copies of the prospectus which is a part of
the shelf registration statement, notify each holder when the shelf registration
statement has become effective and take other actions as are required to permit
unrestricted resales of the original notes. A holder that sells original notes
pursuant to the shelf registration statement generally must be named as a
selling security-holder in the related prospectus and must deliver a prospectus
to purchasers, will be subject to civil liability provisions under the
Securities Act in connection with these sales and will be bound by the
provisions of the Registration Rights Agreements which are applicable to the
holder, including certain indemnification obligations. In addition, each holder
of original notes must deliver information to be used in connection with the
shelf registration statement and provide comments on the shelf registration
statement in order to have its original notes included in the shelf registration
statement and benefit from the provisions regarding any liquidated damages
described below.
INCREASE IN INTEREST RATE
If we are required to file the shelf registration statement and either
(1) the shelf registration statement has not become effective or been
declared effective on or before the 90th calendar day following the
date such obligation to file arises, or
(2) the shelf registration statement has been declared effective and such
shelf registration statement ceases to be effective, except as
specifically permitted in the Registration Rights Agreements, without
being succeeded promptly by an additional registration statement filed
and declared effective,
the interest rate borne by the original notes will be increased by 0.25% per
annum following such default, determined daily, from the date of such default
until the date it is cured, and by an additional 0.25% for each subsequent
90-day period. However, in no event will the interest rate borne by the original
notes be increased by an aggregate of more than 1.0%.
The sole remedy available to the holders of the original notes will be the
immediate assessment of cash interest on the original notes as described above.
Any amounts of additional interest due as described above will be payable in
cash on the same interest payments dates as the original notes.
EXPIRATION DATE; EXTENSIONS; AMENDMENT
The term "Expiration Date" shall mean the expiration date set forth on the
cover page of this prospectus, unless we, in our sole discretion, extend the
exchange offer, in
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which case the term "Expiration Date" shall mean the latest date to which the
exchange offer is extended.
In order to extend the Expiration Date, we will notify the Exchange Agent
of any extension by oral or written notice and will issue a public announcement
thereof, each prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date. Such announcement may state that
we are extending the exchange offer for a specified period of time.
We reserve the right (a) to delay accepting any original notes, to extend
the exchange offer or to terminate the exchange offer and not accept original
notes not previously accepted if any of the conditions set forth herein under
"-- Conditions" shall have occurred and shall not have been waived by us (if
permitted to be waived by us), by giving oral or written notice of such delay,
extension or termination to the Exchange Agent, or (b) to amend the terms of the
exchange offer in any manner deemed by it to be advantageous to the holders of
the original notes. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof. If the exchange offer is amended in a manner determined by us to
constitute a material change, we will promptly disclose such amendment in a
manner reasonably calculated to inform the holders of the original notes of such
amendment and we may extend the exchange offer, depending upon the significance
of the amendment and the manner of disclosure to holders of the original notes,
if the exchange offer would otherwise expire during such extension period.
Without limiting the manner in which we may choose to make public
announcement of any extension, amendment or termination of the exchange offer,
we shall have no obligation to publish, advertise, or otherwise communicate any
such public announcement, other than by making a timely release to an
appropriate news agency.
INTEREST ON THE NEW NOTES
The new notes will bear interest from March 17, 1999, payable semiannually
on April 1 and October 1 of each year, commencing October 1, 1999. Holders of
original notes whose original notes are accepted for exchange will be deemed to
have waived the right to receive any payment in respect of interest on the
original notes accrued up until the date of the issuance of the new notes.
PROCEDURES FOR TENDERING
To tender in the exchange offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by instruction 2 of the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile or an Agent's
Message (as defined below) in connection with a book entry transfer, together
with the original notes and any other required documents. To be validly
tendered, such documents must reach the Exchange Agent before 5:00 p.m., New
York City time, on the Expiration Date. Delivery of the original notes may be
made by book-entry transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the Exchange Agent
prior to the Expiration Date.
The term "Agent's Message" means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent, forming a part of a
confirmation of a book-entry transfer, which states that such book-entry
transfer facility has received an express acknowledgment from the participant in
such book-entry transfer facility tendering the original notes that such
participant has received and agrees to be bound by the terms
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of the Letter of Transmittal and that we may enforce such agreement against such
participant.
The tender by a holder of original notes will constitute an agreement
between such holder and us in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect such tender for such
holders.
THE METHOD OF DELIVERY OF ORIGINAL NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BEFORE 5:00 P.M. NEW
YORK CITY TIME, ON THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR ORIGINAL
NOTES SHOULD BE SENT TO US.
Only a holder of original notes may tender such original notes in the
exchange offer. The term "holder" with respect to the exchange offer means any
person in whose name original notes are registered on our books or any other
person who has obtained a properly completed bond power from the registered
holder.
Any beneficial holder whose original notes are registered in the name of
its broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on its behalf. If such beneficial holder wishes
to tender on its own behalf, such registered holder must, prior to completing
and executing the Letter of Transmittal and delivering its original notes,
either make appropriate arrangements to register ownership of the original notes
in such holder's name or obtain a properly completed bond power from the
registered holder. The transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States (an "Eligible Institution"), unless the original notes tendered
pursuant thereto are tendered (a) by a registered holder who has not completed
the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (b) for the account of an Eligible
Institution. In the event that signatures on a Letter of Transmittal or a notice
of withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any original notes listed therein, such original notes must
be endorsed or accompanied by appropriate bond powers and a proxy which
authorizes such person to tender the original notes on behalf of the registered
holder, in each case signed as the name of the registered holder or holders
appears on the original notes.
If the Letter of Transmittal or any original notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate
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when signing, and unless waived by us, evidence satisfactory to us of their
authority so to act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), and withdrawal of the tendered original notes will be determined by us
in our sole discretion, which determination will be final and binding. We
reserve the absolute right to reject any and all original notes not properly
tendered or any original notes our acceptance of which would, in the opinion of
counsel for us, be unlawful. We also reserve the right to waive any
irregularities or conditions of tender as to particular original notes. Our
interpretation of the terms and conditions of the exchange offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of original notes must be cured within such time as we shall determine. None of
us, the Exchange Agent or any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of original
notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of original notes will not be deemed to have been made
until such irregularities have been cured or waived. Any original notes received
by the Exchange Agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost to
such holder by the Exchange Agent to the tendering holders of original notes,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, we reserve the right in our sole discretion to (a) purchase or
make offers for any original notes that remain outstanding subsequent to the
Expiration Date or, as set forth under "-- Conditions," to terminate the
exchange offer in accordance with the terms of the Registration Rights
Agreements and (b) to the extent permitted by applicable law, purchase original
notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers will differ from the terms of the exchange
offer.
By tendering, each holder will represent to us that, among other things,
(a) the new Notes acquired pursuant to the exchange offer are being obtained in
the ordinary course of business of such holder or other person, (b) neither such
holder nor such other person is engaged in or intends to engage in a
distribution of the new notes, (c) neither such holder or other person has any
arrangement or understanding with any person to participate in the distribution
of such new notes, and (d) such holder or other person is not our "affiliate,"
as defined under Rule 405 of the Securities Act, or, if such holder or other
person is such an affiliate, will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
We understand that the Exchange Agent will make a request promptly after
the date of this prospectus to establish accounts with respect to the original
notes at the Depository Trust Company ("DTC") for the purpose of facilitating
the exchange offer, and subject to the establishment thereof, any financial
institution that is a participant in DTC's system may make book-entry delivery
of original notes by causing DTC to transfer such original notes into the
Exchange Agent's account with respect to the original notes in accordance with
DTC's procedures for such transfer. Although delivery of the original notes may
be effected through book-entry transfer into the Exchange Agent's account at
DTC, an appropriate Letter of Transmittal properly completed and duly executed
with any required signature guarantee, or an Agent's Message in lieu thereof,
and all other required documents must in each case be transmitted to and
received or confirmed by the Exchange Agent at its address set forth below on or
prior to the Expiration Date, or, if the guaranteed delivery procedures
described below are complied with, within the time period
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provided under such procedures. Delivery of documents to DTC does not constitute
delivery to the Exchange Agent.
The original notes were issued on Mach 17, 1999, and there is no public
market for them at present. To the extent original notes are tendered and
accepted in the exchange offer, the principal amount of outstanding original
notes will decrease with a resulting decrease in the liquidity in the market
therefor. Following the consummation of the exchange offer, holders of original
notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for the original notes could be
adversely affected.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their original notes and (a) whose original
notes are not immediately available or (b) who cannot deliver their original
notes, the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if: (i) the tender is
made through an Eligible Institution; (ii) prior to the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or
hand delivery) setting forth the name and address of the holder of the original
notes, the certificate number or numbers of such original notes and the
principal amount of original notes tendered, stating that the tender is being
made thereby, and guaranteeing that, within three business days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof or Agent's
Message in lieu thereof) together with the certificate(s) representing the
original notes to be tendered in proper form for transfer and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) such properly completed
and executed Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing all tendered original notes in proper form for
transfer and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within three business days after the Expiration
Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of original notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date, unless previously accepted for exchange.
To withdraw a tender of original notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (a) specify the name of
the person having deposited the original notes to be withdrawn (the
"Depositor"), (b) identify the original notes to be withdrawn (including the
certificate number or numbers and principal amount of such original notes or, in
the case of original notes transferred by book-entry transfer, the name and
number of the account at DTC to be credited), (c) be signed by the Depositor in
the same manner as the original signature on the Letter of Transmittal by which
such original notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee with
respect to the original notes register the transfer of such original notes into
the name of the Depositor withdrawing the tender and (d) specify the name in
which any such original notes are to be registered, if different from that of
the Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such withdrawal notices will be determined by us, and our
determination shall be final and binding on all parties. Any original notes so
withdrawn will
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be deemed not to have been validly tendered for purposes of the exchange offer
and no new notes will be issued with respect thereto unless the original notes
so withdrawn are validly retendered. Any original notes which have been tendered
but which are not accepted for exchange will be returned to the holder thereof
without cost to such holder as soon as practicable after withdrawal, rejection
of tender or termination of the exchange offer. Properly withdrawn original
notes may be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept for exchange, or exchange, any new notes for any original
notes, and may terminate or amend the exchange offer before the acceptance of
any original notes for exchange, if the exchange offer violates any applicable
law or interpretation by the staff of the Commission.
If we determine in their sole discretion that the foregoing condition
exists, we may (i) refuse to accept any original notes and return all tendered
original notes to the tendering holders, (ii) extend the exchange offer and
retain all original notes tendered prior to the expiration of the exchange
offer, subject, however, to the rights of holders who tendered such original
notes to withdraw their tendered original notes, or (iii) waive such condition,
if permissible, with respect to the exchange offer and accept all properly
tendered original notes which have not been withdrawn. If such waiver
constitutes a material change to the exchange offer, we will promptly disclose
such waiver by means of a prospectus supplement that will be distributed to the
holders, and we will extend the exchange offer as required by applicable law.
Pursuant to the Registration Rights Agreements, if the exchange offer shall
not be consummated prior to the Exchange Offer Termination Date (as defined
below), we will be obligated to cause to be filed with the Commission the shelf
registration statement with respect to the original notes as promptly as
practicable after the exchange offer Termination Date, and thereafter use its
best efforts to have the shelf registration statement declared effective.
"Exchange Offer Termination Date" means the date on which the earliest of
any of the following events occurs: (a) applicable interpretations of the staff
of the Commission do not permit us to effect the exchange offer, (b) any holder
of notes notifies us that either (i) such holder is not eligible to participate
in the exchange offer or (ii) such holder participates in the exchange offer and
does not receive freely transferable new notes in exchange for tendered original
notes or (c) the exchange offer is not consummated within 180 days after the
Issue Date.
If any of the conditions described above exists, we will refuse to accept
any original notes and will return all tendered original notes to exchanging
holders of the original notes.
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EXCHANGE AGENT
Harris Trust Company of New York has been appointed as exchange agent (the
"Exchange Agent") for the exchange offer. Questions and requests for assistance
and requests for additional copies of this prospectus or of the Letter of
Transmittal should be directed to Harris Trust Company of New York addressed as
follows:
For Information by Telephone:
(212) 701-7637
By Hand or Overnight Delivery Service:
Harris Trust Company of New York
Wall Street Plaza
88 Pine Street
19th Floor
New York, New York 10005
Attention: Corporate Trust Department
By Facsimile Transmission:
(212) 701-7624
(Telephone Confirmation)
(212) 701-7637
Harris Trust Company of New York is an affiliate of the trustee under the
indentures governing the notes.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. We have not retained any
dealer-manager in connection with the exchange offer and will not make any
payments to brokers, dealers or others soliciting acceptances of the exchange
offer. We, however, will pay the Exchange Agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection with providing the services.
The cash expenses to be incurred in connection with the exchange offer will
be paid by us. Such expenses include fees and expenses of Harris Trust Company
of New York as Exchange Agent, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the original
notes as reflected in our accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by us.
The expenses of the exchange offer and the unamortized expenses related to the
issuance of the original notes will be amortized over the term of the notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of original notes who are eligible to participate in the exchange
offer but who do not tender their original notes will not have any further
registration rights, and their original notes will continue to be subject to
restrictions on transfer. Accordingly, such original notes may be resold only:
- to us, upon redemption of these notes or otherwise,
- so long as the original notes are eligible for resale pursuant to Rule
144A under the Securities Act, to a person inside the United States whom
the seller reasonably believes is a qualified institutional buyer within
the meaning of Rule 144A in a transaction meeting the requirements of
Rule 144A,
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- in accordance with Rule 144 under the Securities Act, or under another
exemption from the registration requirements of the Securities Act, and
based upon an opinion of counsel reasonably acceptable to us,
- outside the United States to a foreign person in a transaction meeting
the requirements of Rule 904 under the Securities Act, or
- under an effective registration statement under the Securities Act.
in each case in accordance with any applicable securities laws of any state of
the United States.
REGULATORY APPROVALS
We do not believe that the receipt of any material federal or state
regulatory approval will be necessary in connection with the exchange offer,
other than the effectiveness of the Exchange Offer Registration Statement under
the Securities Act.
OTHER
Participation in the exchange offer is voluntary and holders of original
notes should carefully consider whether to accept the terms and condition of
this exchange offer. Holders of the original notes are urged to consult their
financial and tax advisors in making their own decisions on what action to take
with respect to the exchange offer.
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BUSINESS
Unless the context otherwise requires, all references to "CCHC" mean
Charter Communications Holdings Capital Corporation. All references to "Charter"
or the "Issuers" mean Charter Holdings and CCHC. All references to the "Charter
Companies" mean Charter Communications Operating, LLC and its subsidiaries prior
to the Marcus Combination. All references to the "Charter Systems" mean all
cable systems owned directly or indirectly by the Charter Companies. All
references to "Marcus" mean Marcus Cable Company, L.L.C. All references to the
"Marcus Companies" mean Marcus and its subsidiaries prior to the Marcus
Combination. All references to the "Marcus Systems" mean all cable systems owned
directly or indirectly by the Marcus Companies. All references to "the Company,"
"we," "us" or "our" mean Charter together with its subsidiaries.
GENERAL
We are the seventh largest operator of cable systems in the United States,
serving approximately 2.3 million customers. Our cable systems are managed in
seven operating regions and operate in 22 states. We offer a full range of cable
television services, including basic, expanded basic, premium and pay-per-view
television programming. We have begun to offer digital cable television services
to customers in some of our systems, and are also expanding into other
entertainment, educational and communications services, such as high-speed
Internet access and interactive services. These new services will take advantage
of the significant bandwidth of our cable systems. For the year ended December
31, 1998, pro forma for the Marcus Combination, our revenues were approximately
$1.1 billion and our EBITDA was approximately $482 million. Approximately 96% of
our equity is beneficially owned by Paul G. Allen, the co-founder of Microsoft
Corporation. The remaining equity is owned by our founders, Jerald L. Kent,
Barry L. Babcock and Howard L. Wood. Mr. Kent is the President and Chief
Executive Officer and a director of CCI.
We have pursued and executed a strategy of operating, developing, acquiring
and consolidating cable systems with the primary goals of increasing our
customer base and operating cash flow by consistently emphasizing superior
customer service. During 1998, we increased the internal customer base, revenues
and EBITDA of the Charter Companies by 4.8%, 9.5% and 11.0%, respectively. This
internal customer growth was more than twice the national average for 1998 (4.8%
versus 1.7%) and was significantly higher than the national average for 1997
(3.5% versus 2.0%). We attribute such success to an operating philosophy that
emphasizes superior customer service, decentralized operations with centralized
financial controls, and innovative marketing techniques.
In addition to growing our internal customer base, we have grown
significantly through acquisitions. Over the past five years, our management
team has successfully completed 22 acquisitions and we have entered into six
agreements to acquire cable systems. These Recent Acquisitions and the Pending
Acquisitions serve a total of approximately 1.3 million customers. Pro forma for
the Marcus Combination, the Recent Acquisitions and the Pending Acquisitions,
our revenues and EBITDA for 1998 would have been $1.7 billion and $755 million,
respectively. We have also entered into a letter of intent to acquire cable
systems with approximately 12,000 additional customers. Pro forma for the Recent
Acquisitions and the Pending Acquisitions and the acquisition currently subject
to a letter of intent, we serve approximately 3.6 million customers. As we
acquire and integrate these and other cable systems in the future, we believe
that the implementation
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of our operating philosophy will provide meaningful opportunities to enhance the
operating results of such systems.
Paul G. Allen, our principal owner and one of the computer industry's
visionaries, has long believed that the broadband capabilities of cable systems
facilitate the convergence of cable television, computers and
telecommunications. Mr. Allen believes that this convergence, which he calls the
"Wired World," will rely on the cable platform to deliver an array of new
services, such as digital video programming, high-speed Internet access,
Internet protocol telephony ("IP telephony") and electronic commerce. Because of
cable's ability to provide all of these services, we believe that individuals
and businesses will view cable as an important service.
BUSINESS STRATEGY
Our business strategy is to grow our customer base and increase our
operating cash flow by:
- maximizing customer satisfaction;
- implementing decentralized operations with centralized financial
controls;
- pursuing strategic acquisitions;
- upgrading our systems;
- emphasizing innovative marketing; and
- offering new products and services.
MAXIMIZING CUSTOMER SATISFACTION. To maximize customer satisfaction, we
operate our business to provide reliable, high-quality service offerings,
superior customer service and attractive programming choices at reasonable
rates. We have implemented stringent internal customer service standards which
we believe meet or exceed those established by the National Cable Television
Association ("NCTA"). In 1998, J.D. Power and Associates ranked the Charter
Companies third among major cable system operators in overall customer
satisfaction. We believe that our customer service efforts have contributed to
our superior customer growth, increased acceptance of our new and enhanced
service offerings and increased strength of the Charter brand name.
IMPLEMENTING DECENTRALIZED OPERATIONS WITH CENTRALIZED FINANCIAL
CONTROLS. Our local cable systems are organized into seven operating regions. A
regional management team oversees local system operations in each region. We
believe that a strong management presence at the local system level increases
our ability to respond to customer needs and programming preferences, improves
our customer service, reduces the need for a large centralized corporate staff,
fosters good relations with local governmental authorities and strengthens
community relations. Our regional management teams work closely with senior
management in our corporate office to develop budgets and coordinate marketing,
programming, purchasing and engineering activities. In order to attract and
retain high quality managers at the local and regional operating levels, we
provide a high degree of operational autonomy and accountability and cash and
equity-based performance compensation. We have committed to adopt a plan to
distribute to members of corporate management and to key regional and
system-level management personnel equity-based incentive compensation based on
10% of our equity value on a fully-diluted basis.
PURSUING STRATEGIC ACQUISITIONS. We intend to continue to pursue strategic
acquisitions and believe that the current consolidation activity in the cable
industry offers
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substantial opportunities to further our acquisition strategy. We believe that
there are significant advantages in increasing the size and scope of our
operations, including:
- improved economies of scale in management, marketing, customer service,
billing and other administrative functions;
- reduced costs for plant and infrastructure;
- increased leverage for negotiating programming contracts; and
- increased influence on the evolution of important new technologies
affecting our business.
In addition, we recognize the benefits of "swapping" cable systems with
other cable operators to reinforce the advantages of our "clustering" strategy.
Among the factors we consider in acquiring a cable system are:
- proximity to our existing cable systems or the potential for developing
new clusters of systems;
- demographic profile of the market as well as the number of homes passed
and customers within the system;
- per customer revenues and operating cash flow and opportunities to
increase these amounts;
- the technological state of such system; and
- the level of competition within the local market.
UPGRADING OUR SYSTEMS. Over the next three years, we plan to spend
approximately $900 million, or $1.2 billion pro forma for the Recent
Acquisitions and the Pending Acquisitions, to upgrade our systems' bandwidth
capacity to 550 MHz or greater so that we may offer advanced cable services,
increase program offerings and permit two-way communication. We believe our
upgraded Systems will also provide enhanced picture quality and system
reliability. Today, approximately 55% of our customers are served by cable
systems with at least 550 MHz bandwidth capacity, and approximately 37% of our
customers have two-way communication capability. By year end 2001, we expect
that approximately 92% of our customers will be served by cable systems with at
least 550 MHz bandwidth capacity and two-way communication capability. A
bandwidth capacity of 550 MHz enables us to offer our customers up to 82
channels of analog video service as well as advanced cable services. As we use
some of this bandwidth for digital service, we expect to offer our customers
even more channels and services at competitive rates.
EMPHASIZING INNOVATIVE MARKETING. We have developed and successfully
implemented a variety of innovative marketing techniques to attract new
customers and enhance the level of service provided to our existing customers.
Our marketing efforts focus on delivering well targeted, branded entertainment
and information services that provide value, choice, convenience and quality. We
utilize demographic "cluster codes" to address specific messages to target
audiences through direct mail and telemarketing. In addition, we promote our
services on radio, in local newspapers and by door-to-door selling. In many of
our systems, we offer discounts to customers who purchase multiple premium
services. We also have a coordinated strategy for retaining customers that
includes televised retention advertising to reinforce the link between quality
service and the Charter brand name and to encourage customers to purchase higher
service levels. Successful implementation of these marketing techniques has
resulted in internal customer growth rates in excess of the cable industry
averages in each year from 1995 through 1998 for the
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Charter Systems. The Marcus Systems came under common management with us in
October 1998, and we have begun to implement our marketing techniques throughout
those systems.
OFFERING NEW PRODUCTS AND SERVICES. By upgrading our systems, we will be
able to expand the array of services and advanced products we can offer to our
customers. Using digital technology, we plan to offer additional channels on our
existing service tiers, create new service tiers, introduce multiplexing of
premium services and increase the number of pay-per-view channels. We also plan
to add digital music services and interactive program guides. In addition to
these expanded cable services, we also plan to provide advanced services
including high-speed Internet access and interactive services. We have entered
into agreements with several providers of high-speed Internet and other
interactive services, including EarthLink Network, Inc. ("EarthLink"), High
Speed Access Corp. ("HSAC"), WorldGate Communications, Inc. ("WorldGate"), Wink
Communications, Inc. ("Wink") and At Home Corporation ("@Home").
RECENT EVENTS
RECENT ACQUISITIONS. In the second quarter of 1999, we completed two
transactions in which we acquired cable systems serving a total of approximately
195,000 customers in four states for a total purchase price of approximately
$699 million. For the year ended December 31, 1998, the cable systems we
acquired in the Recent Acquisitions had revenues of $57.2 million and earnings
before interest, taxes, depreciation and amortization (EBITDA) of approximately
$28.3 million. The Recent Acquisitions are as follows:
AMERICAN CABLE ENTERTAINMENT, LLC. In April 1999, we purchased American
Cable LLC. ("ACE") for approximately $240 million. ACE owns cable systems
located in California serving approximately 68,000 customers and will be
operated as part of our Western Region. For the year ended December 31, 1998,
ACE had revenues and EBITDA of approximately $15.7 million and $7.8 million,
respectively.
RENAISSANCE. In February 1999, CCI and one of its subsidiaries entered
into an agreement to purchase Renaissance for approximately $459 million,
consisting of cash of $348 million and $111 million of debt to be assumed.
Renaissance owns cable systems located in Louisiana, Mississippi and Tennessee,
has approximately 127,000 customers and will be operated as part of our Southern
Region. For the year ended December 31, 1998, Renaissance had revenues and
EBITDA of approximately $41.5 million and $20.5 million, respectively. At year
end 1998, approximately 36% of Renaissance's customers were served by systems
with at least 550 MHz bandwidth capacity. We anticipate that this transaction
will close on or about April 30, 1999.
ACQUISITION AGREEMENTS. In addition to the recent acquisitions described
above, since the beginning of 1999, we have entered into definitive agreements
to acquire certain additional cable systems with a total of approximately 1.1
million customers in 18 states for a total purchase price of approximately $3.9
billion, including the exchange of certain cable systems, as described below
under the heading "-- InterMedia Systems," with a fair market value of $0.4
billion. For the year ended December 31, 1998, the cable systems to be acquired
in connection with the Pending Acquisitions had revenues of $464.0 million and
earnings before interest, taxes, depreciation and amortization (EBITDA) of
approximately $209.1 million. In addition, we are also in active negotiations
with several other potential acquisition candidates whose systems would further
complement our regional operating clusters. We expect to finance these
acquisitions with additional
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borrowings under our credit facilities and with additional equity. The Pending
Acquisitions are as follows:
GMI SYSTEMS. In February 1999, CCI entered into an agreement to purchase
the GMI Systems for approximately $500 million. CCI assigned its rights under
such agreement to us. The GMI Systems are located in Massachusetts, have
approximately 170,000 customers and will be operated as part of our Northeast
Region. For the year ended December 31, 1998, the GMI Systems had revenues and
EBITDA of approximately $78.6 million and $29.8 million, respectively. At year
end 1998, approximately 75% of the GMI Systems' customers were served by systems
with at least 550 MHz bandwidth capacity. We anticipate that this transaction
will close during the third quarter of 1999.
HELICON. In March 1999, two of our subsidiaries entered into an agreement
to acquire Helicon for approximately $550 million, of which $25 million will be
payable in the form of preferred limited liability company interests in one of
the subsidiaries. Helicon owns cable systems located in Alabama, Georgia, New
Hampshire, North Carolina, West Virginia, South Carolina, Tennessee,
Pennsylvania, Louisiana and Vermont, has approximately 173,000 customers and
will be operated as part of our Southeast, Southern and Northeast regions. For
the year ended December 31, 1998, Helicon had revenues and EBITDA of
approximately $75.6 million and $31.9 million, respectively. At year end 1998,
approximately 69% of Helicon's customers were served by systems with at least
550 MHz bandwidth capacity. We anticipate that this transaction will close
during the third quarter of 1999.
INTERMEDIA SYSTEMS. In April 1999, certain of our subsidiaries entered
into agreements to purchase the InterMedia Systems in exchange for cash and
certain of our cable systems. The InterMedia Systems serve approximately 402,000
customers in North Carolina, South Carolina, Georgia and Tennessee. As part of
this transaction, we will "swap" some of our non-strategic cable systems serving
approximately 140,000 customers located in Indiana, Montana, Utah and northern
Kentucky. The purchase price of the InterMedia Systems, net of the "swap," is
approximately $872.7 million. This transaction will result in a net increase of
262,000 customers concentrated in our Southeast and Southern regions. For the
year ended December 31, 1998, the InterMedia Systems had revenues and EBITDA of
approximately $176.1 million and $86.2 million, respectively. At year end 1998,
approximately 79% of these customers were served by systems with at least 550
MHz bandwidth capacity. We anticipate that acquisition of the InterMedia Systems
will close during the third or fourth quarter of 1999.
RIFKIN. In April 1999, CCI entered into agreements to purchase the
partnership interests in Rifkin for an aggregate purchase price of approximately
$1.46 billion. CCI has assigned its rights under such purchase agreement to us.
Certain sellers will have the right to elect to receive their pro-rata portion
of the purchase price in preferred equity of Charter Holdings or a subsidiary of
Charter Holdings, such equity is to consist of a minimum of $25 million and a
maximum of approximately $240 million in the aggregate. Rifkin owns cable
systems primarily in Florida, Georgia, Illinois, Indiana, Tennessee, Virginia
and West Virginia serving approximately 464,000 customers. These systems will
primarily be operated as part of our Central, Southern and Southeast regions.
For the year ended December 31, 1998, Rifkin had revenues and EBITDA of
approximately $124.4 million and $56.5 million, respectively. At year end 1998,
approximately 36% of Rifkin's customers were served by systems with at least 550
MHz bandwidth capacity. We anticipate that this transaction will close during
the third or fourth quarter of 1999.
OTHER ACQUISITIONS. In addition to the acquisitions described above, from
January to April 1999, CCI and/or a subsidiary of CCI has entered into
definitive agreements to
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purchase Vista and certain cable assets of Cable Satellite. By these Other
Acquisitions, we plan to acquire cable systems located in Southern California,
Georgia and Southern Florida, have a total of approximately 36,000 customers and
will be operated as part of our Southern and Southeast regions. The total
purchase price for the Other Acquisitions is approximately $148 million. For the
year ended December 31, 1998, the cable systems to be acquired in connection
with these Other Acquisitions had revenues and EBITDA of $25.0 million and $12.5
million, respectively.
MARCUS COMBINATION. On April 7, 1999, Marcus Cable Holdings, LLC, the
guarantor of our obligations under the original notes and the indentures, was
merged with and into Charter Holdings, the surviving entity and an issuer of the
original notes. As a result of this combination, the subsidiaries of Marcus
Holdings became our subsidiaries. Under the terms of the original notes and the
indentures, upon the Marcus Combination, the guarantee of our obligations under
the notes was automatically terminated. In addition, upon the sale of the
original notes, Marcus Holdings issued a senior note in favor of Charter
Holdings in an amount equal to the portion of the proceeds from the sale of the
original notes that was used to repay certain outstanding senior indebtedness of
the Marcus Companies. This senior note was secured by a pledge by Marcus
Holdings of all of the membership interests of Marcus Cable Company, L.L.C.
Under the terms of the original notes and the indentures, Charter Holdings
pledged the senior note to the trustee under the indentures for the equal and
ratable benefit of the holders of the original notes. Under the terms of the
original notes and the indentures, upon the Marcus Combination, the senior note
was automatically extinguished and the pledge of such collateral was released.
THE COMPANY'S SYSTEMS
Our systems consist of approximately 65,900 miles of coaxial and
approximately 8,500 sheath miles of fiber optic cable passing approximately 3.9
million households and serving approximately 2.3 million customers. Today,
approximately 55% of our customers are served by systems with at least 550 MHz
bandwidth capacity, approximately 40% have at least 750 MHz bandwidth capacity
and approximately 37% are served by systems capable of providing two-way
interactive communication capability, such as two-way Internet connections, Wink
and interactive program guides.
CORPORATE MANAGEMENT. We are managed from our corporate office in St.
Louis, Missouri. Our senior management at that office consists of approximately
140 people led by Jerald L. Kent and is responsible for coordinating and
overseeing company-wide operations, including certain critical functions such as
marketing and engineering that are conducted by personnel at the regional and
local system level. The corporate office also performs certain financial control
functions such as accounting, finance and acquisitions, payroll and benefit
administration, internal audit, purchasing and programming contract
administration on a centralized basis.
OPERATING REGIONS. To manage and operate our systems, we have established
two divisions that contain a total of seven operating regions: Western; Central;
MetroPlex (Dallas/Ft. Worth); North Central; Northeast; Southeast; and Southern.
Each region is managed by a team consisting of a Senior Vice President or a Vice
President, supported by operational, marketing and engineering personnel. The
two divisions are managed by two Senior Vice Presidents who report directly to
our Chief Executive Officer and are responsible for overall supervision of our
seven operating regions. Within each region, certain groups of cable systems are
further organized into groups known as "clusters." We believe that much of our
success is attributable to our operating philosophy which emphasizes
decentralized management, with decisions being made as close to the customer as
possible.
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The following table provides an overview of selected technical, operating
and financial data for each of our operating regions, as of and for the year
ended December 31, 1998. Unless otherwise indicated, the following table does
not reflect the impact of the Recent Acquisitions or the Pending Acquisitions.
Upon completion of the Recent Acquisitions and the Pending Acquisitions, our
systems will pass approximately 5.7 million homes serving approximately 3.6
million customers.
SELECTED TECHNICAL, OPERATING AND FINANCIAL DATA BY OPERATING REGION
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
NORTH
WESTERN CENTRAL METROPLEX CENTRAL NORTHEAST SOUTHEAST SOUTHERN TOTAL
------- ------- --------- ------- --------- --------- -------- ---------
TECHNICAL DATA:
Miles of coaxial cable........ 7,500 8,800 5,700 10,000 4,600 16,700 12,600 65,900
Density(a).................... 131 65 77 62 31 40 38 59
Headends...................... 21 34 16 86 7 60 59 283
Planned headend
eliminations................ 3 3 1 30 0 11 8 56
Plant bandwidth(b):
450 MHz or less............... 23.9% 56.7% 37.0% 50.4% 51.2% 43.9% 60.2% 44.8%
550 MHz....................... 8.0% 10.2% 14.4% 12.9% 33.5% 25.6% 13.8% 15.2%
750 MHz or greater............ 68.1% 33.1% 48.6% 36.7% 15.4% 30.5% 26.0% 40.0%
Two-way capability............ 52.2% 41.5% 57.2% 49.6% 15.4% 14.8% 19.8% 37.0%
OPERATING DATA:
Homes passed.................. 984,000 569,000 437,000 618,000 142,000 664,000 478,000 3,892,000
Basic customers............... 496,000 357,000 187,000 396,000 124,000 441,000 316,000 2,317,000
Basic penetration(c).......... 50.4% 62.7% 42.8% 64.1% 87.3% 66.4% 66.1% 59.5%
Premium units................. 310,000 193,000 120,000 128,000 116,000 242,000 147,000 1,256,000
Premium penetration(d)........ 62.5% 54.1% 64.2% 32.3% 93.5% 54.9% 46.5% 54.2%
Basic customers, pro forma for
the Pending Acquisitions.... 568,000 356,000 187,000 396,000 350,000 982,000 778,000 3,617,000
FINANCIAL DATA:
Revenues, in millions(e)...... $251.8 $168.8 $90.8 $164.5 $60.5 $184.2 $139.3 $1,059.9
Average monthly total revenue
per customer(f)............. $42.31 $39.40 $40.46 $34.62 $40.66 $34.81 $36.74 $38.12
- -------------------------
(a) Represents homes passed divided by miles of coaxial cable.
(b) Represents percentage of basic customers within a region served by the
indicated plant bandwidth.
(c) Basic penetration represents basic customers as a percentage of homes
passed.
(d) Premium penetration represents premium units as a percentage of basic
customers.
(e) Gives effect to all acquisitions and dispositions by the Charter Companies
and the Marcus Companies as if they had occurred on January 1, 1998. See
"Unaudited Pro Forma Financial Statement and Operating Data."
(f) Represents total revenues divided by twelve divided by the number of
customers at year end.
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WESTERN REGION. The Western Region consists of cable systems serving
approximately 496,000 customers located entirely in the state of California,
with approximately 365,000 customers located within the Los Angeles metropolitan
area. These customers reside primarily in the communities of Pasadena, Alhambra,
Glendale, Long Beach and Riverside. We also have approximately 131,000 customers
in central California, principally located in the communities of San Luis
Obispo, West Sacramento and Turlock. The Western Region will also be responsible
for managing the approximately 68,000 customers associated with the recent
acquisition of ACE and 4,000 customers associated with the pending acquisition
of Rifkin. According to National Decision Systems, 1998 ("NDS"), the projected
median household growth in the counties currently served by the region's systems
is 5.2% for the period ending 2003, versus the projected U.S. median household
growth of 5.2% for the same period.
The Western Region's cable systems have been significantly upgraded with
approximately 76% of the region's customers served by cable systems with at
least 550 MHz bandwidth capacity as of December 31, 1998. The planned upgrade of
the Western Region's cable systems will reduce the number of headends from 21 to
18 by December 31, 2001. We expect that by December 31, 2001, 99% of our
customers will be served by systems with at least 550 MHz bandwidth capacity
with two-way communication capability.
CENTRAL REGION. The Central Region consists of cable systems serving
approximately 357,000 customers of which approximately 244,000 customers reside
in and around St. Louis County or in adjacent areas in Illinois, and over 94%
are served by two headends. The remaining approximately 113,000 of these
customers reside in Indiana, and these Systems are primarily classic cable
systems serving small to medium-sized communities. The Indiana systems will be
"swapped" as part of the InterMedia Systems transaction. See "-- Recent Events."
The Central Region will also be responsible for managing approximately 112,000
customers associated with the pending acquisition of Rifkin. According to NDS,
the projected median household growth in the counties currently served by the
region's systems is 4.7% for the period ending 2003, versus the projected U.S.
median household growth of 5.2% for the same period.
At December 31, 1998, approximately 43% of the Central Region's customers
were served by cable systems with at least 550 MHz bandwidth capacity. The
majority of the cable plants in the Illinois Systems have been upgraded to 750
MHz bandwidth capacity. The planned upgrade of the Central Region's cable
systems will reduce the number of headends from 34 to 31 by December 31, 2001.
We have begun a three-year project, scheduled for completion in 2001, to upgrade
the cable plant in St. Louis County, serving approximately 175,000 customers, to
870 MHz bandwidth capability. We expect that by December 31, 2001, approximately
89% of the region's customers will be served by cable systems with at least 550
MHz bandwidth capacity with two-way communication capability.
METROPLEX REGION. The MetroPlex Region consists of cable systems serving
approximately 187,000 customers of which approximately 131,000 are served by the
Ft. Worth system. The systems in this region serve one of the fastest growing
areas of Texas. The anticipated population growth combined with the existing low
basic penetration rate of approximately 43% offers significant potential to
increase the total number of customers and the associated revenue and cash flow
in this region. According to NDS, the projected median household growth in the
counties served by the region's systems is 8.4%
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for the period ending 2003, versus the projected U.S. median household growth of
5.2% for the same period.
The MetroPlex Region's cable systems have been significantly upgraded with
approximately 63% of the region's customers served by cable systems with at
least 550 MHz bandwidth capacity as of December 31, 1998. In 1997, we began to
upgrade the Ft. Worth system to 870 MHz of bandwidth capacity. We expect to
complete this project during 1999. The planned upgrade of the MetroPlex Region's
cable systems will reduce the number of headends from 16 to 15 by December 31,
2001. We expect that by December 31, 2001, approximately 98% of the region's
customers will be served by cable systems with at least 550 MHz bandwidth
capacity with two-way communication capability.
NORTH CENTRAL REGION. The North Central Region consists of cable systems
serving approximately 396,000 customers. These customers are primarily located
throughout the state of Wisconsin, along with a small system of approximately
26,000 customers in Rosemont, Minnesota, a suburb of Minneapolis. Within the
state of Wisconsin, the four largest operating clusters are located in and
around Eau Claire, Fond du Lac, Janesville and Wausau. According to NDS, the
projected median household growth in the counties served by the region's systems
is 5.4% for the period ending 2003, versus the projected U.S. median household
growth of 5.2% for the same period.
At December 31, 1998, approximately 49% of the North Central Region's
customers were served by cable systems with at least 550 MHz bandwidth capacity.
The planned upgrade of the North Central Region's cable systems will reduce the
number of headends from 86 to 56 by December 31, 2001. We plan to rebuild much
of the region's cable plant, and expect that by December 31, 2001, approximately
93% of the region's customers will be served by cable systems with capacity
between 550 MHz and 750 MHz of bandwidth capacity with two-way communication
capability.
NORTHEAST REGION. The Northeast Region consists of cable systems serving
approximately 124,000 customers residing in the states of Connecticut and
Massachusetts. These systems serve the communities of Newtown and Willimantic,
Connecticut, and areas in and around Pepperell, Massachusetts, and are included
in the New York, Hartford, and Boston areas of demographic influence. The North
Central Region will be responsible for managing the approximately 170,000
customers associated with the pending acquisition of cable systems from GMI and
approximately 56,000 customers associated with the pending acquisition of
Helicon. According to NDS, the projected median household growth in the counties
currently served by the region's systems is 3.7% for the period ending 2003,
versus the projected U.S. median household growth of 5.2% for the same period.
At December 31, 1998, approximately 49% of the Northeast Region's customers
were served by cable systems with at least 550 MHz of bandwidth capacity. We
have begun to rebuild the region's cable plant, and expect that by December 31,
2001, all of the region's customers will be served by cable systems with at
least 750 MHz bandwidth capacity with two-way communication capability.
SOUTHEAST REGION. The Southeast Region consists of cable systems serving
approximately 441,000 customers residing primarily in small to medium-sized
communities in North Carolina, South Carolina, Georgia and eastern Tennessee.
There are significant clusters of cable systems in and around the cities and
counties of Greenville/Spartanburg, South Carolina; Hickory and Asheville, North
Carolina; Henry County, Georgia (a suburb of Atlanta); and Johnson City,
Tennessee. These areas have experienced rapid population
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growth over the past few years, contributing to the high rate of internal
customer growth for these Systems. According to NDS, the projected median
household growth in the counties served by the region's systems is 6.9% for the
period ending 2003, versus the projected U.S. median household growth of 5.2%
for the same period. In addition, the Southeast Region will be responsible for
managing an aggregate of 541,000 customers associated with the Helicon, the
InterMedia Systems, Rifkin, Vista and Cable Satellite Pending Acquisitions.
At December 31, 1998, approximately 56% of the Southeast Region's customers
were served by cable systems with at least 550 MHz bandwidth capacity. The
planned upgrade of the Southeast Region's cable systems will reduce the number
of headends from 60 to 49 by December 31, 2001. The rebuild program for this
region is anticipated to result in approximately 94% of the customer base by
December 31, 2001 being served by cable systems with at least 550 MHz bandwidth
capacity with two-way communication capability.
SOUTHERN REGION. The Southern Region consists of cable systems serving
approximately 443,000 customers located primarily in the states of Louisiana,
Alabama, Kentucky, Mississippi and central Tennessee. In addition, the Southern
Region includes systems in Kansas, Colorado, Utah and Montana. The Southern
Region has significant clusters of cable systems in and around the cities of
Birmingham, Alabama; Nashville, Tennessee; and New Orleans, Louisiana. According
to NDS, the projected median household growth in the counties currently served
by the region's systems is 6.3% for the period ending 2003, versus the projected
U.S. median household growth of 5.2% for the same period. In addition, the
Southern Region will be responsible for managing an aggregate of 335,000
customers associated with the Helicon, the InterMedia Systems and Rifkin Pending
Acquisitions.
At December 31, 1998, approximately 40% of the Southern Region's customers
were served by cable systems with at least 550 MHz bandwidth capacity. The
planned upgrade of the Southeast Region's cable systems will reduce the number
of headends from 59 to 51 by December 31, 2001. The rebuild program for this
region is anticipated to result in approximately 75% of the region's customer
base being served by December 31, 2001 by cable systems with at least 550 MHz
bandwidth capacity with two-way communication capability.
PLANT AND TECHNOLOGY OVERVIEW. We have engaged in an aggressive program to
upgrade our existing cable plant over the next three years. As such, we intend
to invest approximately $1.8 billion through December 31, 2001, with
approximately one-half of that amount used to rebuild and upgrade our existing
cable plant. The remaining capital will be spent on plant extensions, new
services, converters and system maintenance.
The following table describes the current technological state of our
systems and the anticipated progress of planned upgrades through 2001, based on
the percentage of our customers who will have access to the bandwidth and other
features shown:
LESS THAN 750 MHZ OR TWO-WAY
550 MHZ 550 MHZ GREATER CAPABILITY
--------- ------- ---------- ----------
December 31, 1998................. 44.8% 15.2% 40.0% 37.0%
December 31, 1999................. 23.9% 20.1% 56.0% 65.2%
December 31, 2000................. 12.9% 22.2% 64.9% 81.4%
December 31, 2001................. 7.7% 21.5% 70.8% 91.8%
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We have adopted the hybrid fiber optic/coaxial ("HFC") architecture as the
standard for our ongoing systems upgrades. In most systems, we deploy fiber
optic cable to individual nodes, serving an average of 800 homes or commercial
buildings, and coaxial cable from each node to individual homes or buildings. We
believe that this network design provides high capacity and superior signal
quality and will enable us to provide the newest forms of telecommunications
services to our customers. The primary advantages of HFC architecture over
traditional coaxial cable networks include:
- increased channel capacity of cable systems;
- reduced number of amplifiers in cascade from the headend to the home,
resulting in improved signal quality and reliability;
- reduced number of homes per node, improving the capacity of the network
to provide high-speed Internet service and reducing the number of
households affected by disruptions in the network; and
- sufficient dedicated bandwidth for two-way services, thereby avoiding
reverse signal interference problems.
The HFC architecture will enable us to offer new and enhanced services,
including additional channels and tiers, expanded pay-per-view options,
high-speed Internet access, wide area network and point-to-point data services
and digital advertising insertion. The upgrades will facilitate our new services
in two primary ways:
- Greater bandwidth allows us to send more information through our systems.
This provides us with the "space" to provide new services in addition to
our current services. As a result, we will be able to roll out digital
cable programming in addition to existing analog channels offered to
customers who do not wish to subscribe to a package of digital services.
- Enhanced design configured for two-way communication with the customer
allows us to provide cable Internet services without telephone support
and other interactive services such as an interactive program guide,
impulse pay-per-view, video-on-demand and Wink that cannot be offered
without upgrading the bandwidth capacity of our systems.
This architecture will also position us to offer cable telephony services
in the future, using either IP technology or switch-based technology.
PRODUCTS AND SERVICES
We offer our customers a full array of traditional cable television
services and programming and have begun to offer new and advanced high bandwidth
services such as high-speed Internet access. We plan to continually enhance and
upgrade these services, including adding new programming and other
telecommunications services, and will continue to position cable television as
an essential service.
TRADITIONAL CABLE TELEVISION SERVICES. Approximately 86% of our customers
subscribe to both "basic" and "expanded basic" service and generally, receive a
line-up of between 33 to 85 channels of television programming, depending on the
bandwidth capacity of the system. Customers who pay a premium to the basic rate
are provided additional channels, either individually or in packages of several
channels, as add-ons to the basic channels. About 28% of our customers subscribe
for premium channels, with additional customers subscribing for other special
add-on packages. We tailor both our basic line-up and our
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additional channel offerings to each system in response to demographics,
programming preferences, competition, price sensitivity and local regulation.
Our traditional cable television service offerings include the following:
- BASIC CABLE. All of our customers receive basic cable services, which
generally consist of local broadcast television, local community
programming (including governmental and public access) and limited
satellite programming. As of December 31, 1998, the average monthly fee
was $10.86 for basic service.
- EXPANDED BASIC CABLE. This expanded tier includes a group of
satellite-delivered or non-broadcast channels, such as Entertainment and
Sports Programming Network ("ESPN"), Cable News Network ("CNN") and
Lifetime Television ("Lifetime"). As of December 31, 1998, the average
monthly fee was $18.57 for expanded basic service.
- PREMIUM CHANNELS. These channels provide unedited, commercial-free
movies, sports and other special event entertainment programming. Home
Box Office ("HBO"), Cinemax and Showtime are typical examples. We offer
subscriptions to these channels either individually or in premium channel
packages. As of December 31, 1998, the average monthly fee was $7.23 per
premium subscription.
- PAY-PER-VIEW. These channels allow customers to pay to view a single
showing of a recently released movie, a one-time special sporting event
or music concerts on an unedited, commercial-free basis. We currently
charge a fee that ranges from $3 to $9 for movies. For special events,
such as championship boxing matches, we have charged a fee of up to
$49.99.
We have employed a variety of targeted marketing techniques to attract new
customers by focusing on delivering value, choice, convenience and quality. We
employ direct mail and telemarketing utilizing demographic "cluster codes" to
target specific messages to target audiences. In many of our systems, we offer
discounts to customers who purchase premium services on a limited trial basis in
order to encourage a higher level of service subscription. We also have a
coordinated strategy for retaining customers that includes televised retention
advertising to reinforce the decision to subscribe and to encourage customers to
purchase higher service levels.
NEW PRODUCTS AND TECHNOLOGIES. A variety of emerging technologies and the
rapid growth of Internet usage have presented us with substantial opportunities
to provide new or expanded products and services to our customers and to expand
our sources of revenue. The desire for such new technologies and the use of the
Internet by businesses in particular have triggered a significant increase in
our commercial market penetration. As a result, we are in the process of
introducing a variety of new or expanded services beyond the traditional
offerings of analog television programming for the benefit of both our
residential and commercial customers. These new products include digital
television and its related enhancements, high-speed Internet access (through
television set-top converter boxes, cable modems installed in PCs and
traditional telephone Internet access), interactive services (such as Wink), and
IP telephony and data transmission services. We believe that we are well
positioned to compete with other providers of these services due to the high
bandwidth of cable technology and our ability to access homes and businesses.
DIGITAL TELEVISION. As part of upgrading our systems, we are installing
headend equipment capable of delivering digitally encoded cable transmissions
with a two-way digital-capable set-top converter box in the customer's home.
This digital connection offers
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significant advantages. For example, we can compress the digital signal to allow
the transmission of up to twelve digital channels in the bandwidth normally used
by one analog channel. This will allow us to increase both programming and
service offerings, including near video-on-demand for pay-per-view customers
which is expected to increase the amount of services purchased by our customers.
Digital services customers may receive a mix of additional television
programming, an electronic program guide and up to 40 channels of digital music.
The additional programming falls into four categories which are targeted towards
specific markets:
- Additional basic channels, which are marketed in systems primarily
serving rural communities;
- Additional premium channels, which are marketed in systems serving both
rural and urban communities;
- "Multiplexes" of premium channels to which a customer previously
subscribed (such as multiple channels of HBO or Showtime), which are
marketed in systems serving both rural and urban communities; and
- Additional pay-per-view programming (for instance, more pay-per-view
options and/or frequent showings of the most popular films to provide
near video-on-demand), which are more heavily marketed in systems
primarily serving both rural and urban communities.
As part of our current pricing strategy for digital services, we have
established a retail rate of $6.95 to $8.95 per month for the digital set-top
converter and the delivery of "multiplexes" of premium services, additional
pay-per-view channels, digital music and an electronic programming guide.
Certain of our systems also offer additional basic and expanded basic tiers of
service. These tiers of services retail for $6.95 per month. At March 31, 1999,
we had in excess of 3,000 customers subscribing to digital services offered by
eight of our cable systems, which serve approximately 318,000 basic cable
customers. By December 31, 1999, we anticipate that approximately 734,000 of our
customers will be served by cable systems capable of delivering digital
services.
INTERNET ACCESS. We currently provide Internet access to our customers by
two principal means:
(i) through television access, using a service such as WorldGate, and
(ii) through cable modems attached to PCs, either directly or through an
outsourcing contract with an Internet service provider.
We can also provide Internet access through traditional dial-up telephone
modems, using a service provider such as HSAC. The principal advantage of cable
Internet connections is the high speed of data transfer over a cable system. We
currently offer these services to our residential customers over coaxial cable
at speeds that can range up to approximately 50 times the speed of a
conventional 28.8 Kbps telephone modem. Furthermore, a two-way communication HFC
cable system can support the entire connection at cable speeds without any need
for a separate telephone line. If the cable system only supports one-way signals
(from the headend to the customer), the customer must use a separate telephone
line to send signals to the provider, although such customer still receives the
benefit of high speed cable access when downloading information, which is the
primary reason for using cable as an Internet connection. In addition to
Internet access over our traditional coaxial system, we also provide our
commercial customers fiber
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optic cable access cable at a price that we believe is generally 20% lower than
the price offered by the telephone companies.
In the past, cable Internet connections have provided customers with widely
varying access speeds because each customer accessed the Internet by sending and
receiving data through a "node." A node is a single connection to a cable
system's main, high-capacity fiber-optic cable that is shared by a number of
customers. Users connecting simultaneously through a single node share the
bandwidth of that node, so that a user's connection speed may diminish as
additional users connect through the same node. To induce users to switch to our
Internet services, however, we guarantee our cable modem customers the minimum
access speed selected from several speed options we offer. We also provide
higher guaranteed access speeds for customers willing to pay an additional cost.
In order to meet these guarantees, we are increasing the bandwidth of our system
and "splitting" nodes easily and cost-effectively to reduce the number of
customers per node.
As of February 1999, we provided Internet access service to approximately
9,300 homes and 130 businesses. The following table indicates the historical and
projected availability of Internet access services to our existing customer base
as of the dates indicated.
BASIC CUSTOMERS WITH
ADVANCED SERVICES
AVAILABLE AS OF
DECEMBER 31,
--------------------
1998 1999
------- ---------
High-Speed Internet Access via Cable Modems:
EarthLink/Charter Pipeline.............................. 413,000 740,000
HSAC.................................................... 15,000 640,000
@Home................................................... 131,000 154,000
------- ---------
Total Cable Modems................................... 559,000 1,534,000
======= =========
Internet Access via WorldGate............................. 230,000 854,000
------- ---------
- CABLE MODEM-BASED INTERNET ACCESS. A "cable modem" is a peripheral
device attached to a PC that allows the user to send and receive data over a
cable system. Generally, we offer Internet access through cable modems to our
customers in systems that have been upgraded to at least 550 MHz bandwidth
capacity.
We have an agreement with EarthLink, one of the world's largest independent
Internet service providers, to provide as a private label service Charter
Pipeline(TM), a cable modem-based, high-speed Internet access service. We
currently charge a monthly usage fee of between $29.95 and $34.95. Our customers
have the option to lease a cable modem for $10 to $15 a month or to purchase a
modem for between $300 and $400. We currently offer Charter Pipeline(TM) and
other Internet access services in Lanett, Alabama; Los Angeles and Riverside,
California; Newtown, Connecticut; Newnan, Georgia; St. Louis, Missouri; Fort
Worth, Texas; and Eau Claire, Wisconsin. At March 31, 1999, we offered EarthLink
Internet access to approximately 421,000 of our homes passed and have
approximately 5,300 customers.
We have a relationship with HSAC to offer Internet access in some of our
smaller systems. HSAC also provides Internet access services to our customers
under the "Charter Pipeline" brand name. Although the Internet access service is
provided by HSAC, the
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Internet "domain name" of our customer's e-mail address and web site, if any, is
"Charter.net," allowing the customer to switch or expand to our other Internet
services without a change of e-mail address. HSAC bears all capital and
marketing costs of providing the service, and seeks to build economies of scale
in our smaller systems that we cannot efficiently build ourselves by
simultaneously contracting to provide the same services to other small
geographically contiguous systems. As of March 31, 1999, HSAC offers Internet
access to approximately 225,000 of our homes passed and approximately 3,000
customers have signed up for the service. During 1999, HSAC plans to launch this
service in an additional 29 systems, covering approximately 415,000 additional
homes passed. HSAC provides turnkey service which covers all capital, operating
and marketing costs. Charter receives 50% of the monthly $39.95 service fee.
Vulcan Ventures, Inc., a company controlled by Paul G. Allen, has an equity
investment in HSAC.
We also have a revenue sharing agreement with @Home, under which @Home
currently provides Internet service to customers in our systems serving Fort
Worth, University Park and Highland Park, Texas. The @Home network provides
high-speed, cable modem-based Internet access using the cable infrastructure. As
of March 31, 1999, we offered @Home Internet service to approximately 140,000 of
our homes passed and have approximately 2,000 customers.
As of March 31, 1999 we provided Internet access to approximately 100
commercial customers. We actively market our cable modem service to businesses
in every one of our systems where we have the capability to offer such service.
Our marketing efforts are often door-to-door, and we have established a separate
division whose function is to make businesses aware that this type of Internet
access is available through us. We also provide several virtual LANs established
for municipal and educational facilities including Cal Tech, the City of
Pasadena and the City of West Covina in our Los Angeles cluster.
- TV-BASED INTERNET ACCESS THROUGH WORLDGATE. We have a non-exclusive
agreement with WorldGate to provide its TV-based e-mail and Internet access to
our cable customers. WorldGate's technology is only available to cable systems
with two-way capability. WorldGate offers easy, low-cost Internet access to
customers at connection speeds ranging up to 128 Kbps. For a monthly fee, we
provide our customers e-mail and Internet access without using a PC, obtaining
an additional telephone line (or tying up an existing line), or purchasing any
additional equipment. Instead, the customer accesses the Internet through the
set-top box which the customer already has on his television set) and a wireless
keyboard (provided with the service) which interfaces with the box. WorldGate
works on both advanced analog and digital platforms and, therefore, can be
installed utilizing the analog converters already deployed. In contrast, other
converter-based, non-PC Internet access products require a digital platform and
a digital converter prior to installation.
Subscribers who opt for television-based Internet access are generally
first-time users who prefer this more user-friendly interface. Of these users,
41% use WorldGate at least once a day, and 76% use it at least once a week.
Although the WorldGate service bears the WorldGate brand name, the Internet
"domain name" of the subscribers who use this service is "Charter.net." This
allows the customer to switch or expand to our other Internet services without a
change of e-mail address.
We first offered WorldGate to subscribers on the upgraded portion of our
systems in St. Louis in April, 1998. We are also currently offering this service
in our systems in Maryville, Illinois and Newtown, Connecticut, and plan to
introduce it in eight additional systems by December 31, 1999. CCI owns a
minority interest in WorldGate, an
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independent company founded by Hal Krisberg (former President of General
Instrument) with headquarters in Bensalem, Pennsylvania. See "Certain
Relationships and Related Transactions." At March 31, 1999, we provided
WorldGate Internet service to approximately 1,800 customers.
WINK-ENHANCED PROGRAMMING. We have formed a relationship with Wink, which
sells technology to embed interactive features (such as additional information
and statistics about a program or the option to order an advertised product)
into programming and advertisements. A customer with a Wink-enabled set-top box
and a Wink-enabled cable provider sees an icon flash on the screen when
additional Wink features are available to enhance a program or advertisement. By
pressing the select button on a standard remote control, a viewer of a
Wink-enhanced program is able to access additional information regarding such
program, including, for example, information on prior episodes or the program's
characters. A viewer watching an advertisement would be able to access
additional information regarding the advertised product and may also be able to
utilize the two-way transmission features to order a product. We have bundled
Wink service with our traditional cable services in both our advanced analog and
digital platforms. Wink services are provided free of charge. A company
controlled by Paul G. Allen has made an equity investment in Wink. See "Certain
Relationships and Related Transactions."
Various programming networks, including CNN, NBC, ESPN, HBO, Showtime,
Lifetime, VH1, the Weather Channel, and Nickelodeon, are currently producing
over 1,000 hours of Wink-enhanced programming per week. Under certain
revenue-sharing arrangements, we will modify our headend technology to allow
Wink-enabled programming to be offered on our systems. Each time one of our
customers uses Wink to request certain additional information or order an
advertised product we receive fees from Wink.
TELEPHONE SERVICES. We expect to be able to offer cable telephony services
in the near future using our systems' direct, two-way connections to homes and
other buildings. We are exploring technologies using IP telephony, as opposed to
the traditional switching technologies that are currently available, to transmit
digital voice signals over our systems. AT&T and other telephone companies have
already begun to pursue strategic partnering and other programs which make it
attractive for us to acquire and develop this alternative IP technology. For the
last two years, we have sold telephony services as a competitive access provider
("CAP") in the state of Wisconsin through Marcus FiberLink LLC, and are
currently looking to expand our CAP services into other states.
MISCELLANEOUS SERVICES. We also offer paging services to our customers in
certain markets. As of March 31, 1999, we had approximately 9,300 paging
customers. We also lease our fiber-optic cable plant and equipment to commercial
and non-commercial users of data and voice telecommunications services.
CUSTOMER SERVICE AND COMMUNITY RELATIONS
Providing a high level of service to our customers has been a central
driver of our historical success. Our emphasis on system reliability,
engineering support and superior customer satisfaction is key to our management
philosophy. In support of our commitment to customer satisfaction, we operate a
24-hour customer service hotline in most systems and offer on-time installation
and service guarantees. It is our policy that if an installer is late for a
scheduled appointment the customer receives free installation, and if a service
technician is late for a service call the customer receives a $20 credit. The
Charter Companies' on-time service call rate was 99.8% in 1997, and 99.7% in
1998.
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We currently maintain eight call centers located in our seven regions. They
are staffed with dedicated personnel who provide service to our customers 24
hours a day, seven days a week. We believe operating regional call centers
allows us to provide "localized" service, which also reduces overhead costs and
improves customer service. We have invested significantly in both personnel and
in equipment to ensure that these call centers are professionally managed and
employ state-of-the-art technology. Where appropriate, we establish and operate
major call centers which today handle customer call volume for more than 58% of
our customers. We also maintain approximately 143 field offices, and employ
approximately 1,200 customer service representatives throughout the systems. Our
customer service representatives receive extensive training to develop customer
contact skills and product knowledge critical to successful sales and high rates
of customer retention. We have approximately 2,300 technical employees who are
encouraged to enroll in courses and attend regularly scheduled on-site seminars
conducted by equipment manufacturers to keep pace with the latest technological
developments in the cable television industry. We utilize surveys, focus groups
and other research tools as part of our efforts to determine and respond to
customer needs. We believe that all of this improves the overall quality of our
services and the reliability of our systems, resulting in fewer service calls
from customers.
We are also committed to fostering strong community relations in the towns
and cities our systems serve. We support many local charities and community
causes in various ways, including marketing promotions to raise money and
supplies for persons in need and in-kind donations that include production
services and free air-time on major cable networks. Recent charity affiliations
include campaigns for "Toys for Tots," United Way, local theatre, children's
museums, local food banks and volunteer fire and ambulance corps. We also
participate in the "Cable in the Classroom" program, whereby cable television
companies throughout the United States provide schools with free cable
television service. In addition, we install and provide free basic cable service
to public schools, government buildings and non-profit hospitals in many of the
communities in which we operate. We also provide free cable modems and
high-speed Internet access to schools and public libraries in our Franchise
areas. We place a special emphasis on education, and regularly award
scholarships to employees who intend to pursue courses of study in the
communications field.
SALES AND MARKETING
PERSONNEL RESOURCES. We have a centralized team responsible for
coordinating the marketing efforts of our individual systems. For most of our
systems with over 30,000 customers we have a dedicated marketing manager, while
smaller systems are handled regionally. We believe our success in marketing
comes from new and innovative ideas, and good interaction between our corporate
office, which handles programs and administration, and our field offices, which
implement the various programs. We are also continually monitoring the
regulatory arena, customer perception, competition, pricing and product
preferences to increase our responsiveness to our customer base. Our customer
service representatives are given the incentive to use their daily contacts with
customers as opportunities to sell our new service offerings.
TARGET MARKETING. We have an innovative marketing program. We utilize
market research on selected systems, compare the data to national research and
tailor a marketing program for each individual market. We gather detailed
customer information through our regional marketing representatives and use the
Claritas geodemographic data program and consulting services to create unique
packages of services and marketing programs. These
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marketing efforts and the follow-up analysis provide consumer information down
to the city block or suburban subdivision level, which allows us to create very
targeted marketing programs. We seek to maximize our revenue per customer
through the use of "tiered" packaging strategies to market premium services and
to develop and promote niche programming services. We regularly use targeted
direct mail campaigns to sell these tiers and services to our existing customer
base. We are developing an in-depth profile database that goes beyond existing
and former customers to include all homes passed. This database information is
expected to improve our targeted direct marketing efforts, bringing us closer
toward our objective of increasing total customers as well as sales per customer
for both new and existing customers. For example, using customer profile data
currently available, we are able to identify those customers that have children
under a specified age who do not currently subscribe to The Disney Channel,
which then enables us to target our marketing efforts with respect to The Disney
Channel to specific addresses. In 1997, we were chosen by Claritas Corporation,
sponsor of a national marketing competition across all industries, as the first
place winner for our national segmenting and targeted marketing program.
Our marketing professionals have also received numerous industry awards
within the last two years, including the Cable and Telecommunication Association
of Marketers' awards for consumer research and best advertising and marketing
programs.
In 1998, the Charter Companies introduced the MVP Package of premium
services. Customers receive a substantial discount on bundled premium services
of HBO, Showtime, Cinemax and The Movie Channel. The Charter Companies were able
to negotiate favorable terms with premium networks, which allowed minimal impact
on margins and provided substantial volume incentives to grow the premium
category. The MPV package has increased premium household penetration, premium
revenue and cash flow. As a result of this package, HBO recognized the Charter
Companies as a top performing customer. We are currently introducing this same
premium strategy in the Marcus Systems.
We expect to continue to invest significant amounts of time, effort and
financial resources in the marketing and promotion of new and existing services.
To increase customer penetration and increase the level of services used by our
customers, we utilize a coordinated array of marketing techniques, including
door-to-door solicitation, telemarketing, media advertising and direct mail
solicitation. We believe we have one of the cable television industry's highest
success rates in attracting customers who have never before subscribed to cable
television. Historically, "nevers" are the most difficult customer to attract.
Based on data gathered at cable television conferences, we believe our
telemarketing force succeeded in persuading five times as many "nevers" to
become customers to our cable service compared to the industry average in 1997,
and five times as many "nevers" in 1998. Furthermore, we have succeeded in
retaining these "nevers."
PROGRAMMING SUPPLY
GENERAL. We believe that offering a wide variety of conveniently scheduled
programming is an important factor influencing a customer's decision to
subscribe to and retain our cable services. We devote considerable resources to
obtaining access to a wide range of programming that we believe will appeal to
both existing and potential customers of basic and premium services. We rely on
extensive market research, customer demographics and local programming
preferences to determine channel offerings in each of our markets. See "-- Sales
and Marketing."
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PROGRAMMING SOURCES. We obtain basic and premium programming from a number
of suppliers, usually pursuant to a written contract. Programming tends to be
made available to us for a flat fee per customer. However, some channels are
available without cost to us and for new channel launches, we may receive a fee
for distribution. For home shopping channels, we may receive a percentage fee
for home shopping revenues from our customers. Our programming contracts
generally continue for a fixed period of time, generally from three to ten
years. Although longer contract terms are available, we prefer to limit
contracts to three years so that we retain flexibility to change programming and
include some of the new channels regularly being developed. Some program
suppliers offer marketing support or volume discount pricing structures. Some of
our programming agreements with premium service suppliers offer cost incentives
under which premium service unit prices decline as certain premium service
growth thresholds are met.
PROGRAMMING COSTS. Our cable programming costs have increased in recent
years and are expected to continue to increase due to system acquisitions,
additional programming being provided to customers, increased cost to produce or
purchase cable programming, inflationary increases and other factors affecting
the cable television industry generally. In every year we have operated, our
costs to acquire programming have exceeded customary inflationary and
cost-of-living type increases. A significant factor with respect to increased
programming costs is the rate increases and surcharges imposed by national and
regional sports networks directly tied to escalating costs to acquire
programming for professional sports packages in a competitive market. Under FCC
rate regulation, cable operators may increase their rates to customers to cover
increased costs for programming, subject to certain limitations. See "Regulation
and Legislation." In October 1995, the Charter Companies and in April, 1996, the
Marcus Companies joined the TeleSynergy programming purchasing cooperative which
offers its members contract benefits in buying programming by virtue of volume
discounts available to a larger buying base. We now contract through TeleSynergy
for more than 50% of our programming. Management believes its membership in
TeleSynergy limits increases in the Company's programming costs relative to what
the increases would otherwise be, although given our increased size and
purchasing ability following the Marcus Combination, the effect may not be
material. Management also believes it will, as a general matter, be able to pass
increases in its programming costs through to customers, although there can be
no assurance that it will be possible.
RATES
Pursuant to the FCC's rules, we have set rates for cable-related equipment
(e.g., converter boxes and remote control devices) and installation services
based upon actual costs plus a reasonable profit and have unbundled these
charges from the charges for the provision of cable service.
Rates charged to customers vary based on the market served and service
selected. As of December 31, 1998, the average monthly fee was $10.86 for basic
service and $18.57 for expanded basic service. A one-time installation fee,
which may be waived in part during certain promotional periods, is charged to
new customers. We believe our rate practices are in accordance with FCC
Guidelines and are consistent with those prevailing in the industry generally.
See "Regulation and Legislation."
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THEFT PROTECTION
The unauthorized tapping of cable plant and the unauthorized receipt of
programming using cable converters purchased through unauthorized sources are
problems which continue to challenge the entire cable industry. We have adopted
specific measures to combat the unauthorized use of our plant to receive
programming. For instance, in several of our regions, we have instituted a
"perpetual audit" whereby each technician is required to check at least four
other nearby residences during each service call to determine if there are any
obvious signs of piracy, namely, a drop line leading from the main cable line
into other homes. Addresses where the technician observes drop lines are then
checked against our customer billing records. If the address is not found in the
billing records, a sales representative calls on the unauthorized user to
correct the "billing discrepancy" and persuade the user to become a formal
customer. In our experience, approximately 25% of unauthorized users who are
solicited in this fashion become customers. Billing records are then closely
monitored to guard against these new customers reverting to their status as
unauthorized users. Unauthorized users who do not convert are promptly
disconnected and, in certain instances, flagrant violators are referred for
prosecution. In addition, we have prosecuted individuals who have sold cable
converters programmed to receive our signals without proper authorization.
FRANCHISES
As of December 31, 1998, our systems operated pursuant to an aggregate of
1,161 franchises, permits and similar authorizations issued by local and state
governmental authorities. Each franchise is awarded by a governmental authority
and is usually not transferable unless the granting governmental authority
consents. Most franchises are subject to termination proceedings in the event of
a material breach. In addition, most franchises require us to pay the granting
authority a franchise fee of up to 5.0% of gross revenues generated by cable
television services under the franchise (i.e., the maximum amount that may be
charged under the Communications Act).
Our franchises have terms which range from 4 to more than 32 years. Prior
to the scheduled expiration of most franchises, we initiate renewal proceedings
with the granting authorities. This process usually takes three years but can
take a longer period of time and often involves substantial expense. The
Communications Act provides for an orderly franchise renewal process in which
granting authorities may not unreasonably withhold renewals. If a renewal is
withheld and the granting authority takes over operation of the affected cable
system or awards it to another party, the granting authority must pay the
existing cable operator the "fair market value" of the system. The
Communications Act also established comprehensive renewal procedures requiring
that an incumbent franchisee's renewal application be evaluated on its own merit
and not as part of a comparative process with competing applications. In
connection with the franchise renewal process, many governmental authorities
require the cable operator make certain commitments, such as technological
upgrades to the system, which may require substantial capital expenditures.
There can be no assurance, however, that any particular franchise will be
renewed or that it can be renewed on commercially favorable terms. Our failure
to obtain renewals of the franchises, especially those in major metropolitan
areas where we have the most customers, would have a material adverse effect on
our business, results of operations and financial condition. See "Risk
Factors--Risks Associated with Regulation of the Cable
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Industry." The following table summarizes our systems' franchises by year of
expiration, and approximate number of basic customers as of December 31, 1998.
PERCENTAGE PERCENTAGE
NUMBER OF OF TOTAL TOTAL BASIC OF TOTAL
YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES CUSTOMERS CUSTOMERS
- ---------------------------- ---------- ---------- ----------- ----------
Prior to December 31, 1999...... 128 11.0% 321,000 13.9%
2000 to 2002.................... 217 18.7% 504,000 21.7%
2003 to 2005.................... 239 20.6% 447,000 19.3%
2006 or after................... 577 49.7% 1,045,000 45.1%
Total...................... 1,161 100.0% 2,317,000 100.0%
Under the 1996 Telecom Act, cable operators are not required to obtain
franchises in order to provide telecommunications services, and granting
authorities are prohibited from limiting, restricting or conditioning the
provision of such services. In addition, granting authorities may not require a
cable operator to provide telecommunications services or facilities, other than
institutional networks, as a condition of an initial franchise grant, a
franchise renewal, or a franchise transfer. The 1996 Telecom Act also limits
franchise fees to an operator's cable-related revenues and clarifies that they
do not apply to revenues that a cable operator derives from providing new
telecommunications services.
We believe our relations with the franchising authorities under which our
systems are operated are generally good. Substantially all of the material
franchises relating to our systems eligible for renewal have been renewed or
extended at or prior to their stated expiration dates.
COMPETITION
Cable television systems compete with other providers of television signals
and other sources of home entertainment. The competitive environment has been
significantly affected both by technological developments and regulatory changes
enacted in The Telecommunications Act of 1996 (the "1996 Telecom Act") which
were designed to enhance competition in the cable television and local telephone
markets. See "Regulation and Legislation."
To date, we believe that we have not lost a significant number of
customers, nor a significant amount of revenue, to our competitors' systems.
However, competition from these technologies may have a negative impact on our
cable television business in the future. As we expand our offerings to include
telecommunications services, we will be subject to competition from other
telecommunications providers. The telecommunications industry is highly
competitive and includes competitors with greater financial and personnel
resources, who have brand name recognition and long-standing relationships with
regulatory authorities. Moreover, mergers, joint ventures and alliances among
franchise, wireless or private cable television operators, Regional Bell
Operating Companies ("RBOCs") and others may result in providers capable of
offering cable television and telecommunications services in direct competition
with us. See "Risk Factors -- Competition in the Cable Industry."
For example, the possibility of delivering video programming via the
Internet is only now developing. Although Internet "video streaming" poses new
potential competition to cable systems, the possibility of cable systems
themselves becoming providers of Internet (and telecommunications) services
represents a large potential growth area for the
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established cable television industry. Advances in communications technology as
well as changes in the marketplace and the regulatory and legislative
environments are constantly occurring. Thus, it is not possible to predict the
effect that ongoing or future developments might have on the cable television
industry or our operations.
Key competitors today include:
- BROADCAST TELEVISION. Cable television has long competed with broadcast
television, which consists of television signals that the viewer is able to
receive without charge using a traditional "off-air" antenna. The extent of such
competition is dependent upon the quality and quantity of broadcast signals
available through "off-air" reception compared to the services provided by the
local cable system. Accordingly, cable operators in rural areas, where "off-air"
reception is more limited, generally achieve higher penetration rates than do
operators in most major metropolitan areas, where numerous, high quality
"off-air" signals are available. The 1996 Telecom Act directed the FCC to
establish, and the FCC has adopted, regulations and policies for the issuance of
licenses for digital television ("DTV") to incumbent television broadcast
licensees. DTV is expected to deliver high definition television pictures and
multiple digital-quality program streams, as well as advanced digital services
such as subscription video.
- DBS. Direct broadcast satellite ("DBS") has emerged as significant
competition to cable systems. The DBS industry has grown rapidly over the last
several years, and now serves approximately 10 million subscribers nationwide.
DBS service allows the subscriber to receive video services directly via
satellite using a relatively small dish antenna. Moreover, video compression
technology allows DBS providers to offer more than 100 digital channels, thereby
surpassing the typical cable system. DBS providers offer most of the same
programming as cable television, but also offer certain sports packages not
available through cable systems and a wide array of pay-per-view movies. DBS
currently faces technical and legal obstacles to providing popular local
broadcast signals, although at least one DBS provider is now attempting to
provide this programming in certain major markets, and Congress and the FCC are
considering proposals that would remove existing legal obstacles. DirecTV, Inc.
("DirecTV"), United States Satellite Broadcasting Corporation, Inc. ("USSB") and
EchoStar Communications Corporation currently offer DBS programming. In
addition, there are several companies licensed to operate a DBS system who have
yet to begin service. PrimeStar, Inc. ("PrimeStar") offers a medium-powered
fixed satellite service that shares many of the attributes of DBS operators.
Additionally, several DBS companies have recently completed mergers which should
strengthen their position, including the combination of DirecTV, USSB and
PrimeStar. DirecTV estimates that such combination will result in its DBS
business serving more than seven million subscribers with more than 370
entertainment channels. Others may announce intentions to enter the DBS market
and may offer DBS services within our service areas.
- TRADITIONAL OVERBUILDS. Cable television systems are operated under
non-exclusive franchises granted by local authorities. More than one cable
system may legally be built in the same area. Although still relatively
uncommon, it is possible that a franchising authority might grant a second
franchise to another cable operator and that franchise might contain terms and
conditions more favorable than those afforded us. Well financed businesses from
outside the cable industry (such as the public utilities) may over time become
competitors. There has been a recent increase in the number of cities that have
constructed their own cable systems, in a manner similar to city-provided
utility services. Although the total number of municipal overbuild cable systems
remains small, the
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potential profitability of a cable system is adversely affected if the local
subscriber base is divided among multiple cable systems. Additionally,
constructing a competing cable system is a capital intensive process which
involves a high degree of risk. We believe that in order to be successful, a
competitor's overbuild would need to be able to serve the homes and businesses
in the overbuilt area on a more cost-effective basis than us. Any such overbuild
operation would require either significant access to capital or access to
facilities already in place that are capable of delivering cable television
programming.
We are aware of overbuild situations in six of our systems located in
Newnan, Columbus and West Point, Georgia; Barron, Wisconsin; and Lanett and
Valley, Alabama. Approximately 44,000 basic customers (approximately 1.9% of our
total basic customers) are passed by these overbuilds. Additionally, we have
been notified that franchises have been awarded, and present potential overbuild
situations, in four of our systems located in Southlake, Roanoke and Keller,
Texas and Willimantic, Connecticut. These potential overbuild areas service an
aggregate of approximately 45,000 basic customers or approximately 2% of our
total basic customers. In response to such overbuilds, these systems have been
designated priorities for the upgrade of cable plant and the launch of new and
enhanced services. We have upgraded each of these systems to at least 750 MHz
two-way HFC architecture, with the exceptions of our systems in Columbus,
Georgia, and Willimantic, Connecticut. Upgrades to at least 750 MHz two-way HFC
architecture with respect to these two systems are expected to be completed by
December 31, 2000 and December 31, 2001, respectively.
- TELEPHONE COMPANIES. Federal cross-ownership restrictions historically
limited entry by local telephone companies into the cable television business.
The 1996 Telecom Act modified this cross-ownership restriction, making it
possible for local exchange carriers ("LECs") who have considerable resources to
provide a wide variety of video services competitive with services offered by
cable systems. Several telephone companies have obtained or are seeking cable
television franchises from local governmental authorities and are constructing
cable systems. SNET PersonalVision, Inc. ("SNET") has a cable television
franchise to offer cable service in the entire state of Connecticut and has
begun offering cable television service in certain communities.
Cross-subsidization by LECs of video and telephony services poses a strategic
advantage over cable operators seeking to compete with LECs that provide video
services. In addition, LECs provide facilities for the transmission and
distribution of voice and data services (including Internet access) in
competition with our existing or potential interactive services ventures and
businesses, including Internet service, as well as data and other non-video
services. We cannot predict the likelihood of success of the broadband services
offered by our competitors or the impact on us of such competitive ventures. See
"Regulation and Legislation -- Telephone Company Entry Into Cable Television."
The entry of telephone companies as direct competitors in the video marketplace,
however, is likely to become more widespread and could adversely affect the
profitability and valuation of the systems.
- SMATV. Additional competition is posed by satellite master antenna
television ("SMATV") systems serving multiple dwelling units ("MDUs") such as
condominiums, apartment complexes, and private residential communities. These
private cable systems may enter into exclusive agreements with such MDUs, which
may preclude operators of franchise systems from serving residents of such
private complexes, although certain states mandate that franchised cable
operators have access to MDUs. Due to the widespread availability of satellite
earth stations, such private cable systems can offer both improved reception of
local television stations and many of the same satellite-delivered program
services which are offered by cable systems. SMATV systems currently benefit
from
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operating advantages not available to franchised cable systems, including fewer
regulatory burdens and no requirement to service low density or economically
depressed communities. It is possible that, as a result of the expansion under
the 1996 Telecom Act of the scope of entities which are exempt from regulation
as "cable systems," some SMATV systems previously regulated as "cable systems"
are now exempt from regulation under the Communications Act of 1934 (the
"Communications Act") as well as regulation under the Cable Communications
Policy Act of 1984 (the "1984 Cable Act") and the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and, together with
the 1984 Cable Act, the "Cable Acts"). Exemption from regulation may provide a
competitive advantage to certain of our current and potential competitors.
- WIRELESS DISTRIBUTION. Cable television systems also compete with
wireless program distribution services such as multi-channel multipoint
distribution systems or "wireless cable" ("MMDS"). MMDS uses low-power microwave
frequencies to transmit television programming over-the-air to paying customers.
Wireless distribution services generally provide many of the programming
services provided by cable systems, and digital compression technology is likely
to increase significantly the channel capacity of their systems. However, most
MMDS operators continue to program in analog technology due to the significant
capital cost in upgrading to digital technology, combined with a high disconnect
ratio for this service. Analog MMDS is limited to approximately 33 channels.
Additionally, both analog and digital MMDS services require unobstructed "line
of sight" transmission paths. While no longer as significant a competitor,
analog MMDS has impacted our customer growth in Riverside and Sacramento,
California and Missoula, Montana. Digital MMDS is a more significant competitor,
presenting potential challenges to us in Los Angeles, California and Atlanta,
Georgia.
- OPEN-VIDEO SYSTEMS. The 1996 Telecom Act established the open video
system ("OVS") as a new legal framework for the delivery of video programming.
Under the statute and the FCC's rules, a LEC or other entrant (other than a
cable system operator) may distribute video programming to customers, without
the requirement to obtain a local franchise, although the OVS operator must
provide non-discriminatory access to unaffiliated programmers on a portion of
its channel capacity. The FCC has to date certified several different companies
to provide OVS in various parts of the United States. The Fifth Circuit Court of
Appeals, however, recently invalidated certain of the FCC's OVS rules, including
the FCC's rule preempting local franchise requirements. The Fifth Circuit
decision may be subject to further appeal.
- PUBLIC UTILITY HOLDING COMPANIES. The 1996 Telecom Act also authorizes
registered utility holding companies and their subsidiaries to provide video
programming services, notwithstanding the applicability of the Public Utility
Holding Company Act. Electric utilities have the potential to become significant
competitors in the video marketplace, as many of them already possess fiber
optic and other transmission lines in areas they serve. In the last year,
several utilities have announced, commenced, or moved forward with ventures
involving multichannel video programming distribution. See "Regulation and
Legislation."
PROPERTIES
Our principal physical assets consist of cable television plant and
equipment, including signal receiving, encoding and decoding devices, headend
reception facilities, distribution systems and customer drop equipment for each
of its cable television systems. Our cable television plant and related
equipment are generally attached to utility poles under pole
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rental agreements with local public utilities and telephone companies, and in
certain locations are buried in underground ducts or trenches. The physical
components of our cable television systems require maintenance and periodic
upgrading to keep pace with technological advances. We own or lease real
property for signal reception sites and business offices in many of the
communities served by its systems and for its principal executive offices. We
own most of our service vehicles.
The Company owns the real property housing its regional data center in Town
& Country, Missouri, as well as the regional office for the Northeast Region in
Newtown, Connecticut and additional owned real estate located in Hickory, North
Carolina; Hammond, Louisiana; and West Sacramento and San Luis Obispo,
California. In addition, we lease space for our regional data center located in
Dallas, Texas and additional locations for business offices throughout our
operating regions. Our headend locations are generally located on owned or
leased parcels of land, and we generally own the towers on which our equipment
is located.
All of our properties and assets are subject to liens securing payment of
indebtedness under the existing credit facilities. We believe that our
properties are in good operating condition and are suitable and adequate for our
business operations.
EMPLOYEES
Neither Charter Holdings nor CCHC has any employees. As of December 31,
1998, the Company had approximately 4,700 full-time equivalent employees of
which 250 were represented by the International Brotherhood of Electrical
Workers. We believe we have an excellent relationship with our employees and
have never experienced a work stoppage.
INSURANCE
We have insurance to cover risks incurred in the ordinary course of
business, including general liability, property coverage, business interruption
and workers' compensation insurance in amounts typical of similar operators in
the cable industry and with reputable insurance providers. As is typical in the
cable industry, we do not insure our underground plant. We believe our insurance
coverage is adequate.
LEGAL PROCEEDINGS
We are involved from time to time in routine legal matters incidental to
our business. We believe that the resolution of such matters will not have a
material adverse impact on our financial position or results of operations.
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REGULATION AND LEGISLATION
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state and local
legislation and regulations affecting the cable television industry. Other
existing federal, state and local legislation and regulations currently are the
subject of judicial proceedings, legislative hearings, and administrative
proposals which could change, in varying degrees, the manner in which this
industry operates. Neither the outcome of these proceedings, nor their impact
upon the cable industry or the Company can be predicted at this time.
The operation of a cable system is extensively regulated by the FCC, some
state governments and most local governments. The 1996 Telecom Act has altered
the regulatory structure governing the nation's communications providers. It
removes barriers to competition in both the cable television market and the
local telephone market. Among other things, it also reduces the scope of cable
rate regulation and encourages additional competition in the video programming
industry by allowing local telephone companies to provide video programming in
their own telephone service areas.
The 1996 Telecom Act requires the FCC to undertake a host of implementing
rulemakings. Moreover, Congress and the FCC have frequently revisited the
subject of cable regulation. Future legislative and regulatory changes could
adversely affect the Company's operations, and there have been calls in Congress
and at the FCC to maintain or even tighten cable regulation in the absence of
widespread effective competition.
CABLE RATE REGULATION. The 1992 Cable Act imposed an extensive rate
regulation regime on the cable television industry. Under that regime, all cable
systems are subject to rate regulation, unless they face "effective competition"
in their local franchise area. Federal law now defines "effective competition"
on a community-specific basis as requiring either: (1) low subscriber
penetration (less than 30%) by the incumbent cable operator; (2) appreciable
subscriber penetration (more than 15%) by competing multichannel video providers
("MVPs"); (3) a municipally-affiliated MVP offering service to 50% of the
community; or (4) a competing MVP affiliated with a local telephone company
offering service to the community.
Although the FCC has established the underlying regulatory scheme, local
government units (commonly referred to as local franchising authorities or
"LFAs") are primarily responsible for administering the regulation of the lowest
level of cable -- the basic service tier ("BST"), which typically contains local
broadcast stations and public, educational, and government ("PEG") access
channels. Before an LFA begins BST rate regulation, it must certify to the FCC
that it will follow applicable federal rules. Many LFAs have voluntarily
declined to exercise their authority to regulate BST rates. LFAs also have
primary responsibility for regulating cable equipment rates. Under federal law,
charges for various types of cable equipment must be unbundled from each other
and from monthly charges for programming services.
The FCC itself directly administers rate regulation of any cable
programming service tier ("CPST"), which typically contains satellite-delivered
programming. Under the 1996 Telecom Act, the FCC can regulate CPST rates only if
an LFA first receives at least two rate complaints from local subscribers and
then files a formal complaint with the FCC. When new CPST rate complaints are
filed, the FCC considers only whether the incremental increase is justified and
will not reduce the previously established CPST rate. We currently have 45 rate
complaints relating to approximately 400,000 subscribers pending at the FCC.
Significantly, the FCC's authority to regulate CPST rates expired on March 31,
1999. The FCC has taken the position that it will still adjudicate CPST
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complaints filed after this sunset date (but no later than 180 days after the
last CPST rate increase imposed prior to March 31, 1999), and will strictly
limit its review (and possible refund orders) to the time period predating the
sunset date.
Under the FCC's rate regulations, most cable systems were required to
reduce their BST and CPST rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs, as well as providing some
incentive for expanding channel carriage. The FCC has modified its rate
adjustment regulations to allow for annual rate increases and to minimize
previous problems associated with regulatory lag. Operators also have the
opportunity to bypass this "benchmark" regulatory scheme in favor of traditional
"cost-of-service" regulation in cases where the latter methodology appears
favorable. Premium cable services offered on a per-channel or per-program basis
remain unregulated, as do affirmatively marketed packages consisting entirely of
new programming product. However, federal law requires that the BST be offered
to all cable subscribers and limits the ability of operators to require purchase
of any CPST if a customer seeks to purchase premium services offered on a
per-channel or per-program basis, subject to a technology exception which
sunsets in 2002.
At December 31, 1998, LFAs covering approximately 42% of the systems'
subscribers were certified to regulate basic tier rates. The 1992 Cable Act
permits communities to certify and regulate rates at any time, so that it is
possible that additional localities served by the systems may choose to certify
and regulate rates in the future.
The FCC and Congress have provided various forms of rate relief for smaller
cable systems owned by smaller operators. If requisite eligibility criteria are
satisfied, a cable operator may be allowed to rely on a vastly simplified
cost-of-service rate justification and/or may be allowed to avoid regulation of
CPST rates entirely. Under FCC regulations, cable systems serving 15,000 or
fewer subscribers, which are owned by or affiliated with a cable company serving
in the aggregate no more than 400,0000 subscribers, can submit a simplified
cost-of-service filing under which the regulated rate (including equipment
charges) will be presumed reasonable if it equates to no more than $1.24 per
channel. Eligibility for this relief continues if the small cable system is
subsequently acquired by a larger cable operator, but is lost when and if the
individual system serves in excess of 15,000 subscribers. The 1996 Telecom Act
immediately deregulated the CPST rates of cable systems serving communities with
fewer than 50,000 subscribers, which are owned by or affiliated with entities
serving, in the aggregate, no more than one percent of the nation's cable
customers (approximately 617,000) and having no more than $250 million in annual
revenues.
As noted above, FCC regulation of CPST rates for all systems (regardless of
size) sunset pursuant to the 1996 Telecom Act on March 31, 1999. Certain
legislators, however, have called for new rate regulations if unregulated cost
rates increase dramatically. The 1996 Telecom Act also relaxes existing "uniform
rate" requirements by specifying that uniform rate requirements do not apply
where the operator faces "effective competition," and by exempting bulk
discounts to multiple dwelling units, although complaints about predatory
pricing still may be made to the FCC.
CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Telecom Act provides that no
state or local laws or regulations may prohibit or have the effect of
prohibiting any entity from providing any interstate or intrastate
telecommunications service. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way and
may require reasonable,
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competitively neutral compensation for management of the public rights-of-way
when cable operators provide telecommunications service. The favorable pole
attachment rates afforded cable operators under federal law can be gradually
increased by utility companies owning the poles (beginning in 2001) if the
operator provides telecommunications service, as well as cable service, over its
plant. The FCC recently clarified that a cable operator's favorable pole rates
are not endangered by the provision of Internet access.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Telecom Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. In July 1997, the Eighth
Circuit Court of Appeals vacated certain aspects of the FCC's initial
interconnection order but most of that decision was reversed by the U.S. Supreme
Court in January 1999. The Supreme Court effectively upheld most of the FCC's
interconnection regulations.
INTERNET SERVICE. Although there is at present no significant federal
regulation of cable system delivery of Internet services, and the FCC recently
issued a report to Congress finding no immediate need to impose such regulation,
this situation may change as cable systems expand their broadband delivery of
Internet services. In particular, proposals have been advanced at the FCC and
Congress that would require cable operators to provide access to unaffiliated
Internet service providers and online service providers. Certain Internet
service providers also are attempting to use existing commercial leased access
provisions to gain access to cable system delivery. Finally, some local
franchising authorities are considering the imposition of mandatory Internet
access requirements as part of cable franchise renewals or transfers.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Telecom Act allows
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable cross-ownership ban. LECs, including the Bell
Operating Companies, can now compete with cable operators both inside and
outside their telephone service areas with certain regulatory safeguards.
Because of their resources, LECs could be formidable competitors to traditional
cable operators, and certain LECs have begun offering cable service. As
described above, we are now witnessing the beginning of LEC competition in
certain metropolitan areas.
Various LECs currently are seeking to provide video programming services
within their telephone service areas through a variety of distribution methods,
including both the deployment of broadband wire facilities and the use of
wireless (MMDS) transmission. In Connecticut, the Department of Public Utility
Control ("DPUC") granted SNET a franchise to serve the entire state of
Connecticut. SNET is operational, with approximately 21,000 cable subscribers in
several Connecticut communities, including one in which we provide cable
television service. Pursuant to the terms of SNET's franchise, its services must
pass all homes in Connecticut within eleven years.
Under the 1996 Telecom Act, a LEC (or any other cable competitor) providing
video programming to subscribers through broadband wire should be regulated as a
traditional cable operator (subject to local franchising and federal regulatory
requirements), unless the LEC elects to deploy its broadband plant as an OVS. To
qualify for favorable OVS status, the competitor must reserve two-thirds of the
system's activated channels for unaffiliated entities. The Fifth Circuit Court
of Appeals recently reversed certain of the FCC's OVS rules, including the FCC's
preemption of local franchising. That decision may be subject to further appeal.
It is unclear what effect this ruling will have on the entities pursuing OVS
operation.
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Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibition remains on LEC buyouts
(i.e., any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator buyouts of co-located LEC systems, and joint ventures between
cable operators and LECs in the same market. The 1996 Telecom Act provides a few
limited exceptions to this buyout prohibition, including a carefully
circumscribed "rural exemption." The 1996 Telecom Act also provides the FCC with
the limited authority to grant waivers of the buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The 1996
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services (including cable television)
notwithstanding the Public Utility Holding Company Act. Electric utilities must
establish separate subsidiaries, known as "exempt telecommunications companies"
and must apply to the FCC for operating authority. Like telephone companies,
electric utilities have substantial resources at their disposal, and could be
formidable competitors to traditional cable systems. Several such utilities have
been granted broad authority by the FCC to engage in activities which could
include the provision of video programming.
ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecom Act eliminates
statutory restrictions on broadcast/cable cross-ownership (including broadcast
network/cable restrictions), but leaves in place existing FCC regulations
prohibiting local cross-ownership between co-located television stations and
cable systems.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national video program services. Although the 1992 Cable
Act also precluded any cable operator from serving more than 30% of all U.S.
domestic cable subscribers, this provision has been stayed pending further
judicial review and FCC rulemaking.
MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast
signal carriage requirements that, among other things, allow local commercial
television broadcast stations to elect once every three years between requiring
a cable system to carry the station ("must carry") or negotiating for payments
for granting permission to the cable operator to carry the station
("retransmission consent"). Less popular stations typically elect "must carry,"
and more popular stations (such as those affiliated with a national network)
typically elect "retransmission consent." Must carry requests can dilute the
appeal of a cable system's programming offerings because a cable system with
limited channel capacity may be required to forego carriage of popular channels
in favor of less popular broadcast stations electing must carry. Retransmission
consent demands may require substantial payments or other concessions. Either
option has a potentially adverse effect on the Company's business. The burden
associated with "must carry" may increase substantially if broadcasters proceed
with planned conversion to digital transmission and the FCC determines that
cable systems must carry all analog and digital broadcasts in their entirety. A
rulemaking is now pending at the FCC regarding the imposition of dual digital
and analog must carry.
ACCESS CHANNELS. LFAs can include franchise provisions requiring cable
operators to set aside certain channels for public, educational and governmental
access programming. Federal law also requires cable systems to designate a
portion of their channel capacity (up to 15% in some cases) for commercial
leased access by unaffiliated third parties. The FCC has adopted rules
regulating the terms, conditions and maximum rates a cable operator may charge
for commercial leased access use. We believe that requests for commercial leased
access carriages have been relatively limited.
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ACCESS TO PROGRAMMING. To spur the development of independent cable
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes video programmers affiliated with cable companies from
favoring their affiliated cable operators over competitors and requires such
programmers to sell their programming to other multichannel video distributors.
This provision limits the ability of vertically integrated cable programmers to
offer exclusive programming arrangements to cable companies. Recently, there has
been increased interest in further restricting the marketing practices of cable
programmers, including subjecting programmers who are not affiliated with cable
operators to all of the existing program access requirements, and subjecting
terrestrially-delivered programming to the program access requirements.
INSIDE WIRING; SUBSCRIBER ACCESS. In a 1997 Order, the FCC established
rules that require an incumbent cable operator upon expiration of an MDU service
contract to sell, abandon, or remove "home run" wiring that was installed by the
cable operator in a MDU building. These inside wiring rules are expected to
assist building owners in their attempts to replace existing cable operators
with new programming providers who are willing to pay the building owner a
higher fee, where such a fee is permissible. The FCC has also proposed
abrogating all exclusive MDU service agreements held by incumbent operators, but
allowing such contracts when held by new entrants. In another proceeding, the
FCC has preempted restrictions on the deployment of private antenna on rental
property within the exclusive use of a tenant (such as balconies and patios).
This FCC ruling may limit the extent to which we along with MDU owners may
enforce certain aspects of MDU agreements which otherwise prohibit, for example,
placement of DBS receiver antennae in MDU areas under the exclusive occupancy of
a renter.
OTHER FCC REGULATIONS. In addition to the FCC regulations noted above,
there are other FCC regulations covering such areas as equal employment
opportunity, subscriber privacy, programming practices (including, among other
things, syndicated program exclusivity, network program nonduplication, local
sports blackouts, indecent programming, lottery programming, political
programming, sponsorship identification, children's programming advertisements,
and closed captioning), registration of cable systems and facilities licensing,
maintenance of various records and public inspection files, aeronautical
frequency usage, lockbox availability, antenna structure notification, tower
marking and lighting, consumer protection and customer service standards,
technical standards, consumer electronics equipment compatibility and Emergency
Alert Systems. The FCC recently ruled that cable customers must be allowed to
purchase cable converters from third parties and established a multi-year
phase-in during which security functions (which would remain in the operator's
exclusive control) would be unbundled from basic converter functions (which
could then be satisfied by third party vendors). The FCC has the authority to
enforce its regulations through the imposition of substantial fines, the
issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities used in connection with cable
operations.
COPYRIGHT. Cable television systems are subject to federal copyright
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenues to a federal copyright royalty pool (that varies depending on the size
of the system, the number of distant broadcast television signals carried, and
the location of the cable system), cable operators can obtain blanket permission
to retransmit copyrighted material included in broadcast signals. The possible
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modification or elimination of this compulsory copyright license is the subject
of continuing legislative review and could adversely affect the Company's
ability to obtain desired broadcast programming. The Company cannot predict the
outcome of this legislative activity. Copyright clearances for nonbroadcast
programming services are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the Association of Songwriters, Composers, Artists and Producers
("ASCAP") and Broadcast Music, Inc. ("BMI"). The cable industry and BMI have
reached a standard licensing agreement, and negotiations with ASCAP are ongoing.
Although the Company cannot predict the ultimate outcome of these industry
negotiations or the amount of any license fees it may be required to pay for
past and future use of ASCAP-controlled music, it does not believe such license
fees will be significant to the Company's business and operations.
STATE AND LOCAL REGULATION. Cable television systems generally are
operated pursuant to nonexclusive franchises granted by a municipality or other
state or local government entity in order to cross public rights-of-way. Federal
law now prohibits LFAs from granting exclusive franchises or from unreasonably
refusing to award additional franchises. Cable franchises generally are granted
for fixed terms and in many cases include monetary penalties for non-compliance
and may be terminable if the franchisee failed to comply with material
provisions.
The specific terms and conditions of franchises vary materially between
jurisdictions. Each franchise generally contains provisions governing cable
operations, service rates, franchising fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states (such as
Connecticut) subject cable systems to the jurisdiction of centralized state
governmental agencies, some of which impose regulation of a character similar to
that of a public utility. Although LFAs have considerable discretion in
establishing franchise terms, there are certain federal limitations. For
example, LFAs cannot insist on franchise fees exceeding 5% of the system's gross
cable-related revenues, cannot dictate the particular technology used by the
system, and cannot specify video programming other than identifying broad
categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and service or increased
franchise fees as a condition of renewal. Similarly, if a local franchising
authority's consent is required for the purchase or sale of a cable system or
franchise, such LFA may attempt to impose more burdensome or onerous franchise
requirements in connection with a request for consent. Historically, most
franchises have been renewed for and consents granted to cable operators that
have provided satisfactory services and have complied with the terms of their
franchise.
Under the 1996 Telecom Act, cable operators are not required to obtain
franchises for the provision of telecommunications services, and LFAs are
prohibited from limiting, restricting, or conditioning the provision of such
services. In addition, LFAs may not require a cable operator to provide any
telecommunications service or facilities, other than institutional networks
under certain circumstances, as a condition of an initial franchise grant, a
franchise renewal, or a franchise transfer. The 1996 Telecom Act also provides
that franchising fees are limited to an operator's cable-related revenues and do
not apply to revenues that a cable operator derives from providing new
telecommunications services.
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MANAGEMENT
Charter Holdings is a holding company with no operations. CCHC is a
wholly-owned subsidiary of Charter Holdings that exists solely for the purpose
of serving as co-obligor of the Notes and has no operations. Neither Charter
Holdings nor CCHC has any employees. We are managed by CCI pursuant to a
management agreement between CCI and Charter Communications Operating Company,
LLC, covering all of our operating subsidiaries. See "Certain Relationships and
Related Transactions."
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors (the "Executive Officers") who are responsible for
providing significant services with respect to our management and operations.
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION
- -------------------------------- --- --------
Paul G. Allen............................. 44 Chairman of the Board of CCI
William D. Savoy.......................... 34 Director of Charter Holdings and CCI
Jerald L. Kent............................ 42 President, Chief Executive Officer and
Director of Charter Holdings, CCHC and
CCI
Barry L. Babcock.......................... 52 Vice Chairman of CCI
Howard L. Wood............................ 60 Vice Chairman of CCI
David G. Barford.......................... 40 Senior Vice President Operations of
CCI -- Western Division
Mary Pat Blake............................ 43 Senior Vice President -- Marketing and
Programming of CCI
Eric A. Freesmeier........................ 46 Senior Vice President -- Administration
of CCI
Thomas R. Jokerst......................... 49 Senior Vice President -- Advanced
Technology Development of CCI
Kent D. Kalkwarf.......................... 39 Senior Vice President and Chief
Financial Officer of Charter Holdings,
CCHC and CCI
Ralph G. Kelly............................ 42 Senior Vice President -- Treasurer of
Charter Holdings, CCHC and CCI
David L. McCall........................... 43 Senior Vice President Operations of
CCI -- Eastern Division
John C. Pietri............................ 49 Senior Vice President -- Engineering of
CCI
Steven A. Schumm.......................... 46 Executive Vice President, Assistant to
the President of Charter Holdings, CCHC
and CCI
Curtis S. Shaw............................ 50 Senior Vice President, General Counsel
and Secretary of Charter Holdings, CCHC
and CCI
The following sets forth certain biographical information with respect to
the individuals named in the chart above.
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PAUL G. ALLEN is the Chairman of the Board of Directors of CCI. Mr. Allen
has been a private investor for more than five years, with interests in a wide
variety of companies, many of which focus on multimedia digital communications
such as Interval Research Corporation, of which Mr. Allen is the controlling
shareholder and a director. In addition, Mr. Allen is the owner and the Chairman
of the Board of the Portland Trail Blazers of the National Basketball
Association, and is the owner and the Chairman of the Board of the Seattle
Seahawks of the National Football League. Mr. Allen currently serves as a
director of Microsoft Corporation and USA Networks, Inc. and also serves as a
director of various private corporations.
WILLIAM D. SAVOY is a director of Charter Holdings and CCI. Mr. Savoy is
also President of Vulcan Northwest Inc., managing the personal finances of Paul
G. Allen, and Vice President of Vulcan Ventures Inc., a venture capital fund
wholly owned by Mr. Allen, since 1990. From 1987 until November 1990, Mr. Savoy
was employed by Layered, Inc. and became its President in 1988. Mr. Savoy serves
on the Advisory Board of DreamWorks SKG and also serves as director of CNET,
Inc., Harbinger Corporation, Metricom, Inc., Telescan, Inc., Ticketmaster
Online -- CitySearch, U.S. Satellite Broadcasting Co., Inc., and USA Networks,
Inc. Mr. Savoy holds a B.S. in Computer Science, Accounting and Finance from
Atlantic Union College.
JERALD L. KENT is a co-founder of CCI, and President and Chief Executive
Officer and director of Charter Holdings, CCHC and CCI and has previously held
the position of Chief Financial Officer of CCI. Prior to co-founding CCI, Mr.
Kent was associated with Cencom Cable Associates, Inc. ("Cencom"), where he
served as Executive Vice President and Chief Financial Officer. Mr. Kent also
served Cencom as Senior Vice President of Finance from May 1987, Senior Vice
President of Acquisitions and Finance from July 1988, and Senior Vice President
and Chief Financial Officer from January 1989. Mr. Kent is a member of the Board
of Directors of HSAC and Cable Television Laboratories ("CableLabs"). Prior to
that time, Mr. Kent was employed by Arthur Andersen & Co. LLP, certified public
accountants, where he attained the position of tax manager. Mr. Kent, a
certified public accountant, received his undergraduate and M.B.A. degrees with
honors from Washington University (St. Louis).
BARRY L. BABCOCK is a co-founder of CCI and Vice Chairman of CCI and has
been involved in the cable industry since 1979. Prior to founding CCI in 1994,
Mr. Babcock was associated with Cencom, where he served as the Executive Vice
President from February 1986 to September 1991, and was named Chief Operating
Officer in May of 1986. Mr. Babcock was one of Cencom's founders and, prior to
the duties he assumed in early 1986, was responsible for all of Cencom's
in-house legal work, contracts and governmental relations. Mr. Babcock serves as
the Chairman of the Board of Directors of Community Telecommunications
Association. He also serves as a director of the National Cable Television
Association, Cable in the Classroom and Mercantile Bank -- St. Louis. Mr.
Babcock, an attorney, received his undergraduate and J.D. degrees from the
University of Oklahoma.
HOWARD L. WOOD is a co-founder of CCI and Vice Chairman of CCI. Prior to
founding CCI, Mr. Wood was associated with Cencom. Mr. Wood joined Cencom as
President, Chief Financial Officer and Director and assumed the additional
position of Chief Executive Officer effective January 1, 1989. Prior to that
time, Mr. Wood was a partner in Arthur Andersen LLP, certified public
accountants, where he served as Partner-in-Charge of the St. Louis Tax Division
from 1973 until joining Cencom. Mr. Wood is a certified public accountant and a
member of the American Institute of Certified Public
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Accountants. He also serves as a director of VanLiner Group, Inc., First State
Bank and Gaylord Entertainment Company. Mr. Wood also serves as Commissioner for
the Missouri Department of Conservation. He is also a past Chairman of the Board
and former director of the St. Louis College of Pharmacy. Mr. Wood graduated
with honors from Washington University (St. Louis) School of Business.
DAVID G. BARFORD is Senior Vice President Operations of CCI -- Western
Division, where he has primary responsibility for all cable operations in the
Central, Western, North Central and MetroPlex Regions. Prior to joining CCI, he
served as Vice President of Operations and New Business Development for Comcast
Cable, where he held various senior marketing and operating roles over an
eight-year period. Mr. Barford received a B.A. degree from California State
University, Fullerton and an M.B.A. from National University in La Jolla,
California.
MARY PAT BLAKE is Senior Vice President -- Marketing and Programming of CCI
and is responsible for all aspects of marketing, sales and programming and
advertising sales. Prior to joining Charter in August 1995, Ms. Blake was active
in the emerging business sector, and formed Blake Investments, Inc. in September
1993, which created, operated and sold a branded coffeehouse and bakery. From
September 1990 to August 1993, Ms. Blake served as Director -- Marketing for
Brown Shoe Company. Ms. Blake has 18 years of experience with senior management
responsibilities in marketing, sales, finance, systems, and general management
with companies such as The West Coast Group, Pepsico Inc.-Taco Bell Division,
General Mills, Inc. and ADP Network Services, Inc. Ms. Blake received a B.S.
degree from the University of Minnesota, and an M.B.A. degree from the Harvard
Business School.
ERIC A. FREESMEIER joined CCI as Senior Vice President -- Administration in
April 1998 and is responsible for human resources, public relations and
communications, corporate facilities and aviation. From 1986 until joining CCI,
he served in various executive management positions at Edison Brothers Stores,
Inc., a specialty retail company. His most recent position was Executive Vice
President -- Human Resources and Administration. From 1974 to 1986, Mr.
Freesmeier held management and executive positions with Montgomery Ward, a
national mass merchandise retailer, and its various subsidiaries. Mr. Freesmeier
holds Bachelor of Business degrees in marketing and industrial relations from
the University of Iowa and a Masters of Management degree in finance from
Northwestern University's Kellogg Graduate School of Management.
THOMAS R. JOKERST is Senior Vice President -- Advanced Technology
Development of CCI. Prior to his appointment to this position, Mr. Jokerst held
the position of Senior Vice President -- Engineering since December 1993. Prior
to joining Charter, from March 1991 to March 1993, Mr. Jokerst served as Vice
President -- Office of Science and Technology for CableLabs in Boulder,
Colorado. From June 1976 to March 1993, Mr. Jokerst was Director of Engineering
for the midwest region of Continental Cablevision. Mr. Jokerst participates in
professional activities with the NCTA, SCTE and CableLabs. Mr. Jokerst is a
graduate of Ranken Technical Institute in St. Louis with a degree in
Communications Electronics and Computer Technology and of Southern Illinois
University in Carbondale, Illinois with a degree in Electronics Technology.
KENT D. KALKWARF is Senior Vice President and Chief Financial Officer of
Charter Holdings CCHC and CCI. Prior to joining CCI, Mr. Kalkwarf was a senior
tax manager for Arthur Andersen, LLP, from 1982 to July 1995. Mr. Kalkwarf has
extensive experience in cable, real estate and international tax issues. Mr.
Kalkwarf has a B.S. degree from Illinois Wesleyan University and is a certified
public accountant.
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RALPH G. KELLY is Senior Vice President -- Treasurer of Charter Holdings,
CCHC and CCI. Mr. Kelly joined CCI in 1993 as Vice President -- Finance, a
position he held until early 1994 when he became Chief Financial Officer of
CableMaxx, Inc., a wireless cable television operator. Mr. Kelly returned to CCI
as Senior Vice President -- Treasurer in February 1996, and has responsibility
for treasury operations, investor relations and financial reporting. From 1984
to 1993, Mr. Kelly was associated with Cencom where he held the positions of
Controller from 1984 to 1989 and Treasurer from 1990 to 1993. Mr. Kelly is a
certified public accountant and was in the audit division of Arthur Andersen LLP
from 1979 to 1984. Mr. Kelly received his undergraduate degree in accounting
from the University of Missouri -- Columbia and his M.B.A. from Saint Louis
University.
DAVID L. MCCALL is Senior Vice President Operations of CCI -- Eastern
Division. Mr. McCall joined CCI in January 1995 as Regional Vice President
Operations and he has primary responsibility for all cable system operations
managed by CCI in the Southeast, Southern and Northeast Regions of the United
States. Prior to joining CCI, Mr. McCall was associated with Crown Cable and its
predecessor company, Cencom, from 1983 to 1994. As a Regional Manager of Cencom,
Mr. McCall's responsibilities included supervising all aspects of operations for
systems located in North Carolina, South Carolina and Georgia, consisting of
over 142,000 customers. From 1977 to 1982, Mr. McCall was System Manager of
Coaxial Cable Developers (known as Teleview Cablevision) in Simpsonville, South
Carolina. Mr. McCall has served as a director of the South Carolina Cable
Television Association for the past ten years.
JOHN C. PIETRI joined CCI in November 1998 as Senior Vice President --
Engineering. Prior to joining CCI, Mr. Pietri was with Marcus in Dallas, Texas
for eight years, most recently serving as Senior Vice President and Chief
Technical Officer. Prior to Marcus, Mr. Pietri served as Regional Technical
Operations Manager for West Marc Communications in Denver, Colorado, and before
that he served as Operations Manager with Minnesota Utility Contracting. Mr.
Pietri attended the University of Wisconsin-Oshkosh.
STEVEN A. SCHUMM is Executive Vice President, Assistant to the President of
Charter Holdings, CCHC and CCI. Mr. Schumm joined CCI in December 1998 and
currently directs the MIS Regulatory and Financial Controls Groups. Prior to
joining CCI, Mr. Schumm was managing partner of the St. Louis office of Ernst &
Young LLP. Mr. Schumm was with Ernst & Young LLP for 24 years and was a partner
of the firm for 14 of those years. Mr. Schumm held various management positions
with Ernst & Young LLP, including the Director of Tax Services for the
three-city area of St. Louis, Kansas City and Wichita and then National Director
of Industry Tax Services. He served as one of 10 members comprising the Firm's
National Tax Committee. Mr. Schumm earned a B.S. degree from St. Louis
University with a major in accounting.
CURTIS S. SHAW is Senior Vice President, General Counsel and Secretary of
Charter Holdings, CCHC and CCI and is responsible for all legal aspects of their
business, government relations and the duties of the corporate secretary. Mr.
Shaw joined CCI in February 1997. Prior to joining CCI, Mr. Shaw served as
corporate Counsel to NYNEX since 1988. From 1983 until 1988 Mr. Shaw served as
Associate General Counsel for Occidental Chemical Corporation, and, from 1986
until 1988, also as Vice President and General Counsel of its largest operating
division. Mr. Shaw has 25 years of experience as a corporate lawyer,
specializing in mergers and acquisitions, joint ventures, public offerings,
financings, and federal securities and antitrust law. Mr. Shaw received a B.A.
with honors from Trinity College and a J.D. from Columbia University School of
Law.
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DIRECTOR COMPENSATION
The directors of Charter Holdings and CCHC are not entitled to any
compensation for serving as a director, nor are they paid any fees for
attendance at any meeting of the Board of Directors. Directors may be reimbursed
for the actual reasonable costs incurred in connection with attendance at such
Board meetings.
EXECUTIVE COMPENSATION
None of the Executive Officers listed above has ever received any
compensation from Charter Holdings or CCHC, nor do such individuals expect to
receive compensation from Charter Holdings or CCHC at any time in the future.
Such Executive Officers receive their compensation from CCI, except for Mr.
McCall, who is compensated by an operating subsidiary. CCI is entitled to
receive management fees from us for providing its management and consulting
services. See "Certain Relationships and Related Transactions."
OPTION PLAN
The Company has committed to adopt a plan (the "Plan") providing for the
grant of options to purchase up to an aggregate of 10% of the equity value of
the Company.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS
The limited liability company agreement of Charter Holdings (the "LLC
Agreement") and the certificate of incorporation of CCHC limit the liability of
directors to the maximum extent permitted by Delaware law. Delaware Corporation
law provides that a corporation may eliminate or limit the personal liability of
a director for monetary damages for breach of fiduciary duty as a director,
except for liability for: (i) any breach of the director's duty of loyalty to
the corporation and its stockholders; (ii) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (iii)
unlawful payments of dividends or unlawful stock purchases or redemptions; or
(iv) any transaction from which the director derived an improper personal
benefit.
The LLC Agreement of Charter Holdings and the Bylaws of CCHC provide that
directors and officers shall be indemnified for acts or omissions performed or
omitted that are determined, in good faith, to be in the best interest of the
Company. No such indemnification is available for actions constituting bad
faith, willful misconduct or fraud.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Charter Holdings
and CCHC pursuant to the foregoing provisions, we have been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
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PRINCIPAL EQUITY HOLDERS OF CHARTER HOLDINGS
The beneficial ownership of the equity of Charter Holdings is as set forth
in the table below. CCHC is a direct wholly owned finance subsidiary of Charter
Holdings.
PERCENTAGE OF EQUITY
BENEFICIALLY OWNED
--------------------
Paul G. Allen........................................ 96%
110 110th Street, N.E
Suite 500
Bellevue, WA 98004
Other Executive Officers and directors as a group.... 4%
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENTS
MANAGEMENT AGREEMENTS RELATING TO THE CHARTER COMPANIES. Prior to March
18, 1999, pursuant to a series of management agreements with certain of the
Charter Companies (the "Previous Management Agreements"), CCI provided
management and consulting services to the Charter Companies. In exchange for
these services, CCI was entitled to receive management fees from 3% to 5% of the
gross revenues of all of the Charter Systems plus reimbursement of expenses.
However, our previous credit facilities limited such management fees to 3% of
gross revenues. The balance of management fees payable under the Previous
Management Agreements were accrued. Following the closing of the Credit
Facilities, the Previous Management Agreements were replaced by a new management
agreement (the "Existing Management Agreement").
The total management fees (including expenses) earned by CCI under the
Previous Management Agreements during the last three years were as follows:
FEES ACCRUED TOTAL FEES
YEAR FEES PAID BUT DEFERRED EARNED
- ---- --------- ------------ ----------
(IN THOUSANDS)
1998............................... $17,073 $7,086 $24,159
1997............................... 14,772 5,518 20,290
1996............................... 11,792 3,651 15,443
Deferred portions of certain management fees bore interest at the rate of
10% per annum.
THE EXISTING MANAGEMENT AGREEMENT. On February 23, 1999, CCI entered into
the Existing Management Agreement with Charter Communications Operating, LLC,
which was amended as of March 17, 1999. Upon the closing of the Credit
Facilities on March 18, 1999, the Previous Management Agreements terminated and
the Existing Management Agreement became operative. The Existing Management
Agreement provides for the payment of management fees to CCI equal to 3.5% of
gross revenues, payable quarterly. The payment of such fees is permitted under
the Credit Facilities. Management fees payable to CCI under the Existing
Management Agreement have been reduced to the extent management fees were
already paid to CCI under the Previous Management Agreements or the Management
Consulting Agreement with Marcus (described below).
MANAGEMENT AGREEMENT RELATING TO THE MARCUS COMPANIES. On October 6, 1998,
Marcus entered into a Management Consulting Agreement with CCI pursuant to which
CCI agreed to provide certain management and consulting services to Marcus and
its subsidiaries, in exchange for a fee equal to 3% of the gross revenues of the
Marcus Systems plus reimbursement of expenses. Management fees expensed by
Marcus during the period from October 1998 to December 31, 1998 were
approximately $3.3 million, which were accrued and unpaid at December 31, 1998.
Upon the Marcus Combination and the closing of the Credit Facilities, this
agreement was terminated and the Marcus Companies now receive management and
consulting services under the Existing Management Agreement.
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EQUITY OWNERSHIP OF SERVICE AND PROGRAMMING PROVIDERS
Paul G. Allen or certain affiliates of Mr. Allen, including CCI, own equity
interests or warrants to purchase equity interests in various entities which
provide us with services or programming. Among these entities are HSA,
WorldGate, Wink, ZDTV and USA Networks, Inc.
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DESCRIPTION OF THE CREDIT FACILITIES
On March 18, 1999, all of the then-existing senior indebtedness of the
Charter Companies and the Marcus Companies, consisting of seven separate credit
facilities, was refinanced with certain of the proceeds of the sale of the
original notes and with the proceeds of certain initial senior secured credit
facilities (the "Committed Credit Facilities"). The borrower under the Committed
Credit Facilities is Charter Communications Operating, LLC (the "Borrower"). The
Committed Credit Facilities were arranged by The Chase Manhattan Bank ("Chase"),
NationsBank, N.A. ("NationsBank"), Toronto Dominion (Texas), Inc. ("TD"), Fleet
Bank, N.A. and Credit Lyonnais New York Branch. The Committed Credit Facilities
are committed facilities for up to $2.75 billion on the date of closing (the
"Stage One Closing"). The Committed Credit Facilities were increased (the "Stage
Two Closing") on April 30, 1999, by $1.35 billion of additional senior secured
credit facilities (the "Additional Credit Facilities" and together with the
Committed Credit Facilities, the "Credit Facilities"). The Credit Facilities
have the benefit of a downstream guarantee from Charter Holdings and upstream
guarantees from the Charter Companies and the Marcus Companies. The obligations
under the Credit Facilities are secured by pledges of inter-company obligations
and the ownership interests of the Borrower in the Charter Companies and the
Marcus Companies, but are not secured by the other assets of the Borrower, the
Charter Companies or the Marcus Companies. The guarantees are secured by pledges
of inter-company obligations and the ownership interests of Charter Holdings in
the Borrower, but are not secured by the other assets of Charter Holdings, or
the Borrower.
The Committed Credit Facilities of $4.1 billion consist of (i) an eight and
one-half year reducing revolving loan in the amount of $1.25 billion, (ii) a
Tranche A term loan in the amount of $1.0 billion, and (iii) a Tranche B term
loan in the amount of $1.85 billion. The Tranche A term loan will be an eight
and one-half year facility and the Tranche B term loan is a nine year facility.
In addition, an uncommitted incremental term facility (the "Incremental Term
Facility") of up to $500 million will be permitted on terms similar to those for
the Tranche B term loan, but will be conditioned on receipt of additional new
commitments from lenders.
The Credit Facilities contain terms and conditions typical of those for
very large cable operators and are more flexible in certain respects than those
contained in our previous credit facilities. The Credit Facilities provide for
the amortization of the principal amount of the Tranche A term loan facility and
the reduction of the revolving loan facility over a period of eight and one-half
years but beginning after the third anniversary of the Stage One Closing. The
amortization of the principal amount of the Tranche B term loan facility is
substantially "back-ended," with more than ninety percent of the principal
balance due in the year of maturity. Any subsequently issued Incremental Term
Facility will have amortization substantially similar to that of the Tranche A
term loan (with respect to up to 50% of the Incremental Term Facility) or the
Tranche B term loan. Interest rates for the Credit Facilities (after an initial
period in which interest rate margins will be fixed) depend upon performance
measured by a "leverage ratio," that is, the ratio of indebtedness to annualized
operating cash flow (i.e., last quarter's operating cash flow before management
fees, multiplied by four). This leverage ratio is based on the indebtedness of
the Borrower, the Charter Companies and the Marcus Companies, exclusive of the
outstanding notes and other indebtedness for money borrowed by Charter Holdings.
The Credit Facilities provide the Borrower with two interest rate options (to
which the margin described in the two preceding sentences is added): a base rate
(generally, the "prime rate" of interest) option, and an interest rate option
based on the London InterBank
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Offered Rate ("LIBOR"). The Credit Facilities contain representations and
warranties, affirmative and negative covenants, information requirements, events
of default and financial covenants (the financial covenants being typically
tested on a quarterly basis). These financial covenants measure performance
against standards set for leverage, debt service coverage, and operating cash
flow coverage of cash interest expense. The Credit Facilities also contain a
change of control provision, making it an event of default (and permitting
acceleration of the indebtedness) in the event that either: (a) Paul G. Allen
(including his estate, heirs and certain other related entities) fails to
maintain a 51% voting and economic interest in the Borrower, provided that after
the consummation of an initial public offering by Charter Holdings or an
affiliate thereof, the economic interest percentage shall be reduced to 35%, or
(b) a "Change of Control" occurs under the indentures governing the notes.
The various negative covenants place limitations on our ability and the
ability of our subsidiaries to, among other things, incur debt, pay dividends,
incur liens, make acquisitions, investments or asset sales, or enter into
transactions with affiliates. Distributions by the Borrower under the Credit
Facilities to Charter Holdings to pay interest on the notes are generally
permitted, except during the existence of a default under the Credit Facilities.
If the 8.250% Senior Notes due 2007 are not refinanced prior to six months
before their maturity date the entire amount outstanding of the Credit
Facilities will become due and payable. This summary is qualified in its
entirety by reference to the credit agreement relating to the Credit Facilities
and the related documents.
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions." In this description, the word
"Company" refers only to Charter Holdings and not to any of its Subsidiaries and
the word "Issuers" means Charter Holdings and Charter Capital.
The original notes were issued and the new notes will be issued under three
separate indentures (the "Indentures"), each dated as of March 17, 1999, among
the Issuers, Marcus Cable Operating, LLC, Marcus Cable Holdings, LLC, as
guarantor (the "Guarantor") and Harris Trust and Savings Bank, as trustee (the
"Trustee"). For convenience, the 8.250% Senior Notes due 2007 are referred to as
the "Eight-Year Senior Notes," the 8.625% Senior Notes due 2009 are referred to
as the "Ten-Year Senior Notes," and the 9.920% Senior Discount Notes due 2011
are referred to as the "Senior Discount Notes." The Eight-Year Senior Notes, the
Ten-Year Senior Notes and the Senior Discount Notes are referred to as the
"Notes." The terms of the Notes include those stated in the Indentures and those
made part of the Indentures by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act").
The form and terms of the new notes are the same in all material respects
to the form and terms of the original notes, except that the new notes will have
been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The original notes have not been registered
under the Securities Act and are subject to certain transfer restrictions.
Upon the closing of the Marcus Combination and the merger of the Guarantor
with and into Charter Holdings, both the Guarantee of the Guarantor and the
Mirror Note issued by the Guarantor automatically became, under the terms of the
Indentures, ineffective. Consequently, all references in the Indentures and the
Notes to the Guarantor, the Guarantee or the Mirror Note, and all matters
related thereto, including, without limitation, the pledges of any collateral
are no longer applicable.
The following description is a summary of the material provisions of the
Indentures. It does not restate the Indentures in their entirety. We urge you to
read the Indentures because they, and not this description, define your rights
as holders of these Notes. Copies of the Indentures are available as set forth
under "Additional Information."
BRIEF DESCRIPTION OF THE NOTES
The Notes:
- are general unsecured obligations of the Issuers;
- are effectively subordinated in right of payment to all existing and
future secured Indebtedness of the Issuers to the extent of the value of
the assets securing such Indebtedness and to all liabilities (including
trade payables) of the Company's Subsidiaries (other than Charter
Capital);
- are equal in right of payment to all existing and future unsubordinated,
unsecured Indebtedness of the Issuers; and
- are senior in right of payment to any future subordinated Indebtedness of
the Issuers.
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PRINCIPAL, MATURITY AND INTEREST OF NOTES
EIGHT-YEAR SENIOR NOTES
The Eight-Year Senior Notes are limited in aggregate principal amount to
$600 million, and will be issued in denominations of $1,000 and integral
multiples of $1,000. The Eight-Year Senior Notes will mature on April 1, 2007.
Interest on the Eight-Year Senior Notes will accrue at the rate of 8.250%
per annum and will be payable semi-annually in arrears on April 1 and October 1,
commencing on October 1, 1999. The Issuers will make each interest payment to
the holders of record of these Eight-Year Senior Notes on the immediately
preceding March 15 and September 15.
Interest on the Eight-Year Senior Notes will accrue from the date of
original issuance of the original notes or, if interest has already been paid,
from the date it was most recently paid. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months.
TEN-YEAR SENIOR NOTES
The Ten-Year Senior Notes are limited in aggregate principal amount to $1.5
billion, and will be issued in denominations of $1,000 and integral multiples of
$1,000. The Ten-Year Senior Notes will mature on April 1, 2009.
Interest on the Ten-Year Senior Notes will accrue at the rate of 8.625% per
annum and will be payable semi-annually in arrears on April 1 and October 1,
commencing on October 1, 1999. The Issuers will make each interest payment to
the holders of record of these Ten-Year Senior Notes on the immediately
preceding March 15 and September 15.
Interest on the Ten-Year Senior Notes will accrue from the date of original
issuance of the original notes or, if interest has already been paid, from the
date it was most recently paid. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
SENIOR DISCOUNT NOTES
The Senior Discount Notes are limited in aggregate principal amount at
maturity to $1.475 billion and will be issued at an issue price of $613.94 per
$1,000 principal amount at maturity, representing a yield to maturity of 9.920%
(calculated on a semi-annual bond equivalent basis) calculated from March 17,
1999. The Issuers will issue Senior Discount Notes, in denominations of $1,000
principal amount at maturity and integral multiples of $1,000 principal amount
at maturity. The Senior Discount Notes will mature on April 1, 2011.
Cash interest on the Senior Discount Notes will not accrue prior to April
1, 2004. Thereafter, cash interest on the Senior Discount Notes will accrue at a
rate of 9.920% per annum and will be payable semi-annually in arrears on April 1
and October 1, commencing on October 1, 2004. The Issuers will make each
interest payment to the holders of record of the Senior Discount Notes on the
immediately preceding March 15 and September 15. Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months.
For United States federal income tax purposes, holders of the Senior
Discount Notes will be required to include amounts in gross income in advance of
the receipt of the cash payments to which the income is attributable. See
"Certain Federal Tax Considerations."
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OPTIONAL REDEMPTION
EIGHT-YEAR SENIOR NOTES
The Eight-Year Senior Notes are not redeemable at the Issuers' option prior
to maturity.
TEN-YEAR SENIOR NOTES
At any time prior to April 1, 2002, the Issuers may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount of the Ten-Year
Senior Notes on a pro rata basis or nearly as pro rata as practicable, at a
redemption price of 108.625% of the principal amount thereof, plus accrued and
unpaid interest to the redemption date, with the net cash proceeds of one or
more Equity Offerings; provided that
(1) at least 65% of the aggregate principal amount of Ten-Year Senior
Notes remains outstanding immediately after the occurrence of such
redemption excluding Ten-Year Senior Notes held by the Company and its
Subsidiaries; and
(2) the redemption must occur within 60 days of the date of the
closing of such Equity Offering.
Except pursuant to the preceding paragraph, the Ten-Year Senior Notes will
not be redeemable at the Issuers' option prior to April 1, 2004.
On or after April 1, 2004, the Issuers may redeem all or a part of the
Ten-Year Senior Notes upon not less than 30 nor more than 60 days notice, at the
redemption prices, expressed as percentages of principal amount, set forth below
plus accrued and unpaid interest thereon, if any, to the applicable redemption
date, if redeemed during the twelve-month period beginning on April 1 of the
years indicated below:
YEAR PERCENTAGE
- ---- ----------
2004........................................................ 104.313%
2005........................................................ 102.875%
2006........................................................ 101.438%
2007 and thereafter......................................... 100.000%
SENIOR DISCOUNT NOTES
At any time prior to April 1, 2002, the Issuers may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount at maturity of the
Senior Discount Notes on a pro rata basis or nearly as pro rata as practicable,
at a redemption price of 109.920% of the Accreted Value thereof, with the net
cash proceeds of one or more Equity Offerings; provided that
(1) at least 65% of the aggregate principal amount at maturity of
Senior Discount Notes remains outstanding immediately after the occurrence
of such redemption, excluding Senior Discount Notes held by the Company and
its Subsidiaries; and
(2) the redemption must occur within 60 days of the date of the
closing of such Equity Offering.
Except pursuant to the preceding paragraph, the Senior Discount Notes will
not be redeemable at the Issuers' option prior to April 1, 2004.
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On or after April 1, 2004, the Issuers may redeem all or a part of the
Senior Discount Notes upon not less than 30 nor more than 60 days notice, at the
redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest thereon, if any, to the applicable redemption
date, if redeemed during the twelve-month period beginning on April 1 of the
years indicated below:
YEAR PERCENTAGE
- ---- ----------
2004........................................................ 104.960%
2005........................................................ 103.307%
2006........................................................ 101.653%
2007 and thereafter......................................... 100.000%
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each holder of Notes will have the right to
require the Issuers to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of that holder's Notes pursuant to a "Change of
Control Offer." In the Change of Control Offer, the Issuers will offer a "Change
of Control Payment" in cash equal to (x) with respect to the Eight-Year Senior
Notes and the Ten-Year Senior Notes, 101% of the aggregate principal amount
thereof repurchased plus accrued and unpaid interest thereon, if any, to the
date of purchase and (y) with respect to the Senior Discount Notes, 101% of the
Accreted Value plus, for any Change of Control Offer occurring after the Full
Accretion Date, accrued and unpaid interest, if any, on the date of purchase.
Within ten days following any Change of Control, the Issuers will mail a notice
to each holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Notes on a certain date (the
"Change of Control Payment Date") specified in such notice, pursuant to the
procedures required by the Indentures and described in such notice. The Issuers
will comply with the requirements of Rule 14e-1 under the Exchange Act (or any
successor rules) and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful:
(1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all Notes or portions thereof so tendered;
and
(3) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of Notes or portions thereof being purchased by the
Issuers.
The Paying Agent will promptly mail to each holder of Notes so tendered the
Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount at maturity of $1,000 or an integral multiple thereof.
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The provisions described above that require the Issuers to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether or not any other provisions of the Indentures are applicable. Except as
described above with respect to a Change of Control, the Indentures do not
contain provisions that permit the Holders of the Notes to require that the
Issuers repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Issuers will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indentures applicable to a Change of Control Offer made by the Issuers
and purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries, taken as a whole. Although
there is a limited body of case law interpreting the phrase "substantially all,"
there is no precise established definition of the phrase under applicable law.
Accordingly, the ability of a holder of Notes to require the Issuers to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries, taken as a whole, another Person or group may be uncertain.
ASSET SALES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) the Company or a Restricted Subsidiary of the Company receives
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of;
(2) such fair market value is determined by the Company's Board of
Directors and evidenced by a resolution of such Board of Directors set
forth in an Officers' Certificate delivered to the Trustee; and
(3) at least 75% of the consideration therefor received by the Company
or such Restricted Subsidiary is in the form of cash, Cash Equivalents or
readily marketable securities.
For purposes of this provision, each of the following shall be deemed to be
cash:
(a) any liabilities shown on the Company's or such Restricted
Subsidiary's most recent balance sheet, other than contingent liabilities
and liabilities that are by their terms subordinated to the Notes, that are
assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases the Company or such Restricted Subsidiary
from further liability;
(b) any securities, notes or other obligations received by the Company
or any such Restricted Subsidiary from such transferee that are converted
by the Company or such Restricted Subsidiary into cash, Cash Equivalents or
readily marketable securities within 60 days after receipt thereof (to the
extent of the cash, Cash Equivalents or readily marketable securities
received in that conversion); and
(c) Productive Assets.
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Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or a Restricted Subsidiary of the Company may apply such Net
Proceeds at its option:
(1) to repay debt under the Credit Facilities or any other
Indebtedness of the Restricted Subsidiaries (other than Indebtedness
represented by a guarantee of a Restricted Subsidiary of the Company); or
(2) to invest in Productive Assets; provided that any Net Proceeds
which the Company or a Restricted Subsidiary of the Company has committed
to invest in Productive Assets within 365 days of the applicable Asset Sale
may be invested in Productive Assets within two years of such Asset Sale.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute Excess Proceeds. When the
aggregate amount of Excess Proceeds exceeds $25.0 million, the Issuers will make
an Asset Sale Offer to all holders of Notes and all holders of other
Indebtedness that is pari passu with the Notes containing provisions requiring
offers to purchase or redeem with the proceeds of sales of assets to purchase
the maximum principal amount of Notes and such other pari passu Indebtedness
that may be purchased out of the Excess Proceeds (which amount includes the
entire amount of the Net Proceeds). The offer price in any Asset Sale Offer will
be payable in cash and equal to (x) with respect to the Eight-Year Senior Notes
and the Ten-Year Senior Notes, 100% of principal amount plus accrued and unpaid
interest, if any, to the date of purchase, and (y) with respect to the Senior
Discount Notes, 100% of the Accreted Value thereof plus, after the Full
Accretion Date, accrued and unpaid interest, if any, to the date of purchase. If
any Excess Proceeds remain after consummation of an Asset Sale Offer, the
Company may use such Excess Proceeds for any purpose not otherwise prohibited by
the Indentures. If the aggregate principal amount of Notes and such other pari
passu Indebtedness tendered into such Asset Sale Offer exceeds the amount of
Excess Proceeds, the applicable Trustee shall select the Notes and such other
pari passu Indebtedness to be purchased on a pro rata basis. Upon completion of
each Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, the Trustee
will select Notes for redemption as follows:
(1) if the Notes are listed, in compliance with the requirements of
the principal national securities exchange on which the Notes are listed;
or
(2) if the Notes are not so listed, on a pro rata basis, by lot or by
such method as the Trustee shall deem fair and appropriate.
No Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note shall state the portion of the principal amount thereof to
be redeemed. A new Note in principal amount equal to the unredeemed portion of
the original Note will be issued in the name of the holder thereof upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the
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redemption date, interest ceases to accrue on, or the Accreted Value ceases to
increase on, as the case may be, Notes or portions of them called for
redemption.
CERTAIN COVENANTS
Set forth below are summaries of certain covenants contained in the
Indentures. During any period of time that (a) either the Eight-Year Senior
Notes, the Ten-Year Senior Notes or the Senior Discount Notes have Investment
Grade Ratings from both Rating Agencies and (b) no Default or Event of Default
has occurred and is continuing under the applicable Indenture, the Company and
its Restricted Subsidiaries will not be subject to the provisions of such
Indenture applicable to them described under "-- Incurrence of Indebtedness and
Issuance of Preferred Stock," "-- Restricted Payments," "-- Asset Sales,"
"-- Sale and Leaseback Transactions," "-- Dividend and Other Payment
Restrictions Affecting Subsidiaries," "-- Transactions with Affiliates,"
"-- Investments" and clause (4) of the first paragraph of "-- Merger,
Consolidation and Sale of Assets" (collectively, the "Suspended Covenants"). In
the event that the Company and its Restricted Subsidiaries are not subject to
the Suspended Covenants for any period of time as a result of the preceding
sentence and, subsequently, one or both of the Rating Agencies withdraws its
ratings or downgrades the ratings assigned to the applicable Notes below the
required Investment Grade Ratings or a Default or Event of Default occurs and is
continuing, then the Company and its Restricted Subsidiaries will thereafter
again be subject to the Suspended Covenants and compliance with the Suspended
Covenants with respect to the Restricted Payments made after the time of such
withdrawal, downgrade, Default or Event of Default will be calculated in
accordance with the terms of the covenant described below under "-- Restricted
Payments" as though such covenant had been in effect during the entire period of
time from the Issue Date.
RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment
in connection with any merger or consolidation involving the Company or any
of its Restricted Subsidiaries) or to the direct or indirect holders of the
Company's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or, in the case of
the Company and its Restricted Subsidiaries, to the Company or a Restricted
Subsidiary of the Company;
(2) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or
consolidation involving the Company) any Equity Interests of the Company or
any direct or indirect parent of the Company or any Restricted Subsidiary
of the Company (other than, in the case of the Company and its Restricted
Subsidiaries, any such Equity Interests owned by the Company or any
Restricted Subsidiary of the Company); or
(3) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Notes(other than the Notes), except a payment of
interest or principal at the Stated Maturity thereof (all such payments and
other actions set forth in clauses (1) through
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(3) above being collectively referred to as "Restricted Payments"), unless,
at the time of and after giving effect to such Restricted Payment:
(4) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(5) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Leverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "-- Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(6) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and each of its Restricted
Subsidiaries after the date of the Indentures (excluding Restricted
Payments permitted by clauses (2), (3), (4), (5), (6), (7) and (8) of the
next succeeding paragraph), shall not exceed, at the date of determination,
the sum of:
(a) an amount equal to 100% of combined Consolidated EBITDA of the
Company since the date of the Indentures to the end of the Company's
most recently ended full fiscal quarter for which internal financial
statements are available, taken as a single accounting period, less the
product of 1.2 times the combined Consolidated Interest Expense of the
Company since the date of the Indentures to the end of the Company's
most recently ended full fiscal quarter for which internal financial
statements are available, taken as a single accounting period, plus
(b) an amount equal to 100% of Capital Stock Sale Proceeds less any
such Capital Stock Sale Proceeds used in connection with (i) an
Investment made pursuant to clause (6) of the definition of "Permitted
Investments" or (ii) the incurrence of Indebtedness pursuant to clause
(10) of "Incurrence of Indebtedness and Issuance of Preferred Stock,"
plus
(c) $100.0 million.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the Indentures;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of the Company in exchange
for, or out of the net proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of, Equity Interests of the Company
(other than Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from clause
(3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of the Company or any of its Restricted
Subsidiaries with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness;
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(4) regardless of whether a Default then exists, the payment of any
dividend or distribution to the extent necessary to permit direct or
indirect beneficial owners of shares of Capital Stock of the Company to pay
federal, state or local income tax liabilities that would arise solely from
income of the Company or any of its Restricted Subsidiaries, as the case
may be, for the relevant taxable period and attributable to them solely as
a result of the Company (and any intermediate entity through which the
holder owns such shares) or any of their Restricted Subsidiaries being a
limited liability company, partnership or similar entity for federal income
tax purposes;
(5) regardless of whether a Default then exists, the payment of any
dividend by a Restricted Subsidiary of the Company to the holders of its
common Equity Interests on a pro rata basis;
(6) the payment of any dividend on the Company Preferred Stock or the
redemption, repurchase, retirement or other acquisition of the Company
Preferred Stock in an amount not in excess of its aggregate liquidation
value;
(7) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company held by any member of the
Company's management pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the
Indentures; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $10 million in any fiscal year of the Company; and
(8) payment of fees in connection with any acquisition, merger or
similar transaction in an amount that does not exceed an amount equal to
1.25% of the transaction value of such acquisition, merger or similar
transaction.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company or any of its Restricted
Subsidiaries pursuant to the Restricted Payment. The fair market value of any
assets or securities that are required to be valued by this covenant shall be
determined by the Board of Directors of the Company whose resolution with
respect thereto shall be delivered to the Trustee. Such Board of Directors'
determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $100 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this "Restricted Payments"
covenant were computed, together with a copy of any fairness opinion or
appraisal required by the Indentures.
INVESTMENTS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) make any Restricted Investment; or
(2) allow any Restricted Subsidiary of the Company to become an
Unrestricted Subsidiary, unless, in each case:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
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(2) the Company would, at the time of, and after giving effect to,
such Restricted Investment or such designation of a Restricted Subsidiary
as an unrestricted Subsidiary, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to the Leverage Ratio test set forth in
the first paragraph of the covenant described below under the caption
"-- Incurrence of Indebtedness and Issuance of Preferred Stock."
An Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary
if such redesignation would not cause a Default.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness (including Acquired
Debt), and the Company will not issue any Disqualified Stock and will not permit
any of its Restricted Subsidiaries to issue any shares of preferred stock unless
the Leverage Ratio would have been not greater than 8.75 to 1.0 determined on a
pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock had been issued, as the case may be, at the beginning of the
most recently ended fiscal quarter.
So long as no Default shall have occurred and be continuing or would be
caused thereby, the first paragraph of this covenant will not prohibit the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(1) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness under the Credit Facilities; provided that the aggregate
principal amount of all Indebtedness of the Company and its Restricted
Subsidiaries outstanding under the Credit Facilities, after giving effect
to such incurrence, does not exceed an amount equal to $3.5 billion less
the aggregate amount of all Net Proceeds of Asset Sales applied by the
Company or any of its Subsidiaries in the case of an Asset Sale since the
date of the Indentures to repay Indebtedness under the Credit Facilities,
pursuant to the covenant described above under the caption "-- Asset
Sales";
(2) the incurrence by the Company and its Restricted Subsidiaries of
Existing Indebtedness (other than the Credit Facilities);
(3) the incurrence on the Issue Date by the Company and its Restricted
Subsidiaries of Indebtedness represented by the Notes;
(4) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case, incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement (including, without limitation, the cost of
design, development, construction, acquisition, transportation,
installation, improvement, and migration) of Productive Assets of the
Company or any of its Restricted Subsidiaries in an aggregate principal
amount not to exceed $75 million at any time outstanding;
(5) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to refund, refinance or replace, in whole or
in part, Indebtedness (other than intercompany Indebtedness) that was
permitted by the Indentures to be incurred under the first paragraph of
this covenant or clauses (2) or (3) of this paragraph;
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(6) the incurrence by the Company or any of its Restricted
Subsidiaries, of intercompany Indebtedness between or among the Company and
any of its Wholly Owned Restricted Subsidiaries; provided, that this clause
does not permit Indebtedness between the Company or any of its Restricted
Subsidiaries, as creditor or debtor, as the case may be, unless otherwise
permitted by the Indentures; provided, further, that:
(a) if the Company is the obligor on such Indebtedness, such
Indebtedness must be expressly subordinated to the prior payment in full
in cash of all Obligations with respect to the Notes; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person other than
the Company or a Wholly Owned Restricted Subsidiary thereof, and (ii)
any sale or other transfer of any such Indebtedness to a Person that is
not either the Company or a Wholly Owned Restricted Subsidiary thereof,
shall be deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or any of its Restricted Subsidiaries, as
the case may be, that was not permitted by this clause (6);
(7) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose of
fixing or hedging interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of the Indentures to be
outstanding;
(8) the guarantee by the Company of Indebtedness of the Company or a
Restricted Subsidiary of the Company, that was permitted to be incurred by
another provision of this covenant;
(9) the incurrence by the Company or any of its Restricted
Subsidiaries, of additional Indebtedness in an aggregate principal amount
at any time outstanding, not to exceed $300 million;
(10) the incurrence by the Company or any of its Restricted
Subsidiaries, of additional Indebtedness in an aggregate principal amount
at any time outstanding, not to exceed 200% of the net cash proceeds
received by the Company from the sale of its Equity Interests (other than
Disqualified Stock) after the date of the Indentures to the extent such net
cash proceeds have not been applied to make Restricted Payments or to
effect other transactions pursuant to the covenant described above under
the subheading "-- Restricted Payments" or to make Permitted Investments
pursuant to clause (6) of the definition thereof;
(11) the accretion or amortization of original issue discount and the
write up of Indebtedness in accordance with purchase accounting.
For purposes of determining compliance with this "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (12) above, or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company will be permitted to classify and from time to time to reclassify such
item of Indebtedness on the date of its incurrence in any manner that complies
with this covenant. For avoidance of doubt, Indebtedness incurred pursuant to a
single agreement, instrument, program, facility or line of credit may be
classified as Indebtedness arising in part under one of the clauses listed
above, and in part under any
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one or more of the clauses listed above, to the extent that such Indebtedness
satisfies the criteria for such clauses.
(b) Notwithstanding the foregoing, in no event shall any Restricted
Subsidiary of the Company consummate a Subordinated Debt Financing or a
Preferred Stock Financing. A "Subordinated Debt Financing" or a "Preferred Stock
Financing", as the case may be, with respect to any Restricted Subsidiary of the
Company shall mean a public offering or private placement (whether pursuant to
Rule 144A under the Securities Act or otherwise) of Subordinated Notes or
preferred stock (whether or not such preferred stock constitutes Disqualified
Stock), as the case may be, of such Restricted Subsidiary to one or more
purchasers (other than to one or more Affiliates of the Company). "Subordinated
Notes" with respect to any Restricted Subsidiary of the Company shall mean
Indebtedness of such Restricted Subsidiary that is contractually subordinated in
right of payment to any other Indebtedness of such Restricted Subsidiary
(including, without limitation, Indebtedness under the Credit Facilities). The
foregoing limitation shall not apply to (i) any Indebtedness or preferred stock
of any Person existing at the time such Person is merged with or into or became
a Subsidiary of the Company; provided that such Indebtedness or preferred stock
was not incurred or issued in connection with, or in contemplation of, such
Person merging with or into, or becoming a Subsidiary of, the Company and (ii)
any Indebtedness or preferred stock of a Restricted Subsidiary issued in
connection with, and as part of the consideration for, an acquisition, whether
by stock purchase, asset sale, merger or otherwise, in each case involving such
Restricted Subsidiary, which Indebtedness or preferred stock is issued to the
seller or sellers of such stock or assets; provided that such Restricted
Subsidiary is not obligated to register such Indebtedness or preferred stock
under the Securities Act or obligated to provide information pursuant to Rule
144A under the Securities Act.
LIENS
The Company will not, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind securing Indebtedness, Attributable Debt or
trade payables on any asset now owned or hereafter acquired, except Permitted
Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Company will not, directly or indirectly, create or permit to exist or
become effective any encumbrance or restriction on the ability of any Restricted
Subsidiary of the Company, to:
(1) pay dividends or make any other distributions on its Capital Stock
to the Company or any of its Restricted Subsidiaries, or with respect to
any other interest or participation in, or measured by, its profits, or pay
any indebtedness owed to the Company or any of its Restricted Subsidiaries;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries or any of its Restricted Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any of
its Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the Indentures
(including, without limitation, the Credit Facilities) and any amendments,
modifications,
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restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof; provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no more restrictive, taken as a whole, with respect to
such dividend and other payment restrictions than those contained in such
Existing Indebtedness, as in effect on the date of the Indentures;
(2) the Indentures and the Notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired; provided that, in the case of
Indebtedness, such Indebtedness was permitted by the terms of the
Indentures to be incurred;
(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so acquired of
the nature described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary of the Company that restricts distributions by such Restricted
Subsidiary pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness; provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred
pursuant to the provisions of the covenant described above under the
caption "-- Liens" that limit the right of the Company or any of its
Restricted Subsidiaries to dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;
(12) restrictions contained in the terms of Indebtedness permitted to
be incurred under the covenant "-- Incurrence of Indebtedness and Issuance
of Preferred Stock"; provided that such restrictions are no more
restrictive than the terms contained in the Credit Facilities as in effect
on the Issue Date; and
(13) restrictions that are not materially more restrictive than
customary provisions in comparable financings and the management of the
Company determines that such restrictions will not materially impair the
Company's ability to make payments as required under the Notes.
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MERGER, CONSOLIDATION, OR SALE OF ASSETS
Neither of the Issuers may, directly or indirectly: (1) consolidate or
merge with or into another Person (whether or not such Issuer is the surviving
corporation); or (2) sell, assign, transfer, convey or otherwise dispose of all
or substantially all of its properties or assets, in one or more related
transactions, to another Person; unless:
(1) either: (a) such Issuer, is the surviving corporation; or (b) the
Person formed by or surviving any such consolidation or merger (if other
than such Issuer) or to which such sale, assignment, transfer, conveyance
or other disposition shall have been made is a Person organized or existing
under the laws of the United States, any state thereof or the District of
Columbia (provided that if the Person formed by or surviving any such
consolidation or merger with either Issuer is a limited liability company
or other Person other than a corporation, a corporate co-issuer shall also
be an obligor with respect to the Notes);
(2) the Person formed by or surviving any such consolidation or merger
(if other than the Company) or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made assumes all
the obligations of the Company under the Notes, in the case of the Company,
and the Indentures pursuant to agreements reasonably satisfactory to the
Trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) the Company or the Person formed by or surviving any such
consolidation or merger (if other than the Company) will, on the date of
such transaction after giving pro forma effect thereto and any related
financing transactions as if the same had occurred at the beginning of the
applicable four-quarter period, either (A) be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Leverage Ratio test set
forth in the first paragraph of the covenant described above under the
caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock" or
(B) have a Leverage Ratio immediately after giving effect to such
consolidation or merger no greater than the Leverage Ratio immediately
prior to such consolidation or merger.
In addition, the Company may not, directly or indirectly, lease all or
substantially all of its properties or assets, in one or more related
transactions, to any other Person. This "Merger, Consolidation, or Sale of
Assets" covenant will not apply to a sale, assignment, transfer, conveyance or
other disposition of assets between or among the Company and any of its Wholly
Owned Subsidiaries.
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any transaction, contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable
to the Company or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person; and
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(2) the Company delivers to the Trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$15.0 million, a resolution of the Board of Directors of the Company set
forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with this covenant and that such Affiliate
Transaction has been approved by a majority of the members of the Board
of Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$50.0 million, an opinion as to the fairness to the holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) existing employment agreement entered into by the Company or any
of its Subsidiaries and any employment agreement entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such
Restricted Subsidiary;
(2) transactions between or among the Company and/or its Restricted
Subsidiaries;
(3) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of the Company, and customary indemnification and
insurance arrangements in favor of directors, regardless of affiliation
with the Company, or any of its Restricted Subsidiaries;
(4) payment of management fees pursuant to management agreements
either (A) existing on the Issue Date or (B) entered into after the Issue
Date, to the extent that such management agreements provide for percentage
fees no higher than the percentage fees existing under the management
agreements existing on the Issue Date;
(5) Restricted Payments that are permitted by the provisions of the
Indentures described above under the caption "-- Restricted Payments"; and
(6) Permitted Investments.
SALE AND LEASEBACK TRANSACTIONS
The Company will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
the Company may enter into a sale and leaseback transaction if:
(1) the Company could have (a) incurred Indebtedness in an amount
equal to the Attributable Debt relating to such sale and leaseback
transaction under the Leverage Ratio test in the first paragraph of the
covenant described above under the caption "-- Incurrence of Additional
Indebtedness and Issuance of Preferred Stock" and (b) incurred a Lien to
secure such Indebtedness pursuant to the covenant described above under the
caption "-- Liens"; and
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(2) the transfer of assets in that sale and leaseback transaction is
permitted by, and the Company applies the proceeds of such transaction in
compliance with, the covenant described above under the caption "-- Asset
Sales."
The foregoing restrictions do not apply to a sale and leaseback transaction
if the lease is for a period, including renewal rights, of not in excess of
three years.
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS
The Company will not permit any of its Restricted Subsidiaries, directly or
indirectly, to Guarantee or pledge any assets to secure the payment of any other
Indebtedness of the Company, except in respect of the Credit Facilities (the
"Guaranteed Indebtedness") unless (i) such Restricted Subsidiary of the Company
simultaneously executes and delivers a supplemental indenture providing for the
Guarantee (a "Subsidiary Guarantee") of the payment of the Notes by such
Restricted Subsidiary and (ii) until one year after all the Notes have been paid
in full in cash, such Restricted Subsidiary waives and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the Company
or any other Restricted Subsidiary of the Company as a result of any payment by
such Restricted Subsidiary under its Subsidiary Guarantee; provided that this
paragraph shall not be applicable to any Guarantee or any Restricted Subsidiary
that existed at the time such Person became a Restricted Subsidiary and was not
Incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary. If the Guaranteed Indebtedness is subordinated to the
Notes, then the Guarantee of such Guaranteed Indebtedness shall be subordinated
to the Subsidiary Guarantee at least to the extent that the Guaranteed
Indebtedness is subordinated to the Notes.
PAYMENTS FOR CONSENT
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any holder of Notes for or as an inducement to any consent, waiver or
amendment of any of the terms or provisions of the Indentures or the Notes
unless such consideration is offered to be paid and is paid to all holders of
the Notes that consent, waive or agree to amend in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
REPORTS
Whether or not required by the Commission, so long as any Notes are
outstanding, the Company will furnish to the holders of Notes, within the time
periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and
10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report on
the annual financial statements by the Company's certified independent
accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if the Company were required to file such reports.
If the Company has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph
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shall include a reasonably detailed presentation, either on the face of the
financial statements or in the footnotes thereto, and in Management's Discussion
and Analysis of Financial Condition and Results of Operations, of the financial
condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of the Company.
In addition, whether or not required by the Commission, the Company will
file a copy of all of the information and reports referred to in clauses (1) and
(2) above with the Commission for public availability within the time periods
specified in the Commission's rules and regulations (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on the
Notes;
(2) default in payment when due of the principal of or premium, if
any, on the Notes;
(3) failure by the Company or any of its Restricted Subsidiaries, to
comply with the provisions described under the captions "-- Change of
Control" or "-- Merger, Consolidation, or Sale of Assets";
(4) failure by the Company or any of its Restricted Subsidiaries, for
30 days after written notice thereof has been given to the Company by the
Trustee or to the Company and the Trustee by holders of at least 25% of the
aggregate principal amount of the Notes outstanding to comply with any of
their other covenants or agreements in the Indentures;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries(or the payment of which is guaranteed by the Company or any of
its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Indentures, if that default:
(a) is caused by a failure to pay at final stated maturity the
principal amount on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity, and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $100.0 million or
more;
(6) failure by the Company or any of its Restricted Subsidiaries to
pay final judgments which are non-appealable aggregating in excess of
$100.0 million (net of applicable insurance which has not been denied in
writing by the insurer), which judgments are not paid, discharged or stayed
for a period of 60 days; and
(7) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries.
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In the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, all outstanding Notes
will become due and payable immediately without further action or notice. If any
other Event of Default occurs and is continuing, the Trustee or the holders of
at least 25% in principal amount of the then outstanding Notes may declare all
the Notes to be due and payable immediately.
Holders of the Notes may not enforce the Indentures or the Notes except as
provided in the Indentures. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indentures except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company will be required to deliver to the Trustee annually a statement
regarding compliance with the Indentures. Upon becoming aware of any Default or
Event of Default, the Company will be required to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, MEMBERS AND
STOCKHOLDERS
No director, officer, employee, incorporator, member or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes, the Indentures, or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of Notes by accepting
a Note waives and releases all such liability. The waiver and release will be
part of the consideration for issuance of the Notes. The waiver may not be
effective to waive liabilities under the federal securities laws.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for:
(1) the rights of holders of outstanding Notes to receive payments in
respect of the Accreted Value or principal of, premium, if any, and
interest on such Notes when such payments are due from the trust referred
to below;
(2) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost
or stolen Notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the Trustee,
and the Company's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indentures.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company released with respect to certain covenants that
are described in the Indentures ("Covenant Defeasance") and thereafter any
omission to comply with
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those covenants shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the Trustee, in trust,
for the benefit of the holders of the Notes, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium,
if any, and interest on the outstanding Notes on the stated maturity or on
the applicable redemption date, as the case may be, and the Company must
specify whether the Notes are being defeased to maturity or to a particular
redemption date;
(2) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an Opinion of Counsel reasonably acceptable to the Trustee
confirming that (a) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (b) since the date
of the Indentures, there has been a change in the applicable federal income
tax law, in either case to the effect that, and based thereon such opinion
of counsel shall confirm that, the holders of the outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel reasonably acceptable to the
Trustee confirming that the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing either: (a) on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied to
such deposit); or (b) or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indentures) to which the Company or
any of its Restricted Subsidiaries is a party or by which the Company or
any of its Restricted Subsidiaries is bound;
(6) the Company must have delivered to the Trustee an Opinion of
Counsel to the effect that after the 91st day assuming no intervening
bankruptcy, that no holder is an insider of the Company following the
deposit and that such deposit would not be deemed by a court of competent
jurisdiction a transfer for the benefit of either Issuer in its capacity as
such, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally;
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(7) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the holders of Notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors
of the Company or others; and
(8) the Company must deliver to the Trustee an Officers' Certificate
and an opinion of counsel, each stating that all conditions precedent
relating to the Legal Defeasance or the Covenant Defeasance have been
complied with.
Notwithstanding the foregoing, the Opinion of Counsel required by clause
(2) above with respect to a Legal Defeasance need not be delivered if all Notes
not theretofore delivered to the Trustee for cancellation (i) have become due
and payable or (ii) will become due and payable on the maturity date within one
year under arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Issuers.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indentures or
the Notes may be amended or supplemented with the consent of the holders of at
least a majority in principal amount, in the case of the Eight-Year Senior Notes
and the Ten-Year Senior Notes, and aggregate principal amount at maturity, in
the case of the Senior Discount Notes, of the Notes of such series then
outstanding (including, without limitation, consents obtained in connection with
a purchase of, or tender offer or exchange offer for, Notes), and any existing
Default or compliance with any provision of the Indentures or the Notes may be
waived with the consent of the holders of a majority in principal amount, in the
case of the Eight-Year Senior Notes and the Ten-Year Senior Notes, and aggregate
principal amount at maturity, in the case of the Senior Discount Notes, of the
Notes of such series then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder):
(1) reduce the principal amount of Notes whose holders must consent to
an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any Note
or alter the payment provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
caption "-- Repurchase at the Option of holders");
(3) reduce the rate of or extend the time for payment of interest on
any Note;
(4) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest on the Notes (except a rescission of
acceleration of the Notes by the holders of at least a majority in
aggregate principal amount of the Notes and a waiver of the payment default
that resulted from such acceleration);
(5) make any Note payable in money other than that stated in the
Notes;
(6) make any change in the provisions of the Indentures relating to
waivers of past Defaults or the rights of holders of Notes to receive
payments of Accreted Value or principal of, or premium, if any, or interest
on the Notes;
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(7) waive a redemption payment with respect to any Note (other than a
payment required by one of the covenants described above under the caption
"-- Repurchase at the Option of Holders");
(8) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indentures or the Notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(3) to provide for the assumption of the Company's obligations to
holders of Notes in the case of a merger or consolidation or sale of all or
substantially all of the Company's assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of Notes or that does not adversely affect the
legal rights under the Indentures of any such holder; or
(5) to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indentures under the Trust Indenture
Act or otherwise as necessary to comply with applicable law.
GOVERNING LAW
The Indentures and the Notes will be governed by the laws of the State of
New York.
CONCERNING THE TRUSTEE
If the Trustee becomes a creditor of the Company, the Indentures limit its
right to obtain payment of claims in certain cases, or to realize on certain
property received in respect of any such claim as security or otherwise. The
Trustee will be permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate such conflict within 90
days, apply to the Commission for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indentures provide that in case an Event of Default
shall occur and be continuing, the Trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indentures at the request of any
holder of Notes, unless such holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indentures
without charge by writing to Charter Communications, Inc., 12444 Powerscourt
Drive, Suite 100, St. Louis, Missouri 63131, Attention: Corporate Secretary.
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BOOK-ENTRY, DELIVERY AND FORM
The Notes will initially be issued in the form of global securities held in
book-entry form. The Notes will be deposited with the Trustee as custodian for
the Depositary Trust Company ("DTC"), and DTC or its nominee will initially be
the sole registered holder of the Notes for all purposes under the Indentures.
Unless it is exchanged in whole or in part for debt securities in definitive
form as described below, a global security may not be transferred. However,
transfers of the whole security between DTC and its nominee or their respective
successors are permitted.
Upon the issuance of a global security, DTC or its nominee will credit on
its internal system the principal amount at maturity of the individual
beneficial interest represented by the global security acquired by the persons
in this offering. Ownership of beneficial interests in a global security will be
limited to persons that have accounts with DTC or persons that hold interests
through participants. Ownership of beneficial interests will be shown on, and
the transfer of that ownership interest will be effected only through, records
maintained by DTC or its nominee relating to interests of participants and the
records of participants relating to interests of persons other than
participants. The laws of some jurisdictions require that some purchasers of
securities take physical delivery of the securities in definitive form. These
limits and laws may impair the ability to transfer beneficial interests in a
global security.
Principal and interest payments on global securities registered in the name
of DTC's nominee will be made in immediate available funds to DTC's nominee as
the registered owner of the global securities. The Issuers and the Trustee will
treat DTC's nominee as the owner of the global securities for all other purposes
as well. Accordingly, the Issuers, the Trustee, any paying agent and the Initial
Purchasers will have no direct responsibility or liability for any aspect of the
records relating to payments made on account of beneficial interests in the
global securities or for maintaining, supervising or reviewing any records
relating to these beneficial interests. It is DTC's current practice, upon
receipt of any payment of principal or interest, to credit direct participants'
accounts on the payment date according to their respective holdings of
beneficial interests in the global securities. These payments will be the
responsibility of the direct and indirect participants and not of DTC, the
Issuers, the Trustee or the Initial Purchasers.
So long as DTC or its nominee is the registered owner or holder of the
global security, DTC or its nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by the global security for the
purposes of:
(1) receiving payment on the Notes;
(2) receiving notices; and
(3) for all other purposes under the Indentures and the Notes.
Beneficial interests in the Notes will be evidenced only by, and transfers of
the Notes will be effected only through, records maintained by DTC and its
participants.
Except as described above, owners of beneficial interests in a global
security will not be entitled to receive physical delivery of certificated notes
in definitive form and will not be considered the holders of the global security
for any purposes under the Indentures. Accordingly, each person owning a
beneficial interest in a global security must rely on the procedures of DTC.
And, if that person is not a participant, the person must rely on the procedures
of the participant through which that person owns its interest, to exercise any
rights of a holder under the Indentures. Under existing industry practices, if
the Issuers
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request any action of holders or an owner of a beneficial interest in a global
security desires to take any action under the Indentures, DTC would authorize
the participants holding the relevant beneficial interest to take that action.
The participants then would authorize beneficial owners owning through the
participants to take the action or would otherwise act upon the instructions of
beneficial owners owning through them.
DTC has advised the Issuers that it will take any action permitted to be
taken by a holder of Notes only at the direction of one or more participants to
whose account with DTC interests in the global security are credited. Further,
DTC will take action only as to the portion of the aggregate principal amount at
maturity of the Notes as to which the participant or participants has or have
given the direction.
Although DTC has agreed to the procedures described above in order to
facilitate transfers of interests in global securities among participants of
DTC, it is under no obligation to perform these procedures, and the procedures
may be discontinued at any time. None of the Issuers, the Trustee, any agent of
the Issuers or the Initial Purchasers will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
DTC has provided the following information to us. DTC is a:
(1) limited-purpose trust company organized under the New York Banking Law;
(2) a banking organization within the meaning of the New York Banking Law;
(3) a member of the U.S. Federal Reserve System;
(4) a clearing corporation within the meaning of the New York Uniform
Commercial Code; and
(5) a clearing agency registered under the provisions of Section 17A of the
Securities Exchange Act.
CERTIFICATED NOTES
Notes represented by a global security are exchangeable for certificated
notes only if:
(1) DTC notifies the Issuers that it is unwilling or unable to continue as
depository or if DTC ceases to be a registered clearing agency, and a
successor depository is not appointed by the Issuers within 90 days;
(2) the Issuers determine not to require all of the Notes to be represented
by a global security and notifies the Trustee of its decision; or
(3) an Event of Default or an event which, with the giving of notice or
lapse of time, or both, would constitute an Event of Default relating
to the Notes represented by the global security has occurred and is
continuing.
Any global security that is exchangeable for certificated notes in
accordance with the preceding sentence will be transferred to, and registered
and exchanged for, certificated notes in authorized denominations and registered
in the names as DTC or its nominee may direct. However, a global security is
only exchangeable for a global security of like denomination to be registered in
the name of DTC or its nominee. If a global security becomes exchangeable for
certificated notes:
(1) certificated notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples of $1,000;
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(2) payment of principal, premium, if any, and interest on the certificated
notes will be payable, and the transfer of the certificated notes will
be registrable, at the office or agency of the Issuers maintained for
these purposes; and
(3) no service charge will be made for any issuance of the certificated
notes, although the Issuers may require payment of a sum sufficient to
cover any tax or governmental charge imposed in connection with the
issuance.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indentures. Reference
is made to the Indentures for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"ACCRETED VALUE" is defined to mean, for any Specific Date, the amount
calculated pursuant to (i), (ii), (iii) or (iv) for each $1,000 of principal
amount at maturity of the Senior Discount Notes:
(i) if the Specified Date occurs on one or more of the following dates
(each a "Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
SEMI-ANNUAL
ACCRUAL DATE ACCRETED VALUE
- ------------ --------------
Issue Date....................................... $ 613.94
October 1, 1999.................................. 646.88
April 1, 2000.................................... 678.96
October 1, 2000.................................. 712.64
April 1, 2001.................................... 747.99
October 1, 2001.................................. 785.09
April 1, 2002.................................... 824.03
October 1, 2002.................................. 864.90
April 1, 2003.................................... 907.80
October 1, 2003.................................. 952.82
April 1, 2004.................................... $1,000.00
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) $613.94 and (b) an
amount equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less $613.94 multiplied by (2) a fraction, the
numerator of which is the number of days from the Issue Date of the Notes
to the Specified Date, using a 360-day year of twelve 30-day months, and
the denominator of which is the number of days elapsed from the issue date
of the Notes to the first Semi-Annual Accrual Date, using a 360-day year of
twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of
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days from the immediately preceding Semi-Annual Accrual Date to the
Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"ACQUIRED DEBT" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified
Person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other Person merging with or into, or becoming a
Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of the
Voting Stock of a Person shall be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" shall have correlative meanings.
"ASSET ACQUISITION" means (a) an Investment by the Company or any of the
Company's Restricted Subsidiaries, in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or any of the
Company's Restricted Subsidiaries, or shall be merged with or into the Company
or any of the Company's Restricted Subsidiaries, or (b) the acquisition by the
Company or any of the Company's Restricted Subsidiaries, of the assets of any
Person which constitute all or substantially all of the assets of such Person,
any division or line of business of such Person or any other properties or
assets of such Person other than in the ordinary course of business.
"ASSET SALE" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights, other than sales of inventory in the ordinary course of business
consistent with past practices; provided that the sale, conveyance or other
disposition of all or substantially all of the assets of the Company and
its Restricted Subsidiaries, taken as a whole, will be governed by the
provisions of the Indentures described above under the caption "-- Change
of Control" and/or the provisions described above under the caption
"-- Merger, Consolidation or Sale of Assets" and not by the provisions of
the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of the Company's
Restricted Subsidiaries or the sale of Equity Interests in any of the
Company's Restricted Subsidiaries.
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Notwithstanding the preceding, the following items shall not be deemed to
be Asset Sales:
(1) any single transaction or series of related transactions that: (a)
involves assets having a fair market value of less than $100 million; or
(b) results in net proceeds to the Company and its Restricted Subsidiaries
of less than $100 million;
(2) a transfer of assets (i) between or among the Company and its
Restricted Subsidiaries;
(3) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary of the Company to the Company or to another Wholly Owned
Restricted Subsidiary of the Company;
(4) a Restricted Payment that is permitted by the covenant described
above under the caption "-- Restricted Payments" and a Restricted
Investment that is permitted by the covenant described above under the
caption "-- Investments"; and
(5) the incurrence of Permitted Liens and the disposition of assets
related to such Permitted Liens by the secured party pursuant to a
foreclosure.
"ATTRIBUTABLE DEBT" in respect of a sale and leaseback transaction means,
at the time of determination, the present value of the obligation of the lessee
for net rental payments during the remaining term of the lease included in such
sale and leaseback transaction including any period for which such lease has
been extended or may, at the option of the lessee, be extended. Such present
value shall be calculated using a discount rate equal to the rate of interest
implicit in such transaction, determined in accordance with GAAP.
"BENEFICIAL OWNER" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as such term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire, whether such
right is currently exercisable or is exercisable only upon the occurrence of a
subsequent condition.
"CABLE RELATED BUSINESS" means the business of owning cable television
systems and businesses ancillary, complementary and related thereto.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest (other than any debt obligation) or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"CAPITAL STOCK SALE PROCEEDS" means the aggregate net cash proceeds
(including the fair market value of the non-cash proceeds, as determined by an
independent appraisal
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firm) received by the Company since the date of the Indentures (x) as a
contribution to the common equity capital or from the issue or sale of Equity
Interests of the Company (other than Disqualified Stock) or (y) from the issue
or sale of convertible or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of the Company that have been converted into or
exchanged for such Equity Interests (other than Equity Interests (or
Disqualified Stock or debt securities) sold to a Subsidiary of the Company).
"CASH EQUIVALENTS" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is pledged in
support thereof) having maturities of not more than twelve months from the
date of acquisition;
(3) certificates of deposit and eurodollar time deposits with
maturities of twelve months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case, with any domestic commercial bank having combined
capital and surplus in excess of $500 million and a Thompson Bank Watch
Rating at the time of acquisition of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having a rating of at least "P-1" from Moody's or
at least "A-1" from S&P and in each case maturing within twelve months
after the date of acquisition;
(6) corporate debt obligations maturing within twelve months after the
date of acquisition thereof, rated at the time of acquisition at least
"Aaa" or "P-1" by Moody's or "AAA" or "A-1" by S&P;
(7) auction-rate preferred stocks of any corporation maturing not
later than 45 days after the date of acquisition thereof, rated at the time
of acquisition at least "Aaa" by Moody's or "AAA" by S&P;
(8) securities issued by any state, commonwealth or territory of the
United States, or by any political subdivision or taxing authority thereof,
maturing not later than six months after the date of acquisition thereof,
rated at the time of acquisition at least "A" by Moody's or S&P; and
(9) money market or mutual funds at least 90% of the assets of which
constitute Cash Equivalents of the kinds described in clauses (1) through
(8) of this definition.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(1) the sale, transfer, conveyance or other disposition (other than by
way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Subsidiaries, taken as a whole, to any "person" (as such term is used
in Section 13(d)(3) of the Exchange Act) other than the Principal or a
Related Party of the Principal;
(2) the adoption of a plan relating to the liquidation or dissolution
of the Company;
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(3) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" (as defined above), other than the Principal and Related Parties
and any entity formed for the purpose of owning Capital Stock of the
Company, becomes the Beneficial Owner, directly or indirectly, of more than
35% of the Voting Stock of the Company, measured by voting power rather
than number of shares, unless the Principal or a Related Party Beneficially
Owns, directly or indirectly a greater percentage of Voting Stock of the
Company, measured by voting power rather than the number of shares, than
such person;
(4) after the Company's initial public offering, the first day on
which a majority of the members of the Board of Directors of the Company
are not Continuing Directors; or
(5) the Company consolidates with, or merges with or into, any Person,
or any Person consolidates with, or merges with or into, the Company, in
any such event pursuant to a transaction in which any of the outstanding
Voting Stock of the Company is converted into or exchanged for cash,
securities or other property, other than any such transaction where the
Voting Stock of the Company outstanding immediately prior to such
transaction is converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person constituting a
majority of the outstanding shares of such Voting Stock of such surviving
or transferee Person immediately after giving effect to such issuance.
"CHARTER CAPITAL" means Charter Communications Holdings Capital
Corporation, a Delaware corporation.
"CHARTER HOLDINGS" means Charter Communications Holdings, LLC, a Delaware
limited liability company.
"COMPANY PREFERRED STOCK" means the 10% cumulative convertible redeemable
preferred stock of the Company with an aggregate liquidation value of $25
million.
"CONSOLIDATED EBITDA" means with respect to any Person, for any period, the
net income of such Person and its Restricted Subsidiaries for such period plus,
to the extent such amount was deducted in calculating such net income:
(1) Consolidated Interest Expense;
(2) income taxes;
(3) depreciation expense;
(4) amortization expense;
(5) all other non-cash items, extraordinary items, nonrecurring and
unusual items and the cumulative effects of changes in accounting
principles reducing such net income, less all non-cash items, extraordinary
items, nonrecurring and unusual items and cumulative effects of changes in
accounting principles increasing such net income, all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries in
conformity with GAAP;
(6) amounts actually paid during such period pursuant to a deferred
compensation plan; and
(7) for purposes of the covenant "-- Incurrence of Indebtedness and
Issuance of Preferred Stock" only, Management Fees;
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provided that Consolidated EBITDA shall not include:
(x) the net income (or net loss) of any Person that is not a
Restricted Subsidiary ("Other Person"), except (I) with respect to net
income, to the extent of the amount of dividends or other distributions
actually paid to such Person or any of its Restricted Subsidiaries by
such Other Person during such period and (II) with respect to net
losses, to the extent of the amount of investments made by such Person
or any Restricted Subsidiary of such Person in such Other Person during
such period;
(y) solely for the purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (3) of the covenant
described under the subheading "Certain Covenants -- Restricted
Payments" (and in such case, except to the extent includable pursuant to
clause (x) above), the net income (or net loss) of any Other Person
accrued prior to the date it becomes a Restricted Subsidiary or is
merged into or consolidated with such Person or any Restricted
Subsidiaries or all or substantially all of the property and assets of
such Other Person are acquired by such Person or any of its Restricted
Subsidiaries; and
(z) the net income of any Restricted Subsidiary to the extent that
the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary (other than any agreement or
instrument evidencing Indebtedness or Preferred Stock outstanding on the
date of the Indenture or incurred or issued thereafter in compliance
with the covenant described under the caption "Certain Covenants --
Incurrence of Indebtedness and Issuance of Preferred Stock"; provided
that the terms of any such agreement restricting the declaration and
payment of dividends or similar distributions apply only in the event of
a default with respect to a financial covenant or a covenant relating to
payment (beyond any applicable period of grace) contained in such
agreement or instrument and provided such terms are determined by such
Person to be customary in comparable financings and such restrictions
are determined by the Company not to materially affect the Company's
ability to make principal or interest payments on the Notes when due).
"CONSOLIDATED INDEBTEDNESS" means, with respect to any Person as of any
date of determination, the sum, without duplication, of:
(1) the total amount of outstanding Indebtedness of such Person and
its Restricted Subsidiaries, plus
(2) the total amount of Indebtedness of any other Person, that has
been Guaranteed by the referent Person or one or more of its Restricted
Subsidiaries, plus
(3) the aggregate liquidation value of all Disqualified Stock of such
Person and all preferred stock of Restricted Subsidiaries of such Person,
in each case, determined on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person for any
period, without duplication, the sum of:
(1) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation,
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amortization or original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net payments (if
any) pursuant to Hedging Obligations); and
(2) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, and
(3) any interest expense on Indebtedness of another Person that is
guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries
(whether or not such Guarantee or Lien is called upon);
excluding, however, any amount of such interest of any Restricted Subsidiary if
the net income of such Restricted Subsidiary is excluded in the calculation of
Consolidated EBITDA pursuant to clause (z) of the definition thereof (but only
in the same proportion as the net income of such Restricted Subsidiary is
excluded from the calculation of Consolidated EBITDA pursuant to clause (z) of
the definition thereof), in each case, on a consolidated basis and in accordance
with GAAP.
"CONTINUING DIRECTORS" means, as of any date of determination, any member
of the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of the
Indentures; or
(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election or whose
election or appointment was previously so approved.
"CREDIT FACILITIES" means, with respect to the Company, and/or its
Restricted Subsidiaries, one or more debt facilities or commercial paper
facilities, in each case with banks or other institutional lenders providing for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in each
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part from time to time.
"DEFAULT" means any event that is, or with the passage of time or the
giving of notice or both would be, an Event of Default.
"DISPOSITION" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, or transfer, lease conveyance
or other disposition of all or substantially all of such Person's assets or
Capital Stock.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the Notes mature. Notwithstanding the preceding sentence, any
Capital Stock that would constitute Disqualified Stock solely because the
holders thereof have the right to require the Company to repurchase such Capital
Stock upon the occurrence of a change of control or an asset sale shall not
constitute Disqualified
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Stock if the terms of such Capital Stock provide that the Company may not
repurchase or redeem any such Capital Stock pursuant to such provisions unless
such repurchase or redemption complies with the covenant described above under
the caption "-- Certain Covenants -- Restricted Payments."
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EQUITY OFFERING" means any private or underwritten public offering of
Qualified Capital Stock of the Company which the gross proceeds to the Company
are at least $25 million.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its
Restricted Subsidiaries in existence on the date of the Indentures, until such
amounts are repaid.
"FULL ACCRETION DATE" means April 1, 2004, the first date on which the
Accreted Value of the Senior Discount Notes has accreted to an amount equal to
the principal amount at maturity of the Senior Discount Notes.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"GUARANTEE" or "GUARANTEE" means a guarantee other than by endorsement of
negotiable instruments for collection in the ordinary course of business, direct
or indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness, measured as the lesser of the
aggregate outstanding amount of the Indebtedness so guaranteed and the face
amount of the guarantee.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements;
(2) interest rate option agreements, foreign currency exchange
agreements, foreign currency swap agreements; and
(3) other agreements or arrangements designed to protect such Person
against fluctuations in interest and currency exchange rates.
"INDEBTEDNESS" means, with respect to any specified Person, any
indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
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(5) in respect of the balance deferred and unpaid of the purchase
price of any property, except any such balance that constitutes an accrued
expense or trade payable; or
(6) representing the notional amount of any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of the
specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) and, to the extent not otherwise included, the guarantee
by such Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount; and
(2) the principal amount thereof, together with any interest thereon
that is more than 30 days past due, in the case of any other Indebtedness.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
"INVESTMENT GRADE RATING" means a rating equal to or higher than Baa3 (or
the equivalent) by Moody's and BBB- (or the equivalent) by S&P.
"ISSUE DATE" means the date on which the Notes are initially issued.
"LEVERAGE RATIO" means, as of any date, the ratio of:
(1) the Consolidated Indebtedness of the Company on such date to
(2) the aggregate amount of combined Consolidated EBITDA for the
Company for the most recently ended fiscal quarter for which internal
financial statements are available multiplied by four (the "Reference
Period").
In addition to the foregoing, for purposes of this definition,
"Consolidated EBITDA" shall be calculated on a pro forma basis after giving
effect to
(1) the issuance of the Notes;
(2) the incurrence of the Indebtedness or the issuance of the
Disqualified Stock or other Preferred Stock of a Restricted Subsidiary (and
the application of the proceeds therefrom) giving rise to the need to make
such calculation and any incurrence or issuance (and the application of the
proceeds therefrom) or repayment of other Indebtedness or Disqualified
Stock or other Preferred Stock or a Restricted Subsidiary, other than the
incurrence or repayment of Indebtedness for ordinary working capital
purposes, at any time subsequent to the beginning of the Reference Period
and on or prior to the date of determination, as if such incurrence (and
the application of the proceeds thereof), or the repayment, as the case may
be, occurred on the first day of the Reference Period;
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(3) any Dispositions or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted
Subsidiaries (including any person that becomes a Restricted Subsidiary as
a result of such Asset Acquisition) incurring, assuming or otherwise
becoming liable for or issuing Indebtedness, Disqualified Stock or
Preferred Stock) made on or subsequent to the first day of the Reference
Period and on or prior to the date of determination, as if such
Disposition, Asset Acquisition (including the incurrence, assumption or
liability for any such Indebtedness Disqualified Stock or Preferred Stock
and also including any Consolidated EBITDA associated with such Asset
Acquisition, including any cost savings adjustments in compliance with
Regulation S-X promulgated by the Commission) had occurred on the first day
of the Reference Period.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"MANAGEMENT FEES" means the fee payable to Charter Communications, Inc.
pursuant to the management agreement between Charter Communications, Inc. and
Charter Communications Operating LLC, as such agreement exists on the Issue
Date, including any amendment or replacement thereof, provided that any such
amendment or replacement is not more disadvantageous to the holders of the Notes
in any material respect from such management agreement existing on the Issue
Date.
"MARCUS COMBINATION" means the consolidation or merger of the Guarantor
with and into the Company or any of its Restricted Subsidiaries.
"MOODY'S" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
"NET PROCEEDS" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result thereof or taxes paid or payable as a result thereof
(including amounts distributable in respect of owners', partners' or members'
tax liabilities resulting from such sale), in each case after taking into
account any available tax credits or deductions and any tax sharing arrangements
and amounts required to be applied to the repayment of Indebtedness.
"NON-RECOURSE DEBT" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable as a guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Indebtedness
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(other than the Notes) of the Company or any of its Restricted Subsidiaries
to declare a default on such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its stated maturity; and
(3) as to which the lenders have been notified in writing that they
will not have any recourse to the stock or assets of the Company or any of
its Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED INVESTMENTS" means:
(1) any Investment by the Company in a Restricted Subsidiary of the
Company, or any Investment by a Restricted Subsidiary of the Company in the
Company;
(2) any Investment in Cash Equivalents;
(3) any Investment by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary of the Company; or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary of the Company;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption
"-- Repurchase at the Option of Holders -- Asset Sales";
(5) Investment made out of the net cash proceeds of the issue and sale
(other than to a Subsidiary of the Company) of Equity Interests (other than
Disqualified Stock) of the Company to the extent that such net cash
proceeds have not been applied to make a Restricted Payment or to effect
other transactions pursuant to the covenant described above under the
subheading "-- Restricted Payments" or to the extent such net cash proceeds
have not been used to incur Indebtedness pursuant to clause (10) of the
covenant described above under the subheading "-- Incurrence of
Indebtedness and Issuance of Preferred Stock";
(6) Investments in Productive Assets having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes is value), when taken together with all
other Investments made pursuant to this clause (7) since the Issue Date,
not to exceed $150 million; provided that either the Company or any of its
Restricted Subsidiaries, after giving effect to such Investments, will own
at least 20% of the Voting Stock of such Person;
(7) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without
giving effect to subsequent changes in value), when taken together with all
other Investments made pursuant to this clause (8) since the date of the
Indentures, not to exceed $50 million;
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(8) Investments in customers and suppliers in the ordinary course of
business which either (A) generate accounts receivable or (B) are accepted
in settlement of bona fide disputes; and
(9) the Company's investment in Marcus Cable Holdings, LLC, as
outstanding on the Issue Date.
"PERMITTED LIENS" means:
(1) Liens on the assets of the Company securing Indebtedness and other
Obligations under clause (1) of the covenant "-- Incurrence of Indebtedness
and Issuance of Preferred Stock";
(2) Liens in favor of the Company and Liens on the assets of any
Restricted Subsidiary of the Company in favor of any other Restricted
Subsidiary of the Company;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with the Company; provided that such
Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Company;
(4) Liens on property existing at the time of acquisition thereof by
the Company; provided that such Liens were in existence prior to the
contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety
or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) purchase money mortgages or other purchase money liens (including
without limitation any Capitalized Lease Obligations) incurred by the
Company upon any fixed or capital assets acquired after the Issue Date or
purchase money mortgages (including without limitation Capitalized Lease
Obligations) on any such assets, whether or not assumed, existing at the
time of acquisition of such assets, whether or not assumed, so long as (i)
such mortgage or lien does not extend to or cover any of the assets of the
Company, except the asset so developed, constructed, or acquired, and
directly related assets such as enhancements and modifications thereto,
substitutions, replacements, proceeds (including insurance proceeds),
products, rents and profits thereof, and (ii) such mortgage or lien secures
the obligation to pay the purchase price of such asset, interest thereon
and other charges, costs and expenses (including, without limitation, the
cost of design, development, construction, acquisition, transportation,
installation, improvement, and migration) and incurred in connection
therewith (or the obligation under such Capitalized Lease Obligation) only;
(7) Liens existing on the date of the Indentures (other than in
connection with the Credit Facilities);
(8) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
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(9) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for
which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(10) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(11) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligation, bankers'
acceptance, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment
of borrowed money);
(12) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of the
Company or any of its Restricted Subsidiaries or the Guarantor or any of
its Restricted Subsidiaries;
(13) Liens of franchisors or other regulatory bodies arising in the
ordinary course of business;
(14) Liens arising from filing Uniform Commercial Code financing
statements regarding leases or other Uniform Commercial Code financing
statements for precautionary purposes relating to arrangements not
constituting Indebtedness;
(15) Liens arising from the rendering of a final judgment or order
against the Company or any of its Restricted Subsidiaries that does not
give rise to an Event of Default;
(16) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(17) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case,
securing Indebtedness under Hedging Obligations and forward contracts,
options, future contracts, future options or similar agreements or
arrangements designed solely to protect the Company or any of its
Restricted Subsidiaries from fluctuations in interest rates, currencies or
the price of commodities;
(18) Liens consisting of any interest or title of licensor in the
property subject to a license;
(19) Liens on the Capital Stock of Unrestricted Subsidiaries;
(20) Liens arising from sales or other transfers of accounts
receivable which are past due or otherwise doubtful of collection in the
ordinary course of business;
(21) Liens incurred in the ordinary course of business of the Company,
with respect to obligations which in the aggregate do not exceed $50
million at any one time outstanding;
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(22) Liens in favor of the Trustee arising under the provisions in the
Indentures under the subheading "-- Compensation and Indemnity"; and
(23) Liens in favor of the Trustee for its benefit and the benefit of
holders of the Notes, as their respective interests appear.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries, issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that unless permitted otherwise
by the Indentures, no Indebtedness of the Company or any of its Restricted
Subsidiaries may be issued in exchange for, or the net proceeds of are used to
extend, refinance, renew, replace, defease or refund Indebtedness of the Company
or any of its Restricted Subsidiaries; provided, further, that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount of
(or accreted value, if applicable), plus accrued interest and premium, if
any, on, the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus the amount of reasonable expenses incurred in
connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the Notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
Notes on terms at least as favorable to the holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by the Company or by any of
its Restricted Subsidiaries who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"PRINCIPAL" means Paul G. Allen.
"PRODUCTIVE ASSETS" means assets (including assets of a referent Person
owned directly or indirectly through ownership of Capital Stock) of a kind used
or useful in the Cable Related Business.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not Disqualified
Stock.
"RATING AGENCIES" means Moody's and S&P.
"RELATED PARTY" means:
(1) the spouse or an immediate family member, estate or heir of the
Principal; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding an 80% or more controlling interest of which consist of the
Principal and/or such other Persons referred to in the immediately
preceding clause (1).
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"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Service, a division of the
McGraw-Hill Companies, Inc. or any successor to the rating agency business
thereof.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of the Company
which is a "Significant Subsidiary" as defined in Rule 1-02(w) of Regulation S-X
under the Securities Act.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the documentation governing
such Indebtedness on the Issue Date, or, if none, the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any Person:
(1) any corporation, association or other business entity of which at
least 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person (or a combination thereof) and, in the
case of any such entity of which 50% of the total voting power of shares of
Capital Stock is so owned or controlled by such Person or one or more of
the other Subsidiaries of such Person, such Person and its Subsidiaries
also has the right to control the management of such entity pursuant to
contract or otherwise; and
(2) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or any Restricted
Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of the Company unless such terms constitute Investments
permitted by the covenant described above under the heading
"-- Investments";
(3) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and
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(5) has at least one director on its board of directors that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries or has at least one executive officer that is not a director
or executive officer of the Company or any of its Restricted Subsidiaries.
Any designation of a Subsidiary of the Company as an Unrestricted
Subsidiary shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described above under the
caption "Certain Covenants -- Investments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indentures and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
and, if such Indebtedness is not permitted to be incurred as of such date under
the covenant described under the caption "Incurrence of Indebtedness and
Issuance of Preferred Stock," the Company shall be in default of such covenant.
The Board of Directors of the Company may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if (1) such Indebtedness is permitted under
the covenant described under the caption "Certain Covenants -- Incurrence of
Indebtedness and Issuance of Preferred Stock," calculated on a pro forma basis
as if such designation had occurred at the beginning of the four-quarter
reference period; and (2) no Default or Event of Default would be in existence
following such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the board of
directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person and/or by one or more Wholly Owned Restricted
Subsidiaries of such Person.
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CERTAIN FEDERAL TAX CONSIDERATIONS
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain United States federal income tax
consequences of the exchange offer to a holder of notes that is an individual
citizen or resident of the United States or a United States corporation that
purchased the notes pursuant to their original issue (a "U.S. Holder"). Except
where noted, the summary deals only with notes held as capital assets within the
meaning of section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code") by U.S. Holders, and does not deal with special situations, such as
those of broker-dealers, tax-exempt organizations, individual retirement
accounts and other tax deferred accounts, financial institutions, insurance
companies, or persons holding notes as part of a hedging or conversion
transaction or a straddle. Furthermore, the discussion below is based upon the
provisions of the Code and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed, revoked,
or modified, possibly with retroactive effect, so as to result in United States
federal income tax consequences different from those discussed below. In
addition, except as otherwise indicated, the following does not consider the
effect of any applicable foreign, state, local or other tax laws or estate or
gift tax considerations.
As used herein, a "United States person" is (1) a citizen or resident of
the U.S., (2) a corporation, partnership or other entity created or organized in
or under the laws of the U.S. or any political subdivision thereof, (3) an
estate the income of which is subject to U.S. federal income taxation regardless
of its source, (4) a trust if (A) a United States court is able to exercise
primary supervision over the administration of the trust and (B) one or more
United States persons have the authority to control all substantial decisions of
the trust, (5) a certain type of trust in existence on August 20, 1996, which
was treated as a United States person under the Code in effect immediately prior
to such date and which has made a valid election to be treated as a United
States person under the Code and (6) any person otherwise subject to U.S.
federal income tax on a net income basis in respect of its worldwide taxable
income. A "U.S. Holder" is a beneficial owner of a note who is a United States
person. A "Non-U.S. Holder" is a beneficial owner of a note that is not a U.S.
Holder.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE ORIGINAL
NOTES FOR NEW NOTES.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
REGARD TO THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR
PARTICULAR SITUATIONS, AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN
OR OTHER TAX LAWS, OR SUBSEQUENT REVISIONS THEREOF.
THE EXCHANGE OFFER
We believe that the exchange of new notes pursuant to the exchange offer
will be treated as a continuation of the corresponding original notes because
the terms of the new notes are not materially different from the terms of the
original notes, and accordingly (i) such exchange will not constitute a taxable
event to a U.S. Holder, (ii) no gain or loss will be realized by a U.S. Holder
upon receipt of a new note, (iii) the holding period of the new note will
include the holding period of the original note exchanged therefor and
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(iv) the adjusted tax basis of the new notes will be the same as the adjusted
tax basis of the original notes exchange. The filing of a shelf registration
statement should not result in a taxable exchange to us or any holder of a note.
UNITED STATES FEDERAL INCOME TAXATION OF U.S. HOLDERS
PAYMENTS OF INTEREST ON THE 8.250% SENIOR NOTES DUE 2007 AND THE 8.625% SENIOR
NOTES DUE 2009.
Interest on the 8.250% Senior Notes due 2007 and the 8.625% Senior Notes
due 2009, as the case may be, will be taxable to a U.S. Holder as ordinary
income from domestic sources at the time it is paid or accrued in accordance
with the U.S. Holder's regular method of accounting for tax purposes.
ORIGINAL ISSUE DISCOUNT ON THE 9.920% SENIOR DISCOUNT NOTES DUE 2011
Because the 9.920% Senior Discount Notes due 2011 will be issued at an
issue price which is substantially less than their stated principal amount at
maturity, and because interest on such notes will not be payable until October
1, 2004, such notes will be deemed to have been issued with original issue
discount ("OID") and each U.S. Holder will be required to include in income in
each year, in advance of receipt of cash payments on such notes to which such
income is attributable, OID income as described below.
The amount of OID with respect to the 9.920% Senior Discount Notes due 2011
will be equal to the excess of (1) the note's "stated redemption price at
maturity" over (2) its "issue price." The issue price of the 9.920% Senior
Discount Notes due 2011 will be equal to the price to the public (not including
any sales to a bond house, broker or similar person or organization acting in
the capacity of an underwriter, placement agent or wholesaler) at which a
substantial amount of such notes is initially sold for money. The stated
redemption price at maturity of such a note is the total of all payments
provided by the 9.920% Senior Discount Notes due 2011, including stated interest
payments.
A U.S. Holder of such a note is required to include in gross income for
U.S. federal income tax purposes an amount equal to the sum of the "daily
portions" of such OID for all days during the taxable year on which the holder
holds such note. The daily portions of OID required to be included in such
holder's gross income in a taxable year will be determined on a constant yield
basis by allocating to each day during the taxable year on which the holder
holds the 9.920% Senior Discount Notes due 2011 a pro rata portion of the OID on
such note which is attributable to the "accrual period" in which such day is
included. Accrual periods with respect to such a note may be of any length and
may vary in length over the term of the 9.920% Senior Discount Notes due 2011 as
long as (1) no accrual period is longer than one year and (2) each scheduled
payment of interest or principal on such note occurs on either the first or
final day of an accrual period. The amount of OID attributable to each accrual
period will be equal to the product of (1) the "adjusted issue price" at the
beginning of such accrual period and (2) the "yield to maturity" of the
instrument stated in a manner appropriately taking into account the length of
the accrual period. The yield to maturity is the discount rate that, when used
in computing the present value of all payments to be made under the 9.920%
Senior Discount Notes due 2011, produces an amount equal to the issue price of
such notes. The adjusted issue price of such a note at the beginning of an
accrual period is generally defined as the issue price of such note plus the
aggregate amount of OID that accrued in all prior accrual periods, less any cash
payments made on the 9.920% Senior Discount Notes due 2011. Accordingly, a U.S.
Holder of such a note will be required to include OID thereon in
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gross income for U.S. federal income tax purposes in advance of the receipt of
cash attributable to such income. The amount of OID allocable to an initial
short accrual period may be computed using any reasonable method if all other
accrual periods, other than a final short accrual period, are of equal length.
The amount of OID allocable to the final accrual period at maturity of a 9.920%
Senior Discount Note due 2011 is the difference between (A) the amount payable
at the maturity of such note and (B) such note's adjusted issue price as of the
beginning of the final accrual period.
Payments on the 9.920% Senior Discount Notes due 2011 (including principal
and stated interest payments) are not separately included in a U.S. Holder's
income, but rather are treated first as payments of accrued OID to the extent of
such accrued OID and the excess as payments of principal, which reduce the U.S.
Holder's adjusted tax basis in such notes.
EFFECT OF MANDATORY AND OPTIONAL REDEMPTION ON OID
In the event of a Change of Control, we will be required to offer to redeem
all of the notes, at redemption prices specified elsewhere herein. In the event
that we receive net proceeds from one or more equity offerings, we may, at our
option, use all or a portion of such net proceeds to redeem in the aggregate up
to 35% of the aggregate principal amount at maturity of the 8.625% Senior Notes
due 2009 and up to 35% of the aggregate principal amount at maturity of the
9.920% Senior Discount Notes due 2011 at redemption prices specified elsewhere
herein, provided that at least 65% of the aggregate principal amount of the
8.625% Senior Notes due 2009 and of the aggregate principal amount at maturity
of the 9.920% Senior Discount Notes due 2011 remains outstanding after each such
redemption. Computation of the yield and maturity of the notes is not affected
by such redemption rights and obligations if, based on all the facts and
circumstances as of the issue date, the stated payment schedule of the notes
(that does not reflect the Change of Control event or Equity Offering event) is
significantly more likely than not to occur. We have determined that, based on
all of the facts and circumstances as of the issue date, it is significantly
more likely than not that the notes will be paid according to their stated
schedule.
We may redeem the 8.625% Senior Notes due 2009 and the 9.920% Senior
Discount Notes due 2011, in whole or in part, at any time on or after April 1,
2004, at redemption prices specified elsewhere herein plus accrued and unpaid
stated interest, if any, on the notes so redeemed but excluding the date of
redemption. The United States Treasury Regulations contain rules for determining
the "maturity date" and the stated redemption price at maturity of an instrument
that may be redeemed prior to its stated maturity date at the option of the
issuer. Under United States Treasury Regulations, solely for the purposes of the
accrual of OID, it is assumed that an issuer will exercise any option to redeem
a debt instrument if such exercise would lower the yield to maturity of the debt
instrument. We believe that we will not be presumed to redeem the notes prior to
their stated maturity under these rules because the exercise of such options
would not lower the yield to maturity of the notes.
U.S. Holders may wish to consult their own tax advisors regarding the
treatment of such contingencies.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
Upon the sale, exchange, retirement or other taxable disposition of a note,
the holder will recognize gain or loss in an amount equal to the difference
between (1) the amount of
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cash and the fair market value of other property received in exchange therefor
(other than amounts attributable to accrued but unpaid interest on the 8.250%
Senior Notes due 2007 and the 8.625% Senior Notes due 2011) and (2) the holder's
adjusted tax basis in such note. A holder's adjusted tax basis in a note will
equal the purchase price paid by such holder for the note increased in the case
of a 9.920% Senior Discount Note due 2011 by any OID previously included in
income by such holder with respect to such note and decreased in the case of a
9.920% Senior Discount Note due 2011 by any payments received thereon.
Gain or loss realized on the sale, exchange, retirement or other taxable
disposition of a note will be capital gain or loss and will be long-term capital
gain or loss if at the time of sale, exchange, retirement, or other taxable
disposition, the note has been held for more than 12 months. The maximum rate of
tax on long-term capital gains with respect to notes held by an individual is
20%. The deductibility of capital losses is subject to certain limitations.
MARKET DISCOUNT
A holder receives a "market discount" when it (1) purchases an 8.250%
Senior Note due 2007 or an 8.625% Senior Note due 2009 for an amount below the
issue price, or (2) purchases a 9.920% Senior Discount Note due 2011 for an
amount below the adjusted issue price on the date of purchase (as determined in
accordance with the OID rules above.) Under the market discount rules, a U.S.
Holder will be required to treat any partial principal payment on, or any gain
on the sale, exchange, retirement or other disposition of, a note as ordinary
income to the extent of the market discount which has not previously been
included in income and is treated as having accrued on such note at the time of
such payment or disposition. In addition, the U.S. Holder may be required to
defer, until the maturity of the note or its earlier disposition in a taxable
transaction, the deduction of a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry such notes.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the note, unless the U.S.
Holder elects to accrue such discount on a constant interest rate method. A U.S.
Holder may elect to include market discount in income currently as it accrues
(on either a ratable or constant interest rate method), in which case the
holder's basis in the note will be increased to reflect the amount of income
recognized and the rules described above regarding deferral of interest
deductions will not apply. This election to include market discount in income
currently, once made, applies to all market discount obligations acquired on or
after the first taxable year to which the election applies and may not be
revoked without the consent of the Internal Revenue Service (the "IRS").
AMORTIZABLE BOND PREMIUM; ACQUISITION PREMIUM
A U.S. Holder that (1) purchases an 8.250% Senior Note due 2007 or an
8.625% Senior Note due 2009 for an amount in excess of the principal amount, or
(2) purchases a 9.920% Senior Discount Note due 2011 for an amount in excess of
the stated redemption price will be considered to have purchased such note with
"amortizable bond premium." A U.S. Holder generally may elect to amortize the
premium over the remaining term of the note on a constant yield method as
applied with respect to each accrual period of the note, and allocated ratably
to each day within an accrual period in a manner substantially similar to the
method of calculating daily portions of OID, as described above. However,
because
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the notes may be optionally redeemed for an amount that is in excess of their
principal amount, special rules apply that could result in a deferral of the
amortization of bond premium until later in the term of the note. The amount
amortized in any year will be treated as a reduction of the U.S. Holder's
interest income (including OID income) from the note. Bond premium on a note
held by a U.S. Holder that does not make such an election will decrease the gain
or increase the loss otherwise recognized upon disposition of the note. The
election to amortize premium on a constant yield method, once made, applies to
all debt obligations held or subsequently acquired by the electing U.S. Holder
on or after the first day of the first taxable year to which the election
applies and may not be revoked without the consent of the IRS.
A U.S. Holder that purchases a 9.920% Senior Discount Note due 2011 for an
amount that is greater than the adjusted issue price of such note on the date of
purchase (as determined in accordance with the OID rules, above) will be
considered to have purchased such note at an "acquisition premium." A holder of
a 9.920% Senior Discount Note due 2011 that is purchased at an acquisition
premium may reduce the amount of the OID otherwise includible in income with
respect to such note by the "acquisition premium fraction." The acquisition
premium fraction is that fraction the numerator of which is the excess of the
holder's adjusted tax basis in such note immediately after its acquisition over
the adjusted issue price of such note and the denominator of which is the excess
of the sum of all amounts payable on such note after the purchase date over the
adjusted issue price of such note. Alternatively, a holder of a 9.920% Senior
Discount Note due 2011 that is purchased at an acquisition premium may elect to
compute the OID accrual on such note by treating the purchase as a purchase of
such note at original issuance (treating the purchase price as the issue price)
and applying the OID rules thereto using a constant yield method.
UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
The payment to a Non-U.S. Holder of interest (including the amount of any
payment that is attributable to OID that accrued while such Non-U.S. Holder held
the note) on a note will not be subject to U.S. federal withholding tax pursuant
to the "portfolio interest exception," provided that (1) the Non-U.S. Holder
does not actually or constructively own 10% or more of the capital or profits
interest in us and is not a controlled foreign corporation that is related to us
within the meaning of the Code and (2) either (A) the beneficial owner of the
notes certifies to us or our agent, under penalties of perjury, that it is not a
U.S. Holder and provides its name and address on U.S. Treasury Form W-8 (or a
suitable substitute form) or (B) a securities clearing organization, bank or
other financial institution that holds the notes on behalf of such Non-U.S.
Holder in the ordinary course of its trade or business (a "financial
institution") certifies under penalties of perjury that such a Form W-8 (or
suitable substitute form) has been received from the beneficial owner by it or
by a financial institution between it and the beneficial owner and furnishes the
payor with a copy thereof. Recently adopted Treasury Regulations that will be
effective January 1, 2001 (the "Withholding Regulations") provide alternative
methods for satisfying the certification requirement described in (2) above. The
Withholding Regulations will generally require, in the case of notes held by a
foreign partnership, that the certificate described in (2) above be provided by
the partners rather than by the foreign partnership, and that the partnership
provide certain information including a U.S. tax identification number.
If a Non-U.S. Holder cannot satisfy the requirements of the portfolio
interest exception described above, payments of interest (including the amount
of any payment
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that is attributable to OID that accrued while such Non-U.S. Holder held the
note) made to such Non-U.S. Holder will be subject to a 30% withholding tax,
unless the beneficial owner of the note provides us or our paying agent, as the
case may be, with a properly executed (1) Internal Revenue Service Form 1001 (or
successor form) claiming an exemption from or reduction in the rate of
withholding under the benefit of a tax treaty or (2) Internal Revenue Service
Form 4224 (or successor form) stating that interest paid on the note is not
subject to withholding tax because it is effectively connected with the
beneficial owner's conduct of a trade or business in the United States.
If a Non-U.S. Holder of a note is engaged in a trade or business in the
United States and interest on the note is effectively connected with the conduct
of such trade or business, such Non-U.S. Holder, although exempt from U.S.
federal withholding tax (provided the Non-U.S. Holder files the appropriate
certification with us or our U.S. agent) will be subject to U.S. federal income
tax on such interest (including OID) in the same manner as if it were a U.S.
Holder. In addition, if such Non-U.S. Holder is a foreign corporation, it may be
subject to a branch profits tax equal to 30% of its effectively connected
earnings and profits (subject to adjustment) for that taxable year unless it
qualifies for a lower rate under an applicable income tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a person other than a U.S. Holder generally
will not be subject to U.S. federal income tax provided (1) such gain is not
effectively connected with the conduct by such holder of a trade or business in
the United States, (2) in the case of gains derived by an individual, such
individual is not present in the United States for 183 days or more in the
taxable year of the disposition and certain other conditions are met and (3) the
Non-U.S. Holder is not subject to tax pursuant to the provisions of U.S. federal
income tax law applicable to certain expatriates.
FEDERAL ESTATE TAX
Subject to applicable estate tax treaty provisions, notes held by an
individual who is not a citizen or resident of the United States for federal
estate tax purposes at the time of his or her death will not be subject to U.S.
federal estate tax if the interest on the notes qualifies for the portfolio
interest exemption from U.S. federal income tax under the rules described above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Backup withholding and information reporting requirements may apply to
certain payments of principal, premium, if any, and interest (and accruals of
OID) on a note, and to the proceeds of the sale or redemption of a note before
maturity. We, our agent, a broker, the trustee or the paying agent under the
indentures governing the notes, as the case may be, will be required to withhold
from any payment that is subject to backup withholding a tax equal to 31% of
such payment if a U.S. Holder fails to furnish his taxpayer identification
number, certify that such number is correct, certify that such holder is not
subject to backup withholding or otherwise comply with the applicable backup
withholding rules. Certain U.S. Holders, including all corporations, are not
subject to backup withholding and information reporting requirements.
Non-U.S. Holders other than corporations may be subject to backup
withholding and information reporting requirements. However, backup withholding
and information reporting requirements do not apply to payments of portfolio
interest (including OID) made by us or a paying agent to Non-U.S. Holders if the
certification described above
150
154
under "-- United States Federal Income Taxation of Non-U.S. Holders" is
received, provided that the payor does not have actual knowledge that the holder
is a U.S. Holder. If any payments of principal and interest are made to the
beneficial owner of a note by or through the foreign office of a foreign
custodian, foreign nominee or other foreign agent of such beneficial owner, or
if the foreign office of a foreign "broker" (as defined in the applicable
Treasury Regulations) pays the proceeds of the sale, redemption or other
disposition of note or a coupon to the seller thereof, backup withholding and
information reporting requirements will not apply. Information reporting
requirements (but not backup withholding) will apply, however, to a payment by a
foreign office of a broker that is a U.S. person or is a foreign person that
derives 50% of more of its gross income for certain periods from the conduct of
a trade or business in the United States, or that is a "controlled foreign
corporation" (generally, a foreign corporation controlled by certain U.S.
shareholders) with respect to the United States unless the broker has
documentary evidence in its records that the holder is a Non-U.S. Holder and
certain other conditions are met or the holder otherwise establishes an
exemption. Payment by a U.S. office of a broker is subject to both backup
withholding at a rate of 31% and information reporting unless the holder
certifies under penalties of perjury that it is a Non-U.S. Holder or otherwise
establishes an exemption.
In October 1997, Treasury regulations were issued which alter the foregoing
rules in certain respects and which generally will apply to any payments in
respect of a note or proceeds from the sale of a note that are made after
December 31, 2000. Among other things, such regulations expand the number of
foreign intermediaries that are potentially subject to information reporting and
address certain documentary evidence requirements relating to exemption from the
backup withholding requirements. Holders of the notes should consult their tax
advisers concerning the possible application of such regulations to any payments
made on or with respect to the notes.
Any amounts withheld under the backup withholding rules from a payment to a
holder of the notes will be allowed as a refund or a credit against such
holder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
Charter must report annually to the IRS and to each Non-U.S. Holder any
interest that is subject to withholding, or that is exempt from U.S. withholding
tax pursuant to a tax treaty, or interest that is exempt from U.S. tax under the
portfolio interest exception. Copies of these information returns may also be
made available under the provisions of a specific treaty or agreement to the tax
authorities of the country in which the Non-U.S. Holder resides.
151
155
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of original notes that were acquired for
the account of such broker-dealer as a result of market-making or other trading
activities (other than original notes acquired directly from us or any of our
affiliates may exchange such original notes for new notes pursuant to the
exchange offer; provided, that each broker-dealer that receives new notes for
its own account in exchange for original notes, where such original notes were
acquired by such broker-dealer as a result of market-making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such new notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of new notes received in exchange for original notes where such
original notes were acquired as a result of market-making activities or other
trading activities. We have agreed that for a period of 180 days after
consummation of the exchange offer or such time as any broker-dealer no longer
owns any registrable securities, we will make this prospectus, as it may be
amended or supplemented from time to time, available to any broker-dealer for
use in connection with any such resale. All dealers effecting transactions in
the new notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers or any other holder of new notes. New notes received by
broker-dealers for their own account pursuant to the exchange offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the new notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such new
notes. Any broker-dealer that resells new notes that were received by it for its
own account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of new notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after consummation of the exchange offer or such
time as any broker-dealer no longer owns any registrable securities, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. We have agreed to pay all expenses incident to the
exchange offer and to our performance of, or compliance with, the Registration
Rights Agreements (other than commissions or concessions of any brokers or
dealers) and will indemnify the holders of the notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The legality of the notes offered hereby and certain other matters will be
passed upon for us by Paul, Hastings, Janofsky & Walker LLP, New York, New York
and by Irell & Manella LLP, Los Angeles, California.
152
156
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-4 to register this exchange offer. This prospectus, which
forms a part of the registration statement, does not contain all the information
included in that registration statement. For further information about us and
the new notes offered in this prospectus, you should refer to the registration
statement and its exhibits. You may read and copy any document we file with the
Securities and Exchange Commission at the public reference facilities maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices at 3475 Lenox Road, N.E., Suite 1000,
Atlanta, Georgia 30326-1232. Copies of such material may be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. You can also review such material
by accessing the Commission's internet web site at http://www.sec.gov. This site
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission.
We intend to furnish to each holder of the new notes annual reports
containing audited financial statements and quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year. We will also furnish to each holder of the new notes such other reports as
may be required by law.
Our principal executive offices are located at 12444 Powerscourt Drive, St.
Louis, Missouri 63131, and our telephone number is (314)965-0555.
153
157
CHARTER COMMUNICATIONS HOLDINGS, LLC
INDEX TO FINANCIAL STATEMENTS
PAGE
----
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES:
Report of Independent Public Accountants.................. F-5
Consolidated Balance Sheet as of December 31, 1998........ F-6
Consolidated Statement of Operations for the Period from
December 24, 1998, Through December 31, 1998........... F-7
Consolidated Statement of Cash Flows for the Period from
December 24, 1998, Through December 31, 1998........... F-8
Notes to Consolidated Financial Statements................ F-9
Report of Independent Public Accountants.................. F-23
Consolidated Balance Sheet as of December 31, 1997........ F-24
Consolidated Statements of Operations for the Period From
January 1, 1998, Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-25
Consolidated Statements of Shareholder's Investment for
the Period From January 1, 1998 Through December 23,
1998 and for the Years Ended December 31, 1997 and
1996................................................... F-26
Consolidated Statements of Cash Flows for the Period From
January 1, 1998, Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-27
Notes to Consolidated Financial Statements................ F-28
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES:
Independent Auditors' Report.............................. F-37
Consolidated Balance Sheet as of December 31, 1997........ F-38
Consolidated Statements of Operations for the Periods From
April 23 to December 23, 1998 and January 1 to April
22, 1998 and for the Years in the Two-Year Period Ended
December 31, 1997...................................... F-39
Consolidated Statements of Partners' Capital (Deficit) for
the Period From January 1, 1998 to April 22, 1998 and
for Each of the Years in the Two-Year Period Ended
December 31, 1997...................................... F-40
Consolidated Statement of Members' Equity from April 23,
1998 to December 31, 1998.............................. F-41
Consolidated Statements of Cash Flows for the Period from
April 23, 1998 to December 23, 1998, From January 1,
1998 to April 22, 1998 and for the Years Ended December
31, 1997 and 1996...................................... F-42
Notes to Consolidated Financial Statements................ F-43
CCA GROUP:
Report of Independent Public Accountants.................. F-55
Combined Balance Sheet as of December 31, 1997............ F-56
Combined Statements of Operations for the Period From
January 1, 1998, Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-57
Combined Statements of Shareholders' Deficit for the
Period From January 1, 1998, Through December 23, 1998
and for the Years Ended December 31, 1997 and 1996..... F-58
Combined Statements of Cash Flows for the Period From
January 1, 1998, Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-59
Notes to Combined Financial Statements.................... F-60
F-1
158
PAGE
----
CHARTERCOMM HOLDINGS, L.P.:
Report of Independent Public Accountants.................. F-75
Consolidated Balance Sheet as of December 31, 1997........ F-76
Consolidated Statements of Operations for the Period From
January 1, 1998 Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-77
Consolidated Statements of Partner's Capital for the
Period From January 1, 1998 Through December 23, 1998
and for the Years Ended December 31, 1997 and 1996..... F-78
Consolidated Statements of Cash Flows for the Period From
January 1, 1998 Through December 23, 1998 and for the
Years Ended December 31, 1997 and 1996................. F-79
Notes to Consolidated Financial Statements................ F-80
GREATER MEDIA CABLEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-93
Combined Balance Sheets as of December 31, 1998
(unaudited), September 30, 1998 and 1997............... F-94
Combined Statements of Income for the Three Months Ended
December 31, 1998 and 1997 (unaudited) and for the
Years Ended September 30, 1998, 1997 and 1996.......... F-95
Combined Statements of Changes in Net Assets for the Three
Months Ended December 31, 1998 (unaudited) and for the
Years Ended September 30, 1996, 1997 and 1998.......... F-96
Combined Statements of Cash Flows for the Three Months
Ended December 31, 1998 and 1997 (unaudited) and for
the Years Ended September 30, 1998, 1997
and 1996............................................... F-97
Notes to Combined Financial Statements.................... F-98
RENAISSANCE MEDIA GROUP LLC:
Report of Independent Auditors............................ F-104
Consolidated Balance Sheet as of December 31, 1998........ F-105
Consolidated Statement of Operations for the Year Ended
December 31, 1998...................................... F-106
Consolidated Statement of Changes in Members' Equity for
the Year Ended December 31, 1998....................... F-107
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1998...................................... F-108
Notes to Consolidated Financial Statements for the Year
Ended December 31, 1998................................ F-109
PICAYUNE MS, LAFOURCHE, LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA AND JACKSON TN CABLE TELEVISION SYSTEMS:
Report of Independent Auditors............................ F-119
Combined Balance Sheet as of April 8, 1998................ F-120
Combined Statement of Operations for the Period from
January 1, 1998 through April 8, 1998.................. F-121
Combined Statement of Changes in Net Assets for the Period
from January 1, 1998 through April 8, 1998............. F-122
Combined Statement of Cash Flows for the Period from
January 1, 1998 through April 8, 1998.................. F-123
Notes to Combined Financial Statements.................... F-124
Report of Independent Auditors............................ F-131
Combined Balance Sheets as of December 31, 1996 and
1997................................................... F-132
Combined Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997....................... F-133
Combined Statements of Changes in Net Assets for the Years
Ended December 31, 1996 and 1997....................... F-134
Combined Statements of Cash Flows for the Years Ended
1995, 1996 and 1997.................................... F-135
Notes to Combined Financial Statements.................... F-136
F-2
159
PAGE
----
HELICON PARTNERS I, L.P. AND AFFILIATES:
Independent Auditors' Report.............................. F-144
Combined Balance Sheets as of December 31, 1997 and
1998................................................... F-145
Combined Statements of Operations for Each of the Years in
the Three-Year Period Ended December 31, 1998.......... F-146
Combined Statements of Changes in Partners' Deficit for
Each of the Years in the Three-Year Period Ended
December 31, 1998...................................... F-147
Combined Statements of Cash Flows for Each of the Years in
the Three-Year Period Ended December 31, 1998.......... F-148
Notes to Combined Financial Statements.................... F-149
INTERMEDIA CABLE SYSTEMS (comprised of components of
InterMedia Partners and InterMedia Capital Partners IV,
L.P.):
Report of Independent Accountants......................... F-163
Combined Balance Sheets at December 31, 1998 and 1997..... F-164
Combined Statements of Operations for the Years Ended
December 31, 1998 and 1997............................. F-165
Combined Statement of Changes in Equity for the Years
Ended December 31, 1998 and 1997....................... F-166
Combined Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997............................. F-167
Notes to Combined Financial Statements.................... F-168
RIFKIN CABLE INCOME PARTNERS L.P.:
Report of Independent Accountants......................... F-181
Balance Sheet at December 31, 1997 and 1998............... F-182
Statement of Operations for Each of the Three Years in the
Period Ended December 31, 1998......................... F-183
Statement of Partners' Equity (Deficit) for Each of the
Three Years in the Period Ended December 31, 1998...... F-184
Statement of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1998......................... F-185
Notes to Financial Statements............................. F-186
RIFKIN ACQUISITION PARTNERS, L.L.L.P.:
Report of Independent Accountants......................... F-190
Consolidated Balance Sheet at December 31, 1998 and
1997................................................... F-191
Consolidated Statement of Operations for Each of the Three
Years in the Period Ended December 31, 1998............ F-192
Consolidated Statement of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998............ F-193
Consolidated Statement of Partners' Capital (Deficit) for
Each of the Three Years in the Period Ended December
31, 1998............................................... F-194
Notes to Consolidated Financial Statements................ F-195
INDIANA CABLE ASSOCIATES, LTD.:
Report of Independent Auditors............................ F-209
Balance sheet as December 31, 1997 and 1998............... F-210
Statement of Operations for the Years Ended December 31,
1996, 1997 and 1998.................................... F-211
Statement of Partners' Deficit for the Years Ended
December 31, 1996, 1997
and 1998............................................... F-212
Statement of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998.................................... F-213
Notes to Financial Statements............................. F-214
F-3
160
PAGE
----
R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP:
Report of Independent Auditors............................ F-219
Consolidated Balance Sheet as of December 31, 1997 and
1998................................................... F-220
Consolidated Statement of Operations for the Years Ended
December 31, 1996, 1997 and 1998....................... F-221
Consolidated Statement of Partners' Equity (Deficit) for
the Years Ended December 31, 1996, 1997 and 1998....... F-222
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998....................... F-223
Notes to Consolidated Financial Statements................ F-224
SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS:
Report of Independent Public Accountants.................. F-228
Statement of Operations and Changes in Net Assets for the
Period from April 1, 1998, through May 20, 1998........ F-229
Statement of Cash Flows for the Period from April 1, 1998,
through May 20, 1998................................... F-230
Notes to Financial Statements............................. F-231
LONG BEACH ACQUISITION CORP.:
Report of Independent Public Accountants.................. F-234
Statement of Operations for the Period from April 1, 1997,
through May 23, 1997................................... F-235
Statement of Stockholder's Equity for the Period from
April 1, 1997, through May 23, 1997.................... F-236
Statement of Cash Flows for the Period from April 1, 1997,
through May 23, 1997................................... F-237
Notes to Financial Statements............................. F-238
F-4
161
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying consolidated balance sheet of Charter
Communications Holdings, LLC and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations and cash flows for the period from
December 24, 1998, through December 31, 1998. We did not audit the balance sheet
of Marcus Cable Company, L.L.C. and subsidiaries as of December 31, 1998, that
is included in the consolidated balance sheet of Charter Communications
Holdings, LLC and subsidiaries and reflects total assets of 40% of the
consolidated totals. This balance sheet was audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Marcus Cable Company, L.L.C. and subsidiaries, is based
solely on the report of the other auditors. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Charter Communications Holdings, LLC and subsidiaries
as of December 31, 1998, and the results of their operations and their cash
flows for the period from December 24, 1998, through December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999 (except with respect to the
matters discussed in Notes 1 and 12,
as to which the date is April 19, 1999)
F-5
162
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998
-----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,386
Accounts receivable, net of allowance for doubtful
accounts of $3,528..................................... 31,163
Prepaid expenses and other................................ 8,613
----------
Total current assets................................... 50,162
----------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 1,473,727
Franchises, net of accumulated amortization of $112,122... 5,705,420
----------
7,179,147
----------
OTHER ASSETS................................................ 6,347
----------
$7,235,656
==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 87,950
Accounts payable and accrued expenses..................... 199,831
Payable to related party.................................. 20,000
Payables to manager of cable television systems -- related
party.................................................. 7,675
----------
Total current liabilities.............................. 315,456
----------
LONG-TERM DEBT.............................................. 3,435,251
----------
DEFERRED MANAGEMENT FEES -- RELATED PARTY................... 15,561
----------
OTHER LONG-TERM LIABILITIES................................. 40,097
----------
MEMBERS' EQUITY -- 100 UNITS ISSUED AND OUTSTANDING......... 3,429,291
----------
$7,235,656
==========
The accompanying notes are an integral part of this consolidated statement.
F-6
163
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
PERIOD FROM
DECEMBER 24,
1998, THROUGH
DECEMBER 31,
1998
-------------
REVENUES.................................................... $23,450
-------
OPERATING EXPENSES:
Operating costs........................................... 9,957
General and administrative................................ 2,722
Depreciation and amortization............................. 13,811
Corporate expense charges -- related party................ 766
-------
27,256
-------
Loss from operations................................... (3,806)
-------
OTHER INCOME (EXPENSE):
Interest income........................................... 133
Interest expense.......................................... (5,051)
-------
(4,918)
-------
Net loss.................................................... $(8,724)
=======
The accompanying notes are an integral part of this consolidated statement.
F-7
164
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
PERIOD FROM
DECEMBER 24,
1998, THROUGH
DECEMBER 31,
1998
--------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (8,724)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 13,811
Changes in assets and liabilities --
Receivables, net..................................... (8,753)
Prepaid expenses and other........................... (587)
Accounts payable and accrued expenses................ 4,961
Payables to manager of cable television systems...... 473
Other operating activities........................... 2,021
----------
Net cash provided by operating activities......... 3,202
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (13,672)
----------
Net cash used in investing activities............. (13,672)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............................. 15,620
----------
Net cash provided by financing activities......... 15,620
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 5,150
CASH AND CASH EQUIVALENTS, beginning of period.............. 5,236
----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 10,386
==========
CASH PAID FOR INTEREST...................................... $ 6,155
==========
NONCASH TRANSACTION -- Transfer of cable television
operating subsidiaries from the parent company (see Note
1)........................................................ $3,438,015
==========
The accompanying notes are an integral part of this consolidated statement.
F-8
165
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited
liability company, was formed in February 1999 as a wholly owned subsidiary of
Charter Communications, Inc. (Charter). Charter, through its wholly owned cable
television operating subsidiary, Charter Communications Properties, LLC (CCP),
commenced operations with the acquisition of a cable television system on
September 30, 1995.
Effective December 23, 1998, through a series of transactions, Paul G.
Allen acquired approximately 94% of Charter for an aggregate purchase price, net
of debt assumed, of $2.2 billion (the "Paul Allen Transaction"). In conjunction
with the Paul Allen Transaction, Charter acquired controlling interests in
CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of CCA
Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach Corp.),
all cable television operating companies. Charter previously managed and owned
minority interests in these companies. In February 1999, Charter transferred all
of its cable television operating subsidiaries to a subsidiary of Charter
Holdings, Charter Communications Operating, LLC (Charter Operating).
As a result of the change in ownership of CCP, CharterComm Holdings and CCA
Group, Charter Holdings has applied push-down accounting in the preparation of
the consolidated financial statements. Accordingly, the Company increased its
members' equity by $2.3 billion to reflect the amounts paid by Paul G. Allen and
Charter. The purchase price was allocated to assets acquired and liabilities
assumed based on their relative fair values. The excess of the purchase price
over the amounts assigned to net tangible assets was $3.6 billion and is
included in franchises. The allocation of the purchase price is based, in part,
on preliminary information which is subject to adjustment upon obtaining
complete valuation information. However, no significant adjustments are
anticipated.
On April 7, 1999, the cable television operating subsidiaries of Marcus
Cable Company, L.L.C. (Marcus) were transferred to Charter Operating. As a
result of the Marcus transfer, Charter Holdings is owned 54% by Charter and 46%
by companies controlled by Paul G. Allen. The transfer was accounted for as a
reorganization of entities under common control similar to a pooling of
interests since Paul G. Allen and a company controlled by Paul G. Allen
purchased substantially all of the outstanding partnership interests in Marcus
in April 1998, and purchased the remaining interest in Marcus on April 7, 1999.
The consolidated financial statements of Charter Holdings include the
accounts of CCP, the accounts of CharterComm Holdings and CCA Group and their
subsidiaries since December 23, 1998 (date acquired by Charter), and the
accounts of Marcus since December 23, 1998 (date Paul G. Allen controlled both
Charter and Marcus), and are collectively referred to as the "Company" herein.
All subsidiaries are wholly owned. All material intercompany transactions and
balances have been eliminated. The Company derives its primary source of
revenues by providing various levels of cable television programming and
services to residential and business customers. As of December 31, 1998, the
Company provided cable television services to customers in 22 states in the U.S.
F-9
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CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated financial statements of Charter Holdings for periods prior
to December 24, 1998, are not presented herein since, as a result of the Paul
Allen Transaction and the application of push down accounting, the financial
information as of December 31, 1998, and for the period from December 24, 1998,
through December 31, 1998, is presented on a different cost basis than the
financial information as of December 31, 1997, and for the periods prior to
December 24, 1998. Such information is not comparable.
The accompanying financial statements have been retroactively restated to
include the accounts of Marcus beginning December 24, 1998, using historical
carrying amounts. Previously reported revenues and net loss of the Company,
excluding Marcus, was $13,713 and $4,432, respectively, for the period from
December 24, 1998, through December 31, 1998. Revenues and net loss of Marcus
for the period from December 24, 1998 through December 31, 1998, included in the
accompanying financial statements, was $9,737 and $4,292, respectively.
Previously reported members' equity of the Company, excluding Marcus, was $2.1
billion as of December 31, 1998.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1998,
cash equivalents consist primarily of repurchase agreements. These investments
are carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installations. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, and equipment replacement and betterments are capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives 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
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable television systems represent the excess
of the cost of properties acquired over the amounts assigned to net tangible
assets at the date of acquisition and are amortized using the straight-line
method over periods up to 15 years.
F-10
167
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of December 31, 1998, no installation revenue has
been deferred, as direct selling costs have exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Company ranging up to a federally
mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are
collected from the Company's customers and are periodically remitted to local
franchises. Franchise fees collected and paid are reported as revenues.
INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
INCOME TAXES
Income taxes are the responsibility of the individual members or partners
and are not provided for in the accompanying consolidated financial statements.
In addition, certain subsidiaries are corporations subject to income taxes but
have no operations and, therefore, no material income tax liabilities or assets.
F-11
168
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
In addition to the acquisitions by Charter of CharterComm Holdings and CCA
Group, the Company acquired cable television systems for an aggregate purchase
price, net of cash acquired, of $291,800 and $342,100 in 1998 and 1997,
respectively, and completed the sale of certain cable television systems for an
aggregate sales price of $405,000 in 1998, all prior to December 24, 1998. The
Company also refinanced substantially all of its long-term debt in March 1999
(see Note 12).
Unaudited pro forma operating results as though the acquisitions and
refinancing discussed above, including the Paul Allen Transaction and the
combination with Marcus, had occurred on January 1, 1997, with adjustments to
give effect to amortization of franchises, interest expense and certain other
adjustments are as follows:
YEAR ENDED
DECEMBER 31
-----------------------
1998 1997
---------- ---------
Revenues....................................... $1,059,882 $ 971,924
Loss from operations........................... (143,557) (185,051)
Net loss....................................... (674,009) (705,648)
Unaudited pro forma balance sheet information as though the refinancing
discussed above had occurred on December 31, 1998, is as follows:
Total assets............................................... $8,563,413
Total debt................................................. 4,850,495
Members' equity............................................ 3,409,807
The unaudited pro forma financial information has been presented for
comparative purposes and does not purport to be indicative of the results of
operations or financial position of the Company had these transactions been
completed as of the assumed date or which may be obtained in the future.
F-12
169
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MEMBERS' EQUITY:
For the period from December 24, 1998, through December 31, 1998, members'
equity consisted of the following:
Balance, December 24, 1998................................. $3,438,015
Net loss................................................... (8,724)
----------
Balance, December 31, 1998................................. $3,429,291
==========
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1998:
Cable distribution systems................................. $1,439,182
Land, buildings and leasehold improvements................. 41,321
Vehicles and equipment..................................... 61,237
----------
1,541,740
Less -- Accumulated depreciation........................... (68,013)
----------
$1,473,727
==========
For the period from December 24, 1998, through December 31, 1998,
depreciation expense was $5,029.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1998:
Accrued interest............................................ $ 34,561
Franchise fees.............................................. 21,441
Programming costs........................................... 21,395
Capital expenditures........................................ 17,343
Accrued income taxes........................................ 15,205
Accounts payable............................................ 7,439
Other accrued liabilities................................... 82,447
--------
$199,831
========
F-13
170
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1998:
Charter:
Credit Agreements (including CCP, CCA Group and
CharterComm Holdings)................................. $1,726,500
Senior Secured Discount Debentures....................... 109,152
11 1/4% Senior Notes..................................... 125,000
Marcus:
Senior Credit Facility................................... 808,000
13 1/2% Senior Subordinated Discount Notes............... 383,236
14 1/4% Senior Discount Notes............................ 241,183
----------
3,393,071
Current maturities....................................... (87,950)
Unamortized net premium.................................. 130,130
----------
$3,435,251
==========
CCP CREDIT AGREEMENT
CCP maintains a credit agreement (the "CCP Credit Agreement"), which
provides for two term loan facilities, one with the principal amount of $60,000
that matures on June 30, 2006, and the other with the principal amount of
$80,000 that matures on June 30, 2007. The CCP Credit Agreement also provides
for a $90,000 revolving credit facility with a maturity date of June 30, 2006.
Amounts under the CCP Credit Agreement bear interest at the LIBOR Rate or Base
Rate, as defined, plus a margin up to 2.88%. The variable interest rates ranged
from 7.44% to 8.19% at December 31, 1998.
CC-I, CC-II COMBINED CREDIT AGREEMENT
Charter Communications, LLC and Charter Communications II, LLC,
subsidiaries of CharterComm Holdings, maintains a combined credit agreement (the
"Combined Credit Agreement"), which provides for two term loan facilities, one
with the principal amount of $200,000 that matures on June 30, 2007, and the
other with the principal amount of $150,000 that matures on December 31, 2007.
The Combined Credit Agreement also provides for a $290,000 revolving credit
facility, with a maturity date of June 30, 2007. Amounts under the Combined
Credit Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus
a margin up to 2.0%. The variable interest rates ranged from 6.69% to 7.31% at
December 31, 1998. A quarterly commitment fee of between 0.25% and 0.375% per
annum is payable on the unborrowed balance of the revolving credit facility.
CHARTERCOMM HOLDINGS -- SENIOR SECURED DISCOUNT DEBENTURES
CharterComm Holdings issued $146,820 of Senior Secured Discount Debentures
(the "Debentures") for proceeds of $75,000. The Debentures are effectively
subordinated to the claims and creditors of CharterComm Holdings' subsidiaries,
including the lenders under
F-14
171
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Combined Credit Agreement. The Debentures are redeemable at the Company's
option at amounts decreasing from 107% to 100% of principal, plus accrued and
unpaid interest to the redemption date, beginning on March 15, 2001. The issuer
is required to make an offer to purchase all of the Debentures, at a purchase
price equal to 101% of the principal amount, together with accrued and unpaid
interest, upon a Change in Control, as defined in the Debentures Indenture. No
interest is payable on the Debentures prior to March 15, 2001. Thereafter,
interest on the Debentures is payable semiannually in arrears beginning
September 15, 2001, until maturity on March 15, 2007.
CHARTERCOMM HOLDINGS -- 11 1/4% SENIOR NOTES
CharterComm Holdings issued $125,000 aggregate principal amount of 11 1/4%
Senior Notes (the "11 1/4% Notes"). The Notes are effectively subordinated to
the claims of creditors of CharterComm Holdings' subsidiaries, including the
lenders under the Combined Credit Agreements. The 11 1/4% Notes are redeemable
at the Company's option at amounts decreasing from 106% to 100% of principal,
plus accrued and unpaid interest to the date of redemption, beginning on March
15, 2001. The issuer is required to make an offer to purchase all of the 11 1/4%
Notes, at a purchase price equal to 101% of the principal amount, together with
accrued and unpaid interest, upon a Change in Control, as defined in the 11 1/4%
Notes indenture. Interest is payable semiannually on March 15 and September 15
until maturity on March 15, 2006.
As of December 24, 1998, the Debentures and 11 1/4% Notes were recorded at
their estimated fair values resulting in an increase in the carrying values of
the debt and an unamortized net premium as of December 31, 1998. The premium
will be amortized to interest expense over the estimated remaining lives of the
debt using the interest method.
CCE-I CREDIT AGREEMENT
Charter Communications Entertainment I LLC, a subsidiary of CCA Group,
maintains a credit agreement (the "CCE-I Credit Agreement"), which provides for
a $280,000 term loan that matures on September 30, 2006, and $85,000 fund loan
that matures on March 31, 2007, and a $175,000 revolving credit facility with a
maturity date of September 30, 2006. Amounts under the CCE-I Credit Agreement
bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin
up to 2.75%. The variable interest rates ranged from 6.88% to 8.06% at December
31, 1998. A quarterly commitment fee of between 0.375% and 0.5% per annum is
payable on the unborrowed balance of the revolving credit facility.
CCE-II COMBINED CREDIT AGREEMENT
Charter Communications Entertainment II, LLC and Long Beach LLC,
subsidiaries of CCA Group, maintain a credit agreement (the "CCE-II Combined
Credit Agreement"), which provides for two term loan facilities, one with the
principal amount of $100,000 that matures on March 31, 2005, and the other with
the principal amount of $90,000 that matures on March 31, 2006. The CCE-II
Combined Credit Agreement also provides for a $185,000 revolving credit
facility, with a maturity date of March 31, 2005. Amounts under the CCE-II
Combined Credit Agreement bear interest at either the LIBOR Rate or Base Rate,
as defined, plus a margin up to 2.5%. The variable rates
F-15
172
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ranged from 6.56% to 7.59% at December 31, 1998. A quarterly commitment fee of
between 0.25% and 0.375% per annum is payable on the unborrowed balance of the
revolving credit facility.
CCE CREDIT AGREEMENT
Charter Communications Entertainment, LLC, a subsidiary of CCA Group,
maintains a credit agreement (the "CCE Credit Agreement") which provides for a
term loan facility with the principal amount of $130,000 that matures on
September 30, 2007. Amounts under the CCE Credit Agreement bear interest at the
LIBOR Rate or Base Rate, as defined, plus a margin up to 3.25%. The variable
interest rate at December 31, 1998, was 8.62%.
CCE-II HOLDINGS CREDIT AGREEMENT
CCE-II Holdings, LLC, a subsidiary of CCA Group, entered into a credit
agreement (the "CCE-II Holdings Credit Agreement"), which provides for a term
loan facility with the principal amount of $95,000 that matures on September 30,
2006. Amounts under the CCE-II Holdings Credit Agreement bear interest at either
the LIBOR Rate or Base Rate, as defined, plus a margin up to 3.25%. The variable
rate at December 31, 1998, was 8.56%.
MARCUS -- SENIOR CREDIT FACILITY
Marcus maintains a senior credit facility (the "Senior Credit Facility"),
which provides for two term loan facilities, one with a principal amount of
$490,000 that matures on December 31, 2002 (Tranche A) and the other with a
principal amount of $300,000 that matures on April 30, 2004 (Tranche B). The
Senior Credit Facility provides for scheduled amortization of the two term loan
facilities which began in September 1997. The Senior Credit Facility also
provides for a $360,000 revolving credit facility ("Revolving Credit Facility"),
with a maturity date of December 31, 2002. Amounts outstanding under the Senior
Credit Facility bear interest at either the (i) Eurodollar rate, (ii) prime rate
or (iii) CD base rate or Federal Funds rate, plus a margin up to 2.25%, which is
subject to certain quarterly adjustments based on the ratio of the issuer's
total debt to annualized operating cash flow, as defined. The variable interest
rates ranged from 6.23% to 7.75% at December 31, 1998. A quarterly commitment
fee ranging from 0.250% to 0.375% per annum is payable on the unused commitment
under the Senior Credit Facility.
MARCUS -- 13 1/2% SENIOR SUBORDINATED DISCOUNT NOTES
Marcus issued $413,461 face amount of 13 1/2% Senior Subordinated Discount
Notes due August 1, 2004 (the "13 1/2% Notes") for net proceeds of $215,000. The
13 1/2% Notes are unsecured, are guaranteed by Marcus and are redeemable, at the
option of Marcus, at amounts decreasing from 105% to 100% of par beginning on
August 1, 1999. No interest is payable on the 13 1/2% Notes until February 1,
2000. Thereafter, interest is payable semiannually until maturity. The discount
on the 13 1/2% Notes is being accreted using the effective interest method. The
unamortized discount was $30,225 at December 31, 1998.
F-16
173
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCUS -- 14 1/4% SENIOR DISCOUNT NOTES
Marcus issued $299,228 of 14 1/4% Senior Discount Notes due December 15,
2005 (the "14 1/4% Notes") for net proceeds of $150,003. The 14 1/4% Notes are
unsecured and are redeemable at the option of Marcus at amounts decreasing from
107% to 100% of par beginning on June 15, 2000. No interest is payable until
December 15, 2000. Thereafter, interest is payable semiannually until maturity.
The discount on the 14 1/4% Notes is being accreted using the effective interest
method. The unamortized discount was $53,545 at December 31, 1998.
The debt agreements require the Company and/or its subsidiaries to comply
with various financial and other covenants, including the maintenance of certain
operating and financial ratios. These debt instruments also contain substantial
limitations on, or prohibitions of, distributions, additional indebtedness,
liens, asset sales and certain other items.
Based upon outstanding indebtedness at December 31, 1998, and the
amortization of term and fund loans, and scheduled reductions in available
borrowings of the revolving credit facilities, aggregate future principal
payments on the total borrowings under all debt agreements at December 31, 1998,
are as follows:
YEAR AMOUNT
- ---- ----------
1999....................................................... $ 87,950
2000....................................................... 110,245
2001....................................................... 148,950
2002....................................................... 393,838
2003....................................................... 295,833
Thereafter................................................. 2,482,193
----------
$3,519,009
==========
F-17
174
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1998, is as follows:
CARRYING NOTIONAL FAIR
DEBT VALUE AMOUNT VALUE
- ---- ---------- ---------- ----------
Charter:
Charter Credit Agreements (including
CCP, CCA Group and CharterComm
Holdings)........................... $1,726,500 $ -- $1,726,500
Senior Secured Discount Debentures..... 138,102 -- 138,102
11 1/4% Senior Notes................... 137,604 -- 137,604
Marcus:
Senior Credit Facility................. 808,000 -- 808,000
13 1/2% Senior Subordinated Discount
Notes............................... 425,812 -- 418,629
14 1/4% Senior Discount Notes.......... 287,183 -- 279,992
INTEREST RATE HEDGE AGREEMENTS
Swaps.................................... (22,092) 1,505,000 (28,977)
Caps..................................... -- 15,000 --
Collars.................................. (4,174) 310,000 (4,174)
As the long-term debt under the credit agreements bears interest at current
market rates, their carrying amount approximates market value at December 31,
1998. The fair values of the 11 1/4% Notes, the Debentures, the 13 1/2% Notes
and the 14 1/2% Notes are based on quoted market prices.
The weighted average interest pay rate for the Company's interest rate swap
agreements was 7.1% at December 31, 1998. The weighted average interest rate for
the Company's interest rate cap agreements was 8.45% at December 31, 1998. The
weighted average interest rates for the Company's interest rate collar
agreements were 8.63% and 7.31% for the cap and floor components, respectively,
at December 31, 1998.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would receive or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate
F-18
175
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
hedge agreements are with certain of the participating banks under the Company's
credit facilities, thereby reducing the exposure to credit loss. The Company has
policies regarding the financial stability and credit standing of major
counterparties. Nonperformance by the counterparties is not anticipated nor
would it have a material adverse effect on the Company's consolidated financial
position or results of operations.
8. RELATED-PARTY TRANSACTIONS:
Charter provides management services to the Company including centralized
customer billing services, data processing and related support, benefits
administration and coordination of insurance coverage and self-insurance
programs for medical, dental and workers' compensation claims. Actual costs of
certain services are charged directly to the Company and are included in
operating costs. Such costs totaled $128 for the period from December 24, 1998,
through December 31, 1998. All other costs incurred by Charter on behalf of the
Company are recorded as expenses in the accompanying consolidated financial
statements and are included in corporate expense charges -- related party.
The Company is charged a management fee based on percentages of revenues or
a flat fee plus additional fees based on percentages of operating cash flows, as
stipulated in the management agreements between Charter and the operating
subsidiaries. To the extent management fees charged to the Company are
greater(less) than the corporate expenses incurred by Charter, the Company will
record distributions to(capital contributions from) Charter. For the period from
December 24, 1998, through December 31, 1998, the management fee charged to the
Company approximated the corporate expenses incurred by Charter on behalf of the
Company. As of December 31, 1998, management fees currently payable of $7,675
are included in payables to manager of cable television systems-related party.
Beginning in 1999, the management fee will be based on 3.5% of revenues as
permitted by the new debt agreements of the Company (see Note 12).
The payable to related party represents the reimbursement of costs incurred
by Paul G. Allen in connection with the acquisition of Marcus by Paul G. Allen.
9. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense for the period from
December 24, 1998, through December 31, 1998, were $144. Future minimum lease
payments are as follows:
1999........................................................ $5,898
2000........................................................ 4,070
2001........................................................ 3,298
2002........................................................ 1,305
2003........................................................ 705
Thereafter.................................................. 3,395
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent
F-19
176
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expense incurred for pole rental attachments for the period from December 24,
1998, through December 31, 1998, was $226.
LITIGATION
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier
F-20
177
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(CPST). The FCC is currently developing permanent regulations to implement the
rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict
the ultimate effect of the 1996 Telecom Act on the Company's consolidated
financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation. The Company is subject to state regulation in
Connecticut.
10. EMPLOYEE BENEFIT PLANS:
The Company's employees may participate in 401(k) plans (the "401(k)
Plans"). Employees that qualify for participation can contribute up to 15% of
their salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company made contributions to
the 401(k) Plans totaling $30 for the period from December 24, 1998, through
December 31, 1998.
11. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings
(loss).
12. SUBSEQUENT EVENTS:
Through April 19, 1999, the Company has entered into definitive agreements
to purchase eight cable television companies, including a swap of cable
television systems, for approximately $4.6 billion. The acquisitions are
expected to close during 1999.
In March 1999, concurrent with the issuance of $600.0 million 8.250% Senior
Notes due 2007, $1.5 billion 8.625% Senior Notes due 2009 and $1.475 billion
9.920% Senior
F-21
178
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Discount Notes due 2011 (collectively, the "CCH Notes"), the Company
extinguished substantially all long-term debt, excluding borrowings of the
Company under its credit agreements, and refinanced substantially all existing
credit agreements at various subsidiaries with a new credit agreement (the "CCO
Credit Agreement") entered into by Charter Operating. The CCO Credit Agreement
provides for two term facilities, one with a principal amount of $1.0 billion
that matures September 2008 (Term A), and the other with the principal amount of
$1.85 billion that matures on March 2009 (Term B). The CCO Credit Agreement also
provides for a $1.25 billion revolving credit facility with a maturity date of
September 2008. Amounts under the CCO Credit Agreement bear interest at the Base
Rate or the Eurodollar rate, as defined, plus a margin up to 2.75%. A quarterly
commitment fee of between 0.25% and 0.375% per annum is payable on the
unborrowed balance of Term A and the revolving credit facility. On March 17,
1999, the Company borrowed $1.75 billion under Term B and invested the excess
cash of $1.0 billion in short-term investments.
Charter Communications Holdings Capital Corporation (CCHC) is a co-issuer
of the CCH Notes. CCHC is a wholly owned finance subsidiary of Charter Holdings
with no independent assets or operations.
F-22
179
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications Holdings, LLC:
We have audited the accompanying consolidated balance sheet of Charter
Communications Holdings, LLC and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, shareholder's investment and cash
flows for the period from January 1, 1998, through December 23, 1998, and for
the years ended December 31, 1997 and 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Charter Communications
Holdings, LLC and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the period from January 1, 1998, through
December 23, 1998, and for the years ended December 31, 1997 and 1996, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999 (except with respect to
the matters discussed in Note 1, as to
which the date is April 7, 1999)
F-23
180
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
DECEMBER 31,
1997
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 626
Accounts receivable, net of allowance for doubtful
accounts of $52........................................ 579
Prepaid expenses and other................................ 32
-------
Total current assets................................... 1,237
-------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 25,530
Franchises, net of accumulated amortization of $3,829..... 28,195
-------
53,725
-------
OTHER ASSETS................................................ 849
-------
$55,811
=======
LIABILITIES AND SHAREHOLDER'S INVESTMENT
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 3,082
Payables to manager of cable television systems -- related
party.................................................. 114
-------
Total current liabilities.............................. 3,196
-------
LONG-TERM DEBT.............................................. 41,500
-------
NOTE PAYABLE TO RELATED PARTY, including accrued interest... 13,090
-------
SHAREHOLDER'S INVESTMENT:
Common stock, $.01 par value, 100 shares authorized, one
issued and outstanding................................. --
Paid-in capital........................................... 5,900
Accumulated deficit....................................... (7,875)
-------
Total shareholder's investment......................... (1,975)
-------
$55,811
=======
The accompanying notes are an integral part of these consolidated statements.
F-24
181
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
PERIOD FROM
JANUARY 1, YEAR ENDED
1998, THROUGH DECEMBER 31
DECEMBER 23, ------------------
1998 1997 1996
------------- ------- -------
REVENUES....................................... $ 49,731 $18,867 $14,881
-------- ------- -------
OPERATING EXPENSES:
Operating costs.............................. 18,751 9,157 5,888
General and administrative................... 7,201 2,610 2,235
Depreciation and amortization................ 16,864 6,103 4,593
Corporate expense allocation -- related
party..................................... 6,176 566 446
-------- ------- -------
48,992 18,436 13,162
-------- ------- -------
Income from operations.................... 739 431 1,719
-------- ------- -------
OTHER INCOME (EXPENSE):
Interest income.............................. 44 41 20
Interest expense............................. (17,277) (5,120) (4,415)
Other, net................................... (728) 25 (47)
-------- ------- -------
(17,961) (5,054) (4,442)
-------- ------- -------
Net loss.................................. $(17,222) $(4,623) $(2,723)
======== ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-25
182
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S INVESTMENT
(DOLLARS IN THOUSANDS)
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ------- ----------- --------
BALANCE, December 31, 1995........ $-- $ 1,500 $ (529) $ 971
Capital contributions........... -- 4,400 -- 4,400
Net loss........................ -- -- (2,723) (2,723)
-- ------- -------- --------
BALANCE, December 31, 1996........ -- 5,900 (3,252) 2,648
Net loss........................ -- -- (4,623) (4,623)
-- ------- -------- --------
BALANCE, December 31, 1997........ -- 5,900 (7,875) (1,975)
Capital contributions........... -- 10,800 -- 10,800
Net loss........................ -- -- (17,222) (17,222)
-- ------- -------- --------
BALANCE, December 23, 1998........ $-- $16,700 $(25,097) $ (8,397)
== ======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-26
183
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
PERIOD FROM
JANUARY 1, YEAR ENDED
1998, THROUGH DECEMBER 31
DECEMBER 23, -------------------
1998 1997 1996
------------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $ (17,222) $(4,623) $ (2,723)
Adjustments to reconcile net loss to net cash
provided by operating activities --
Depreciation and amortization.................... 16,864 6,103 4,593
Loss on sale of cable television system.......... -- 1,363 --
Amortization of debt issuance costs, debt
discount and interest rate cap agreements...... 267 123 --
(Gain) loss on disposal of property, plant and
equipment...................................... (14) 130 --
Changes in assets and liabilities, net of effects
from acquisitions --
Receivables, net............................... 10 (227) 6
Prepaid expenses and other..................... (125) 18 312
Accounts payable and accrued expenses.......... 16,927 894 3,615
Payables to manager of cable television
systems..................................... 5,288 (153) 160
Other operating activities..................... 569 -- --
--------- ------- --------
Net cash provided by operating activities...... 22,564 3,628 5,963
--------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment......... (15,364) (7,880) (5,894)
Payments for acquisitions, net of cash acquired.... (167,484) -- (34,069)
Proceeds from sale of cable television system...... -- 12,528 --
Other investing activities......................... (486) -- 64
--------- ------- --------
Net cash provided by (used in) investing
activities.................................. (183,334) 4,648 (39,899)
--------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....................... 217,500 5,100 31,375
Repayments of long-term debt....................... (60,200) (13,375) (1,000)
Capital contributions.............................. 7,000 -- 4,400
Payment of debt issuance costs..................... (3,487) (12) (638)
--------- ------- --------
Net cash provided by (used in) financing
activities.................................. 160,813 (8,287) 34,137
--------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 43 (11) 201
CASH AND CASH EQUIVALENTS, beginning of period....... 626 637 436
--------- ------- --------
CASH AND CASH EQUIVALENTS, end of period............. $ 669 $ 626 $ 637
========= ======= ========
CASH PAID FOR INTEREST............................... $ 7,679 $ 3,303 $ 2,798
========= ======= ========
F-27
184
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Charter Communications Holdings, LLC (Charter Holdings), a Delaware limited
liability company, was formed in February 1999 as a wholly owned subsidiary of
Charter Communications, Inc. (Charter). Charter, through its wholly owned cable
television operating subsidiary, Charter Communications Properties, LLC (CCP),
commenced operations with the acquisition of a cable television system on
September 30, 1995.
Effective December 23, 1998, through a series of transactions, Paul G.
Allen acquired approximately 94% of Charter for an aggregate purchase price, net
of debt assumed, of $2.2 billion (the "Paul Allen Transaction"). In conjunction
with the Paul Allen Transaction, Charter acquired controlling interests in
CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of CCA
Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach Corp.),
all cable television operating companies. In February 1999, Charter transferred
all of its cable television operating subsidiaries to a subsidiary of Charter
Holdings, Charter Communications Operating, LLC (Charter Operating).
On April 7, 1999, the cable television operating subsidiaries of Marcus
Cable Company, L.L.C. (Marcus) were transferred to Charter Operating. The
transfer was accounted for as a reorganization of entities under common control
similar to a pooling of interests, since Paul G. Allen and a company controlled
by Paul G. Allen purchased substantially all of the outstanding partnership
interests in Marcus in April 1998, and purchased the remaining interests in
Marcus on April 7, 1999.
The accompanying financial statements include the accounts of CCP,
Charter's wholly owned cable operating subsidiary, representing the financial
statements of Charter Holdings and subsidiaries (the Company) for all periods
presented. The accounts of CharterComm Holdings and CCA Group are not included
since these companies were not owned and controlled by Charter prior to December
23, 1998. The accounts of Marcus are not included since both Charter and Marcus
were not owned and controlled by the same party prior to December 23, 1998.
As a result of the change in ownership of CCP, CharterComm Holdings and CCA
Group, Charter Holdings has applied push-down accounting in the preparation of
the consolidated financial statements effective December 23, 1998. Accordingly,
the financial statements of Charter Holdings for periods ended on or before
December 23, 1998, are presented on a different cost basis than the financial
statements for the periods after December 23, 1998 (not presented herein), and
are not comparable.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997,
cash equivalents consist primarily of repurchase agreements. These investments
are carried at cost that approximates market value.
F-28
185
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installations. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, and equipment replacement and betterments are capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
Cable distribution systems................................ 3-15 years
Buildings and leasehold improvements...................... 5-15 years
Vehicles and equipment.................................... 3-5 years
In 1997, the Company shortened the estimated useful lives of certain
property, plant and equipment for depreciation purposes. As a result, additional
depreciation of $550 was recorded during 1997.
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable television systems represent the excess
of the cost of properties acquired over the amounts assigned to net tangible
assets at the date of acquisition and are amortized using the straight-line
method over a period of up to 15 years.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of December 31, 1997, no installation revenue has
been deferred, as direct selling costs 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.
F-29
186
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On a monthly basis, such fees are collected from the Company's customers and are
periodically remitted to local franchises. Franchise fees collected and paid are
reported as revenues.
INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain debt agreements. Interest rate swaps,
caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
INCOME TAXES
The Company files a consolidated income tax return with Charter. Income
taxes are allocated to the Company in accordance with the tax-sharing agreement
between the Company and Charter.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS:
In 1998, the Company acquired cable television systems for an aggregate
purchase price, net of cash acquired, of $228,400, comprising $167,500 in cash
and $60,900 in a note payable to Seller. The excess of cost of properties
acquired over the amounts assigned to net tangible assets at the date of
acquisition was $207,600 and is included in franchises.
In 1996, the Company acquired cable television systems for an aggregate
purchase price, net of cash acquired, of $34,100. The excess of the cost of
properties acquired over the amounts assigned to net tangible assets at the date
of acquisition was $24,300 and is included in franchises.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the
F-30
187
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements from the dates of acquisition. The purchase prices were
allocated to tangible and intangible assets based on estimated fair values at
the acquisition dates.
Unaudited pro forma operating results as though the acquisition discussed
above, excluding the Paul Allen Transaction, had occurred on January 1, 1997,
with adjustments to give effect to amortization of franchises, interest expense
and certain other adjustments are as follows:
PERIOD FROM
JANUARY 1, 1998,
THROUGH YEAR ENDED
DECEMBER 23, 1998 1997
----------------- ----------
(UNAUDITED)
Revenues.......................................... $ 67,007 $ 63,909
Loss from operations.............................. (7,097) (7,382)
Net loss.......................................... (24,058) (26,099)
The unaudited pro forma information has been presented for comparative
purposes and does not purport to be indicative of the results of operations had
these transactions been completed as of the assumed date or which may be
obtained in the future.
3. SALE OF FT. HOOD SYSTEM:
In February 1997, the Company sold the net assets of the Ft. Hood system,
which served customers in Texas, for an aggregate sales price of approximately
$12,500. The sale of the Ft. Hood system resulted in a loss of $1,363, which is
included in operating costs in the accompanying statement of operations for the
year ended December 31, 1997.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1997:
Cable distribution systems.................................. $29,061
Land, buildings and leasehold improvements.................. 447
Vehicles and equipment...................................... 1,744
-------
31,252
Less- Accumulated depreciation.............................. (5,722)
-------
$25,530
=======
For the period from January 1, 1998, through December 23, 1998, and for the
years ended December 31, 1997 and 1996, depreciation expense was $6,249, $3,898
and $2,371, respectively.
F-31
188
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1997:
Accrued interest............................................ $ 292
Capital expenditures........................................ 562
Franchise fees.............................................. 426
Programming costs........................................... 398
Accounts payable............................................ 298
Other....................................................... 1,012
------
$2,988
======
6. LONG-TERM DEBT:
The Company maintained a revolving credit agreement (the "Old Credit
Agreement") with a consortium of banks for borrowings up to $47,500, of which
$41,500 was outstanding at December 31, 1997. In 1997, the Credit Agreement was
amended to reflect the impact of the sale of a cable television system. The debt
bears interest, at the Company's option, at rates based on the prime rate of the
Bank of Montreal (the agent bank), or LIBOR, plus the applicable margin based
upon the Company's leverage ratio at the time of the borrowings. The variable
interest rates ranged from 7.44% to 7.63% at December 31, 1997.
In May 1998, the Company entered into a credit agreement (the "CCP Credit
Agreement"), which provides for two term loan facilities, one with the principal
amount of $60,000 that matures on June 30, 2006, and the other with the
principal amount of $80,000 that matures on June 30, 2007. The CCP Credit
Agreement also provides for a $90,000 revolving credit facility with a maturity
date of June 30, 2006. Amounts under the CCP Credit Agreement bear interest at
the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.88%.
Commencing March 31, 1999, and at the end of each quarter thereafter,
available borrowings under the revolving credit facility shall be reduced on an
annual basis by 3.5% in 1999, 7.0% in 2000, 9.0% in 2001, 10.5% in 2002 and
16.5% in 2003. Commencing March 31, 2000, and at the end of each quarter
thereafter, available borrowings under the term loan shall be reduced on an
annual basis by 6.0% in 2000, 8.0% in 2001, 11.0% in 2002 and 16.5% in 2003.
Commencing March 31, 2000, and at the end of each quarter thereafter, available
borrowings under the other term loan shall be reduced on an annual basis by 1.0%
in 2000, 1.0% in 2001, 1.0% in 2002 and 1.0% in 2003.
7. NOTE PAYABLE TO RELATED PARTY:
As of December 31, 1997, the Company holds a promissory note payable to CCT
Holdings Corp., a company managed by Charter and acquired by Charter effective
December 23, 1998. The promissory note bears interest at the rates paid by CCT
Holdings Corp. on a note payable to a third party. Principal and interest are
due on September 29, 2005.
F-32
189
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1997, is as follows:
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
-------- -------- -------
Debt
CCP Credit Agreement............................. $41,500 $ -- $41,500
Interest Rate Hedge Agreements
Caps............................................. -- 15,000 --
Collars.......................................... -- 20,000 (74)
As the long-term debt under the credit agreements bears interest at current
market rates, its carrying amount approximates market value at December 31,
1997.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would receive or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. The Company has
policies regarding the financial stability and credit standing of major
counterparties. Nonperformance by the counterparties is not anticipated nor
would it have a material adverse effect on the Company's financial position or
results of operations.
9. INCOME TAXES:
At December 31, 1997, the Company had net operating loss carryforwards of
$9,594, which if not used to reduce taxable income in future periods, expire in
the years 2010 through 2012. As of December 31, 1997, the Company's deferred
income tax assets were offset by valuation allowances and deferred income tax
liabilities resulting primarily from differences in accounting for depreciation
and amortization.
10. RELATED-PARTY TRANSACTIONS:
Charter provides management services to the Company including centralized
customer billing services, data processing and related support, benefits
administration and coordination of insurance coverage and self-insurance
programs for medical, dental and workers' compensation claims. Actual costs of
certain services are charged directly to the Company and are included in
operating costs. Such costs totaled $437, $220 and $131, respectively for the
period from January 1, 1998, through December 23, 1998, and the years ended
F-33
190
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997 and 1996. All other costs incurred by Charter on behalf of the
Company are expensed in the accompanying financial statements and are included
in corporate expense allocations -- related party. The cost of these services is
allocated based on the number of basic customers. Management considers this
allocation to be reasonable for the operations of the Company.
The Company is charged a management fee based on percentages of revenues as
stipulated in the management agreement between Charter and the Company. For the
period from January 1, 1998, through December 23, 1998, and the years ended
December 31, 1997 and 1996, the management fee charged to the Company
approximated the corporate expenses incurred by Charter on behalf of the
Company. Management fees currently payable of $114 are included in payables to
manager of cable television systems -- related party as of December 31, 1997.
11. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense for the period from
January 1, 1998, through December 23, 1998, and for the years ended December 31,
1997 and 1996, were $278, $130 and $91, respectively.
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expense incurred for pole rental attachments for the
period from January 1, 1998, through December 23, 1998, and for the years ended
December 31, 1997 and 1996, was $421, $271 and $174, respectively.
LITIGATION
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's financial position or results of operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
F-34
191
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 31,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation. The Company is subject to state regulation in
Connecticut.
12. EMPLOYEE BENEFIT PLAN:
401(K) PLAN
The Company's employees may participate in the Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 15% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Company contributes an amount equal to 50% of the first 5% of contributions by
each employee. The Company contributed
F-35
192
CHARTER COMMUNICATIONS HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$74, $29 and $22 for the period from January 1, 1998, through December 23, 1998,
and for the years ended December 31, 1997 and 1996, respectively.
APPRECIATION RIGHTS PLAN
Certain employees of Charter participate in the 1995 Charter
Communications, Inc. Appreciation Rights Plan (the "Plan"). As a result of the
acquisition of Charter by Paul G. Allen, the Plan will be terminated and all
amounts will be paid by Charter in 1999. The cost of this plan was allocated to
the Company based on the number of basic customers. Management considers this
allocation to be reasonable for the operations of the Company. For the period
January 1, 1998, through December 23, 1998, the Company expensed $3,800,
included in corporate expense allocation, for the cost of this plan.
13. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings
(loss).
F-36
193
INDEPENDENT AUDITORS' REPORT
The Members
Marcus Cable Company, L.L.C.:
We have audited the accompanying consolidated balance sheets of Marcus
Cable Company, L.L.C. and subsidiaries as of December 31, 1998 and 1997 (which
December 31, 1998 balance sheet is not presented separately herein) and the
related consolidated statements of operations, members' equity and cash flows
for the period from April 23, 1998 to December 23, 1998 and the consolidated
statements of operations, partners' capital (deficit), and cash flows for the
period from January 1, 1998 to April 22, 1998 and for each of the years in the
two-year period ended December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Marcus Cable
Company, L.L.C. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the periods from April 23,
1998 to December 23, 1998 and from January 1, 1998 to April 22, 1998 and for
each of the years in the two-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements,
substantially all of Marcus Cable Company, L.L.C. was acquired by Vulcan Cable,
Inc. and Paul G. Allen as of April 22, 1998 in a business combination accounted
for as a purchase. As a result of the application of purchase accounting, the
consolidated financial statements of Marcus Cable Company, L.L.C. and
subsidiaries for the period from April 23, 1998 to December 23, 1998 are
presented on a different cost basis than those for periods prior to April 23,
1998, and accordingly, are not directly comparable.
/s/ KPMG LLP
Dallas, Texas
February 19, 1999
(except for the tenth paragraph of Note 1
which is as of April 7, 1999)
F-37
194
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
PREDECESSOR (NOTE 1)
--------------------
1997
----
ASSETS
- ----------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents................................. $ 1,607
Accounts receivable, net of allowance of $1,800 in 1998
and $1,904 in 1997..................................... 23,935
Prepaid expenses and other................................ 2,105
----------
Total current assets.............................. 27,647
Investment in cable television systems:
Property, plant and equipment............................. 706,626
Franchises................................................ 972,440
Noncompetition agreements................................. 6,770
Other assets................................................ 36,985
----------
$1,750,468
==========
LIABILITIES AND PARTNERS' CAPITAL
- ----------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt...................... $ 67,499
Accrued liabilities....................................... 68,754
----------
Total current liabilities......................... 136,253
Long-term debt.............................................. 1,531,927
Other long-term liabilities................................. 2,261
Partners' capital........................................... 80,027
----------
$1,750,468
==========
See accompanying notes to consolidated financial statements.
F-38
195
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PREDECESSOR (NOTE 1)
SUCCESSOR (NOTE 1) -----------------------------------------------
-------------------- YEAR ENDED DECEMBER 31
PERIOD FROM APRIL 23 PERIOD FROM JANUARY 1 -----------------------
TO DECEMBER 23, 1998 TO APRIL 22, 1998 1997 1996
-------------------- --------------------- ---------- ----------
Revenues:
Cable services.......... $ 332,139 $ 157,389 $ 473,701 $ 432,172
Management fees --
related party........ 181 374 5,614 2,335
--------- --------- --------- ---------
Total
revenues...... 332,320 157,763 479,315 434,507
--------- --------- --------- ---------
Operating expenses:
Selling, service and
system management.... 129,435 60,501 176,515 157,197
General and
administrative....... 51,912 24,245 72,351 73,017
Transaction and
severance costs...... 16,034 114,167 -- --
Management fees --
related party........ 3,048 -- -- --
Depreciation and
amortization......... 174,968 64,669 188,471 166,429
--------- --------- --------- ---------
Total operating
expenses...... 375,397 263,582 437,337 396,643
--------- --------- --------- ---------
Operating income
(loss)........ (43,077) (105,819) 41,978 37,864
--------- --------- --------- ---------
Other (income) expense:
Interest expense........ 93,103 49,905 151,207 144,376
Gain on sale of
assets............... -- (43,662) -- (6,442)
--------- --------- --------- ---------
Total other
expense....... 93,103 6,243 151,207 137,934
--------- --------- --------- ---------
Loss before
extraordinary
item.......... (136,180) (112,062) (109,229) (100,070)
Extraordinary item -- gain
on early retirement of
debt.................... (2,384) -- -- --
--------- --------- --------- ---------
Net loss........ $(133,796) $(112,062) $(109,229) $(100,070)
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-39
196
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(IN THOUSANDS)
PREDECESSOR (NOTE 1)
----------------------------------
CLASS B
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
-------- -------- -----
Balance at December 31, 1995.................... $(21,396) $ 310,722 $ 289,326
Net loss...................................... (200) (99,870) (100,070)
-------- --------- ---------
Balance at December 31, 1996.................... (21,596) 210,852 189,256
Net loss...................................... (218) (109,011) (109,229)
-------- --------- ---------
Balance at December 31, 1997.................... (21,814) 101,841 80,027
Net loss -- January 1, 1998 to April 22,
1998....................................... (224) (111,838) (112,062)
-------- --------- ---------
Balance at April 22, 1998....................... $(22,038) $ (9,997) $ (32,035)
======== ========= =========
See accompanying notes to consolidated financial statements.
F-40
197
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
(IN THOUSANDS)
SUCCESSOR (NOTE 1)
----------------------------------------
MARCUS
CABLE
PROPERTIES, VULCAN
L.L.C. CABLE, INC. TOTAL
----------- ----------- ----------
Initial capitalization (note 3)................ $53,200 $1,346,800 $1,400,000
Capital contribution (note 3).................. -- 20,000 20,000
Net loss -- April 23, 1998 to December 23,
1998......................................... (5,084) (128,712) (133,796)
------- ---------- ----------
Balance at December 23, 1998................... $48,116 $1,238,088 $1,286,204
======= ========== ==========
See accompanying notes to consolidated financial statements.
F-41
198
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SUCCESSOR (NOTE 1) PREDECESSOR (NOTE 1)
-------------------- ---------------------------------------------------
YEAR ENDED DECEMBER 31,
PERIOD FROM APRIL 23 PERIOD FROM JANUARY 1 --------------------------
TO DECEMBER 23, 1998 TO APRIL 22, 1998 1997 1996
-------------------- --------------------- ---- ----
Cash flows from operating activities:
Net loss.................................. $(133,796) $(112,062) $(109,229) $(100,070)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Extraordinary item -- gain on early
retirement of debt.................... (2,384) -- -- --
Gain on sale of assets.................. -- (43,662) -- (6,442)
Depreciation and amortization........... 174,969 64,669 188,471 166,429
Non cash interest expense............... 52,942 24,819 72,657 63,278
Amortization of carrying value
premium............................... (11,043) -- -- --
Changes in assets and liabilities, net
of working capital adjustments for
acquisitions:
Accounts receivable, net.............. 6,550 1,330 (6,439) (70)
Prepaid expenses and other............ (1,356) (1,855) 95 (574)
Other assets.......................... -- (16) (385) (502)
Payables to related party............. 3,048 -- -- --
Accrued liabilities................... (1,504) 90,804 9,132 (3,063)
--------- --------- --------- ---------
Net cash provided by operating
activities:...................... 87,426 24,027 154,302 118,986
--------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of cable systems.............. -- (57,500) (53,812) (10,272)
Proceeds from sale of assets, net of cash
acquired and selling costs.............. 340,568 64,564 -- 20,638
Additions to property, plant and
equipment............................... (158,388) (65,715) (197,275) (110,639)
Other..................................... (648) (42) -- --
--------- --------- --------- ---------
Net cash provided by (used in)
investing activities:............ 181,532 (58,693) (251,087) (100,273)
--------- --------- --------- ---------
Cash flows from financing activities:
Borrowings under Senior Credit Facility... 158,750 59,000 226,000 65,000
Repayments under Senior Credit Facility... (343,250) (16,250) (131,250) (95,000)
Repayments of notes and debentures........ (109,344) -- -- --
Payment of debt issuance costs............ -- (99) (1,725) --
Cash contributed by member................ 20,000 -- -- --
Payments on other long-term liabilities... (550) (321) (667) (88)
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities............. (274,394) 42,330 92,358 (30,088)
--------- --------- --------- ---------
Net decrease in cash and cash equivalents... (5,436) 7,664 (4,427) (11,375)
Cash and cash equivalents at the beginning
of the period............................. 9,271 1,607 6,034 17,409
--------- --------- --------- ---------
Cash and cash equivalents at the end of the
period.................................... $ 3,835 $ 9,271 $ 1,607 $ 6,034
========= ========= ========= =========
Supplemental disclosure of cash flow
information:
Interest paid............................. $ 52,631 $ 28,517 $ 81,155 $ 83,473
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-42
199
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Marcus Cable Company, L.L.C. ("MCCLLC") and subsidiaries (collectively, the
"Company") is a Delaware limited liability company, formerly Marcus Cable
Company, L.P. ("MCCLP"). MCCLP was formed as a Delaware limited partnership and
was converted to a Delaware limited liability company on June 9, 1998 (note 3).
The Company derives its primary source of revenues by providing various levels
of cable television programming and services to residential and business
customers. The Company's operations are conducted through Marcus Cable Operating
Company, L.L.C. ("MCOC"), a wholly-owned subsidiary of the Company. The Company
has operated its cable television systems primarily in Texas, Wisconsin,
Indiana, California and Alabama.
The accompanying consolidated financial statements include the accounts of
MCCLLC and its subsidiary limited liability companies and corporations. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
On April 23, 1998, Vulcan Cable, Inc. and Paul G. Allen (collectively
referred to as "Vulcan") acquired all of the outstanding limited partnership
interests and substantially all of the general partner interest in MCCLP. Under
the terms of the purchase agreement, the owner of the remaining 0.6% general
partner interest (the "Minority Interest") in the Company can cause Vulcan to
purchase the 0.6% general partner interest under certain conditions, or Vulcan
can cause the Minority Interest to sell its interest to Vulcan under certain
conditions, at a fair value of not less than $8,000.
As a result of this acquisition (the "Vulcan Acquisition"), the Company has
applied purchase accounting in the preparation of the accompanying consolidated
financial statements. Accordingly, MCCLP adjusted its equity as of April 23,
1998 to reflect the amount paid in the Vulcan Acquisition and has allocated that
amount to assets acquired and liabilities assumed based on their relative fair
values. The excess of the purchase price over the fair value of MCCLP's tangible
and separately identifiable intangible assets less liabilities was allocated as
franchises. The allocation of the purchase price is based, in part, on
preliminary information which is subject to adjustment upon completion of
certain appraisal and valuation information.
The total transaction was valued at $3,243,475 and was allocated as
follows:
Franchises............................. $2,492,375
Property, plant and equipment.......... 735,832
Noncompetition agreements.............. 6,343
Other assets........................... 8,925
----------
$3,243,475
==========
The transaction was initially funded through cash payments of $1,392,000
from Vulcan and the assumption of $1,809,621 in net liabilities. In addition,
Vulcan incurred direct costs of the acquisition (principally financial advisory,
legal and accounting fees) of $20,000, which will be reimbursed by the Company.
In addition, the Company recorded the fair value of the Minority Interest of
$8,000 in equity and $13,854 in direct transaction costs.
In connection with the Vulcan Acquisition, the Company incurred transaction
costs of approximately $114,167, comprised of $90,167 paid to employees of the
Company in
F-43
200
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
settlement of specially designated Class B units in MCCLP ("EUnit") granted in
past periods by the general partner of MCCLP, and $24,000 of transaction fees
paid to certain equity partners for investment banking services. These
transaction costs have been included in the accompanying consolidated statement
of operations for the period from January 1, 1998 to April 22, 1998.
As a result of the Vulcan Acquisition and the application of purchase
accounting, financial information in the accompanying consolidated financial
statements and notes thereto for the period from April 23, 1998 to December 23,
1998 (the "Successor Period") are presented on a different cost basis than the
financial information as of December 31, 1997 and for the period from January 1,
1998 to April 22, 1998 and for the years ended December 31, 1997 and 1996 (the
"Predecessor Period"), and therefore, such information is not comparable.
Effective December 23, 1998, through a series of transactions, Paul G.
Allen acquired approximately 94% of Charter Communications, Inc. ("Charter").
In March 1999, Charter transferred all of its cable television operating
subsidiaries to a subsidiary, Charter Communications Holdings, LLC (Charter
Holdings) in connection with the issuance of Senior Notes and Senior Discount
Notes totaling $3.6 billion. These operating subsidiaries were then transferred
to Charter Communications Operating, LLC ("Charter Operating"). On April 7,
1999, the cable operations of the Company were transferred to Charter Operating
subsequent to the purchase by Paul G. Allen of the Minority Interest. The
transfer was accounted for as a reorganization of entities under common control
similar to a pooling of interests. For periods subsequent to December 23, 1998
(the date Paul G. Allen controlled both Charter and the Company), the accounts
of the Company will be included in the consolidated financial statements of
Charter Holdings at historical carrying amounts.
As a result of the combination of the Company and Charter, the Company
recognized severance and stay-on bonus compensation of $16,034, which is
included in Transaction and Severance Costs in the accompanying statement of
operations for the period from April 22, 1998 to December 23, 1998. As of
December 23, 1998, 35 employees and officers of the Company had been terminated
and $13,634 had been paid under severance and bonus arrangements. By March 31,
1999, an additional 50 employees will be terminated. The remaining balance of
$2,400 is to be paid by April 30, 1999 and an additional $400 in stay-on bonuses
will be recorded as compensation in 1999 as the related services are provided.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997,
cash equivalents consist of certificates of deposit and money market funds.
These investments are carried at cost which approximates market value.
(b) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installation. The costs of disconnecting
F-44
201
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a customer are charged to expense in the period incurred. Expenditures for
maintenance and repairs are charged to expense as incurred and equipment
replacements and betterments are capitalized.
Depreciation is provided by the straight-line method over the estimated
useful lives of the related assets as follows:
Cable distribution systems............. 3-10 years
Buildings and leasehold improvements... 5-15 years
Vehicles and equipment................. 3-5 years
(c) FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the estimated lives of the franchises. Costs relating to
unsuccessful franchise applications are charged to expense when it is determined
that the efforts to obtain the franchise will not be successful. Franchise
rights acquired through the purchase of cable television systems, including the
Vulcan Acquisition, represent the excess of the cost of properties acquired over
the amounts assigned to net tangible and identifiable intangible assets at date
of acquisition and are amortized using the straight-line method over a period of
15 years. Accumulated amortization was $264,600 at December 31, 1997.
The historical cost of $37,274 and the related accumulated amortization of
$9,959 for the going concern value of acquired cable television systems as of
December 31, 1997 has been reflected in the caption "Franchises" in the
accompanying consolidated balance sheet. This asset was amortized in the
Predecessor Period using the straight-line method over a period of up to 15
years.
(d) NONCOMPETITION AGREEMENTS
Noncompetition agreements are amortized using the straight-line method over
the term of the respective agreements. Accumulated amortization was $19,144 at
December 31, 1997.
(e) OTHER ASSETS
Debt issuance costs were amortized to interest expense over the term of the
related debt. Debt issuance costs associated with debt outstanding at the Vulcan
Acquisition date were eliminated in connection with pushdown accounting.
(f) IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
(g) REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of
F-45
202
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997, no installation revenue has been deferred, as direct selling
costs exceeded installation revenue.
Management fee revenues are recognized concurrently with the recognition of
revenues by the managed cable television system, or as a specified monthly
amount as stipulated in the management agreement. Incentive management fee
revenue is recognized upon performance of specified actions as stipulated in the
management agreement.
(h) INCOME TAXES
Income taxes are the responsibility of the individual members and are not
provided for in the accompanying financial statements. The Company's subsidiary
corporations are subject to federal income tax but have had no operations and
therefore, no taxable income since inception.
(i) INTEREST RATE HEDGE AGREEMENTS
The Company manages fluctuations in interest rates by using interest rate
hedge agreements, as required by certain of its debt agreements. Interest rate
swaps and caps are accounted for as hedges of debt obligations, and accordingly,
the net settlement amounts are recorded as adjustments to interest expense in
the period incurred.
The Company's interest rate swap agreements require the Company to pay a
fixed rate and receive a floating rate thereby creating thereby creating fixed
rate debt. Interest rate caps are entered into by the Company to reduce the
impact of rising interest rates on floating rate debt.
The Company's participation in interest rate hedging transactions involves
instruments that have a close correlation with its debt, thereby managing its
risk. Interest rate hedge agreements have been designed for hedging purposes and
are not held or issued for speculative purposes.
(j) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(k) ACCOUNTING STANDARD NOT IMPLEMENTED
In June 1998, the Financial Accounting Standards Boards adopted Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Financial Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999.
F-46
203
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has not yet quantified the impacts of adopting SFAS No. 133 on its
consolidated financial statements nor has it determined the timing or method of
its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility of
earnings (loss).
(3) CAPITAL STRUCTURE
PARTNERS' CAPITAL
(a) CLASSES OF PARTNERSHIP INTERESTS
The MCCLP partnership agreement (the "Partnership Agreement") provided for
Class B Units and Convertible Preference Units. Class B Units consisted of
General Partner Units ("GP Units") and Limited Partner Units ("LP Units"). To
the extent that GP Units had the right to vote, GP Units voted as Class B Units
together with Class B LP Units. Voting rights of Class B LP Units were limited
to items specified under the Partnership Agreement. Prior to the dissolution of
the Partnership on June 9, 1998, there were 18,848.19 GP Units and 294,937.67
Class B LP Units outstanding.
The Partnership Agreement also provided for the issuance of a class of
Convertible Preference Units. These units were entitled to a general
distribution preference over the Class B LP Units and were convertible into
Class B LP Units. The Convertible Preference Units could vote together with
Class B Units as a single class, and the voting percentage of each Convertible
Preference Unit, at a given time, was based on the number of Class B LP Units
into which such Convertible Preference Unit is then convertible. MCCLP had
issued 7,500 Convertible Preference Units with a distribution preference and
conversion price of two thousand dollars per unit.
The Partnership Agreement permitted the General Partner, at its sole
discretion, to issue up to 31,517 Employee Units (classified as Class B Units)
to key individuals providing services to the Company. Employee Units were not
entitled to distributions until such time as all units have received certain
distributions as calculated under provisions of the Partnership Agreement
("subordinated thresholds"). At December 31, 1997 28,033.20 Employee Units were
outstanding with a subordinated threshold ranging from $1,600 to $1,750 per unit
(per unit amounts in whole numbers). In connection with the Vulcan Acquisition,
the amount paid to EUnit holders of $90,167 was recognized as Transaction and
Severance Costs in the period from January 1, 1998 to April 22, 1998.
(b) ALLOCATION OF INCOME AND LOSS TO PARTNERS
MCCLP incurred losses from inception. Losses were allocated as follows:
(1) First, among the partners whose capital accounts exceed their
unreturned capital contributions in proportion to such excesses until each such
partner's capital account equals its unreturned capital contribution; and
(2) Next, to the holders of Class B Units in accordance with their
unreturned capital contribution percentages.
The General Partner was allocated a minimum of 0.2% to 1% of income or loss
at all times, depending on the level of capital contributions made by the
partners.
F-47
204
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MEMBERS' EQUITY
Upon completion of the Vulcan Acquisition, Vulcan collectively owned 99.4%
of MCCLP through direct ownership of all LP Units and through 80% ownership of
Marcus Cable Properties, Inc. ("MCPI"), the general partner of Marcus Cable
Properties, L.P. ("MCPLP"), the general partner of MCCLP. The Minority Interest
owned the voting common stock, or the remaining 20% of MCPI. In connection with
the Vulcan Acquisition, historical partners' capital at April 22, 1998 was
eliminated and the Successor entity was initially recapitalized at $1,400,000
(see note 1). In July 1998, Vulcan contributed $20,000 in cash to the Company
relating to certain employee severance arrangements.
On June 9, 1998, MCCLP was converted into a Delaware limited liability
company with two members: Vulcan Cable, Inc., with 96.2% ownership, and Marcus
Cable Properties, L.L.C. ("MCPLLC") (formerly MCPLP), with 3.8% ownership.
Vulcan Cable, Inc. owns approximately 25.6% and MCPI owns approximately 74.4% of
MCPLLC, with Vulcan's interest in MCPI unchanged. As there was no change in
ownership interests, the historical partners' capital balances at June 9, 1998
were transferred to and became the initial equity of MCCLLC, and thus the
accompanying statement of members' equity from April 22, 1998 to December 23,
1998 has been presented as if the conversion of MCCLP into MCCLLC occurred on
April 23, 1998.
As of December 23, 1998, MCCLLC has 100 issued and outstanding membership
units. Income and losses of MCCLLC are allocated to the members in accordance
with their ownership interests. Members are not personally liable for
obligations of MCCLLC.
(4) ACQUISITIONS AND DISPOSITIONS
In 1998, the Company acquired cable television systems in the Birmingham,
Alabama area for a purchase price of $57,500. The excess of the cost of
properties acquired over the amounts assigned to net tangible assets and
noncompetition agreements as of the date of acquisition was approximately
$44,603 and is included in franchises.
Additionally, in 1998, the Company completed the sale of certain cable
television systems for an aggregate sales price of $405,132, resulting in a gain
of $43,662. No gains or losses were recognized on the sale of the cable
television systems divested after the Vulcan Acquisition as such amounts are
considered to be an adjustment of the purchase price allocation as these systems
were designated as assets to be sold at the date of the Vulcan Acquisition.
In 1997, the Company acquired cable television systems in the Dallas-Ft.
Worth, Texas area for a purchase price of $35,263. The excess of the cost of
properties acquired over the amounts assigned to net tangible assets as of the
date of acquisition was $15,098 and is included in franchises.
Additionally, in July 1997, the Company completed an exchange of cable
television systems in Indiana and Wisconsin. According to the terms of the trade
agreement, in addition to the contribution of its systems, the Company paid
$18,549.
In 1996, the Company acquired cable television systems in three separate
transactions for an aggregate purchase price of $10,272. The excess of the cost
of properties acquired over the amounts assigned to net tangible assets as of
the date of acquisition was $4,861 and is included in franchises.
F-48
205
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, in 1996, the Company completed the sale of cable television
systems in Washington, D.C. for a sale price of $20,638. The sale resulted in a
gain of $6,442.
The above acquisitions, which were completed during the Predecessor Period,
were accounted for using the purchase method of accounting and, accordingly,
results of operations of the acquired assets have been included in the
accompanying consolidated financial statements from the dates of acquisition.
The purchase prices were allocated to tangible and intangible assets based on
estimated fair market values at the dates of acquisition. The cable system trade
discussed above was accounted for as a nonmonetary exchange and, accordingly,
the additional cash contribution was allocated to tangible and intangible assets
based on recorded amounts of the nonmonetary assets relinquished.
Unaudited pro forma operating results as though 1998 and 1997 acquisitions
and divestitures discussed above, including the Vulcan Acquisition, had occurred
on January 1, 1997, with adjustments to give effect to amortization of
franchises, interest expense and certain other adjustments is as follows:
PERIOD FROM
JANUARY 1 TO YEAR ENDED
DECEMBER 23, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
Revenues................................. $444,738 $ 421,665
Operating loss........................... (51,303) (56,042)
Net loss................................. (187,342) (190,776)
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31,
1997:
(PREDECESSOR)
-------------
Cable distribution systems............................ $878,721
Vehicles and other.................................... 37,943
Land and buildings.................................... 17,271
--------
933,935
Accumulated depreciation.............................. (227,309)
--------
$706,626
========
Depreciation expense for the periods from January 1, 1998 to April 22, 1998
and from April 23, 1998 to December 23, 1998 and for the years ended December
31, 1997 and 1996 was $35,929, $70,538, $96,220, and $72,281, respectively.
(6) OTHER ASSETS
Other assets consist of the following at December 31, 1997:
(PREDECESSOR)
-------------
Debt issuance costs................................... $45,225
Other................................................. 1,090
-------
46,315
Accumulated amortization.............................. (9,330)
-------
$36,985
=======
F-49
206
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31, 1997:
(PREDECESSOR)
-------------
Accrued operating liabilities......................... $27,923
Accrued programming costs............................. 9,704
Accrued franchise fees................................ 10,131
Accrued property taxes................................ 5,125
Accrued interest...................................... 7,949
Other accrued liabilities............................. 7,922
-------
$68,754
=======
(8) LONG-TERM DEBT
The Company has outstanding the following borrowings on long-term debt
arrangements at December 31, 1997:
(PREDECESSOR)
-------------
Senior Credit Facility................................ $ 949,750
13 1/2% Senior Subordinated Discount Notes............ 336,304
14 1/4% Senior Discount Notes......................... 213,372
11 7/8% Senior Debentures............................. 100,000
----------
1,599,426
Less current maturities............................... 67,499
----------
$1,531,927
==========
In conjunction with the Vulcan Acquisition and in accordance with purchase
accounting, the Company recorded its outstanding debt at its fair value. As a
result, the Company recognized a carrying value premium (fair market value of
outstanding debt less historical carrying amount) of $108,292 as of the date of
the Vulcan Acquisition. The carrying value premium is being amortized to
interest expense over the estimated remaining lives of the related indebtedness
using the effective interest method.
The Company, through MCOC, maintains a senior credit facility ("Senior
Credit Facility"), which provides for two term loan facilities, one with a
principal amount of $490,000 that matures on December 31, 2002 ("Tranche A") and
the other with a principal amount of $300,000 million that matures on April 30,
2004 ("Tranche B"). The Senior Credit Facility provides for scheduled
amortization of the two term loan facilities which began in September 1997. The
Senior Credit Facility also provides for a $360,000 revolving credit facility
("Revolving Credit Facility"), with a maturity date of December 31, 2002.
Amounts outstanding under the Senior Credit Facility bear interest at either
the: i) Eurodollar rate, ii) prime rate, or iii) CD base rate or Federal Funds
rate, plus a margin of up to 2.25%, which is subject to certain quarterly
adjustments based on the ratio of MCOC's total debt to annualized operating cash
flow, as defined. The variable interest rates ranged from 6.23% to 7.75% and
5.97% to 8.00% at December 23, 1998, and December 31, 1997, respectively. A
quarterly commitment fee ranging from 0.250% to 0.375% per annum is payable on
the unused commitment under the Senior Credit Facility.
On October 16, 1998, the Company entered into an agreement to amend its
Senior Credit Facility. The amendment provides for, among other items, a
reduction in the permitted leverage and cash flow ratios, a reduction in the
interest rate charge under the Senior Credit Facility and a change in the
restriction related to the use of cash proceeds from asset sales to allow such
proceeds to be used to redeem the 11 7/8% Senior Debentures.
F-50
207
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1995, the Company issued $299,228 of 14 1/4% Senior Discount Notes due
December 15, 2005 (the "14 1/4% Notes") for net proceeds of $150,003. The
14 1/4% Notes are unsecured and rank pari passu to the 11 7/8% Debentures
(defined below). The 14 1/4% Notes are redeemable at the option of MCCLLC at
amounts decreasing from 107% to 100% of par beginning on June 15, 2000. No
interest is payable until December 15, 2000. Thereafter interest is payable
semi-annually until maturity. The discount on the 14 1/4% Notes is being
accreted using the effective interest method. The unamortized discount was
$85,856 at December 31, 1997.
In 1994, the Company, through MCOC, issued $413,461 face amount of 13 1/2%
Senior Subordinated Discount Notes due August 1, 2004 (the "13 1/2% Notes") for
net proceeds of $215,000. The 13 1/2% Notes are unsecured, are guaranteed by
MCCLLC and are redeemable, at the option of MCOC, at amounts decreasing from
105% to 100% of par beginning on August 1, 1999. No interest is payable on the
13 1/2% Notes until February 1, 2000. Thereafter, interest is payable
semi-annually until maturity. The discount on the 13 1/2% Notes is being
accreted using the effective interest method. The unamortized discount was
$77,157 at December 31, 1997.
In 1993, the Company issued $100,000 principal amount of 11 7/8% Senior
Debentures due October 1, 2005 (the "11 7/8% Debentures"). The 11 7/8%
Debentures were unsecured and were redeemable at the option of the Company on or
after October 1, 1998 at amounts decreasing from 105.9% to 100% of par at
October 1, 2002, plus accrued interest, to the date of redemption. Interest on
the 11 7/8% Debentures was payable semi-annually each April 1 and October 1
until maturity.
On July 1, 1998, $4,500 face amount of the 14 1/4% Notes and $500 face
amount of the 11 7/8% Notes were tendered for gross tender payments of $3,472
and $520 respectively. The payments resulted in a gain on the retirement of the
debt of $753. On December 11, 1998, the 11 7/8% Notes were redeemed for a gross
payment of $107,668, including accrued interest. The redemption resulted in a
gain on the retirement of the debt of $1,631.
The 14 1/4% Notes, 13 1/2% Notes, 11 7/8% Debentures and Senior Credit
Facility are all unsecured and require the Company and/or its subsidiaries to
comply with various financial and other covenants, including the maintenance of
certain operating and financial ratios. These debt instruments also contain
substantial limitations on, or prohibitions of, distributions, additional
indebtedness, liens, asset sales and certain other items.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying and fair values of the Company's significant financial
instruments as of December 31, 1997 are as follows:
(PREDECESSOR)
-------------------
CARRYING FAIR
VALUE VALUE
-------- -----
Senior Credit Facility...................................... $949,750 $949,750
13 1/2% Notes............................................... 336,304 381,418
14 1/4% Notes............................................... 213,372 258,084
11 7/8% Debentures.......................................... 100,000 108,500
The carrying amount of the Senior Credit Facility approximates fair value
as the outstanding borrowings bear interest at market rates. The fair values of
the 14 1/4% Notes, 13 1/2% Notes, and 11 7/8% Debentures, are based on quoted
market prices. The Company had interest rate swap agreements covering a notional
amount of $500,000 at December 31, 1997.
F-51
208
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average interest pay rate for the interest rate swap
agreements was 5.7% at December 31, 1997. Certain of these agreements allow for
optional extension by the counterparty or for automatic extension in the event
that one month LIBOR exceeds a stipulated rate on any monthly reset date.
Approximately $100,000 notional amount included in the $500,000 notional amount
described above is also modified by an interest rate cap agreement which resets
monthly.
The notional amounts of the interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair values of the interest rate hedge agreements generally reflect the
estimated amounts that the Company would receive or (pay) (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's Senior Credit Facility thereby reducing the exposure
to credit loss. The Company has policies regarding the financial stability and
credit standing of the major counterparties. Nonperformance by the
counterparties is not anticipated nor would it have a material adverse effect on
the Company's consolidated financial position or results of operations.
(10) RELATED PARTY TRANSACTIONS
The Company and Charter entered into a management agreement on October 6,
1998 whereby Charter began to manage the day-to-day operations of the Company.
In consideration for the management consulting services provided by Charter,
Marcus pays Charter an annual fee equal to 3% of the gross revenues of the cable
system operations, plus expenses. From October 6, 1998 to December 23, 1998,
management fees under this agreement were $3,048.
Prior to the consummation of the Vulcan Acquisition, affiliates of Goldman
Sachs owned limited partnership interests in MCCLP. Maryland Cable Partners,
L.P. ("Maryland Cable"), which was controlled by an affiliate of Goldman Sachs,
owned the Maryland Cable systems. MCOC managed the Maryland Cable systems under
the Maryland Cable Agreement. Pursuant to such agreement, MCOC earned a
management fee equal to 4.7% of the revenues of Maryland Cable.
Effective January 31, 1997, Maryland Cable was sold to a third party.
Pursuant to the Maryland Cable Agreement, MCOC recognized incentive management
fees of $5,069 during the twelve months ended December 31, 1997 in conjunction
with the sale. Although MCOC is no longer involved in the active management of
the Maryland Cable systems, MCOC has entered into an agreement with Maryland
Cable to oversee the activities, if any, of Maryland Cable through the
liquidation of the partnership. Pursuant to such agreement, MCOC earns a nominal
monthly fee. During the periods from January 1, 1998 to April 22, 1998 and from
April 23, 1998 to December 23, 1998, MCOC earned total management fees of $374
and $181, respectively. Including the incentive management fees noted above,
during the years ended December 31, 1997 and 1996, MCOC earned total management
fees of $5,614 and $2,335, respectively.
F-52
209
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) plan for its employees whereby employees that
qualify for participation under the plan can contribute up to 15% of their
salary, on a before tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matches participant
contributions up to a maximum of 2% of a participant's salary. For the periods
from January 1, 1998 to April 22, 1998 and from April 23, 1998 to December 23,
1998, and for the years ended December 31, 1997 and 1996, the Company made
contributions to the plan of $329, $536, $761 and $480, respectively.
(12) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Lease and rental costs charged to expense for the periods from
January 1, 1998 to April 22, 1998 and from April 23, 1998 to December 23, 1998,
and for the years ended December 31, 1997 and 1996 were $1,098, $2,222, $3,230,
and $2,767, respectively. The Company also rents utility poles in its
operations. Generally, pole rentals are cancelable on short notice, but the
Company anticipates that such rentals will recur. Rent expense for pole
attachments for the periods from January 1, 1998 to April 22, 1998 and from
April 23, 1998 to December 23, 1998 and for the years ended December 31, 1997
and 1996 were $1,372 , $2,620, $4,314, and $4,008, respectively.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 23,
1998, the amount returned by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous
F-53
210
MARCUS CABLE COMPANY, L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
twelve-month period may be ordered upon certification if the Company is unable
to justify its basic rates. The Company is unable to estimate at this time the
amount of refunds, if any, that may be payable by the Company in the event
certain of its rates are successfully challenged by franchising authorities or
found to be unreasonable by the FCC. The Company does not believe that the
amount of any such refunds would have a material adverse effect on the financial
position or results of operations of the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
LITIGATION
In Alabama, Indiana, Texas and Wisconsin, customers have filed punitive
class action lawsuits on behalf of all person residing in those respective
states who are or were potential customers of the Company's cable television
service, and who have been charged a processing fee for delinquent payment of
their cable bill. The actions challenge the legality of the processing fee and
seek declaratory judgment, injunctive relief and unspecified damages. In Alabama
and Wisconsin, the Company has entered into joint speculation and case
management orders with attorneys for plaintiffs. A Motion to Dismiss is pending
in Indiana. The Company intends to vigorously defend the actions. At this stage
of the actions, the Company is not able to project the expenses of defending the
actions or the potential outcome of the actions, including the impact on the
consolidated financial position or results of operations.
The Company is also party to lawsuits which are generally incidental to its
business. In the opinion of management, after consulting with legal counsel, the
outcome of these lawsuits will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
(13) SUBSEQUENT EVENT (UNAUDITED)
In March 1999, concurrent with the issuance of Senior Notes and Senior
Discount Notes, the combined company (Charter and the Company, see note 1)
extinguished all long-term debt, excluding borrowings of Charter and the Company
under their respective credit agreements, and refinanced all existing credit
agreements at various subsidiaries of the Company and Charter with a new credit
agreement entered into by a wholly owned subsidiary of the combined company.
F-54
211
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CCA Group:
We have audited the accompanying combined balance sheet of CCA Holdings
Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc.
(collectively CCA Group) and subsidiaries as of December 31, 1997, and the
related combined statements of operations, shareholders' deficit and cash flows
for the period from January 1, 1998, through December 23, 1998, and for the
years ended December 31, 1997 and 1996. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of CCA Group and
subsidiaries as of December 31, 1997, and the combined results of their
operations and their cash flows for the period from January 1, 1998, through
December 23, 1998, and for the years ended December 31, 1997 and 1996, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
F-55
212
CCA GROUP
COMBINED BALANCE SHEET -- DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,501
Accounts receivable, net of allowance for doubtful
accounts of $926....................................... 9,407
Prepaid expenses and other................................ 1,988
Deferred income tax asset................................. 5,915
----------
Total current assets.............................. 21,811
----------
RECEIVABLE FROM RELATED PARTY, including accrued interest... 13,090
----------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 352,860
Franchises, net of accumulated amortization of $132,871... 806,451
----------
1,159,311
----------
OTHER ASSETS................................................ 13,731
----------
$1,207,943
==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 25,625
Accounts payable and accrued expenses..................... 48,554
Payables to manager of cable television systems -- related
party.................................................. 1,975
----------
Total current liabilities......................... 76,154
----------
DEFERRED REVENUE............................................ 1,882
----------
DEFERRED INCOME TAXES....................................... 117,278
----------
LONG-TERM DEBT, less current maturities..................... 758,795
----------
DEFERRED MANAGEMENT FEES.................................... 4,291
----------
NOTES PAYABLE, including accrued interest................... 348,202
----------
SHAREHOLDERS' DEFICIT:
Common stock.............................................. 1
Additional paid-in capital................................ 128,499
Accumulated deficit....................................... (227,159)
----------
Total shareholders' deficit....................... (98,659)
----------
$1,207,943
==========
The accompanying notes are an integral part of these combined statements.
F-56
213
CCA GROUP
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
PERIOD FROM
JANUARY 1,
1998, YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 23, --------------------
1998 1997 1996
------------ ---- ----
REVENUES........................................ $ 324,432 $289,697 $233,392
--------- -------- --------
EXPENSES:
Operating costs............................... 135,705 122,917 102,977
General and administrative.................... 28,440 26,400 18,687
Depreciation and amortization................. 136,689 116,080 96,547
Management fees -- related parties............ 17,392 11,414 8,634
--------- -------- --------
318,226 276,811 226,845
--------- -------- --------
Income from operations..................... 6,206 12,886 6,547
--------- -------- --------
OTHER INCOME (EXPENSE):
Interest income............................... 4,962 2,043 1,883
Interest expense.............................. (113,824) (108,122) (88,999)
Other, net.................................... (294) 171 (2,504)
--------- -------- --------
(109,156) (105,908) (89,620)
--------- -------- --------
Net loss................................... $(102,950) $(93,022) $(83,073)
========= ======== ========
The accompanying notes are an integral part of these combined statements.
F-57
214
CCA GROUP
COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- -----
BALANCE, December 31, 1995........... $ 1 $ 99,999 $ (51,064) $ 48,936
Net loss........................... -- -- (83,073) (83,073)
--- -------- --------- ---------
BALANCE, December 31, 1996........... 1 99,999 (134,137) (34,137)
Capital contributions.............. -- 28,500 -- 28,500
Net loss........................... -- -- (93,022) (93,022)
--- -------- --------- ---------
BALANCE, December 31, 1997........... 1 128,499 (227,159) (98,659)
Capital contributions.............. -- 5,684 -- 5,684
Net loss........................... -- -- (102,950) (102,950)
--- -------- --------- ---------
BALANCE, December 23, 1998........... $ 1 $134,183 $(330,109) $(195,925)
=== ======== ========= =========
The accompanying notes are an integral part of these combined statements.
F-58
215
CCA GROUP
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
PERIOD FROM
JANUARY 1,
1998, YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 23, ---------------------
1998 1997 1996
------------ ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $(102,950) $(93,022) $ (83,073)
Adjustments to reconcile net loss to net cash provided
by operating activities --
Depreciation and amortization...................... 136,689 116,080 96,547
Amortization of debt issuance costs and non cash
interest cost.................................... 44,701 49,107 39,927
(Gain) loss on sale of property, plant and
equipment........................................ 511 (156) 1,257
Changes in assets and liabilities, net of effects
from acquisitions --
Accounts receivable, net......................... 4,779 222 (1,393)
Prepaid expenses and other....................... 243 (175) 216
Accounts payable and accrued expenses............ 3,849 8,797 3,855
Payables to manager of cable television systems,
including deferred management fees............ 3,485 784 448
Deferred revenue................................. 1,336 559 (236)
Other operating activities....................... 5,583 (3,207) 1,372
--------- -------- ---------
Net cash provided by operating activities........ 98,226 78,989 58,920
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............ (95,060) (82,551) (56,073)
Payments for acquisitions, net of cash acquired....... -- (147,187) (122,017)
Other investing activities............................ (2,898) (1,296) 54
--------- -------- ---------
Net cash used in investing activities.............. (97,958) (231,034) (178,036)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.......................... 300,400 162,000 127,000
Repayments of long-term debt.......................... (64,120) (39,580) (13,100)
Payments of debt issuance costs....................... (8,442) (3,360) (3,126)
Repayments under notes payable........................ (230,994) -- --
Capital contributions................................. -- 28,500 --
--------- -------- ---------
Net cash provided by (used in) financing
activities....................................... (3,156) 147,560 110,774
--------- -------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS............... (2,888) (4,485) (8,342)
CASH AND CASH EQUIVALENTS, beginning of period.......... 4,501 8,986 17,328
--------- -------- ---------
CASH AND CASH EQUIVALENTS, end of period................ $ 1,613 $ 4,501 $ 8,986
========= ======== =========
CASH PAID FOR INTEREST.................................. $ 179,781 $ 49,687 $ 51,434
========= ======== =========
The accompanying notes are an integral part of these combined statements.
F-59
216
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
CCA Group consists of CCA Holdings Corp. (CCA Holdings), CCT Holdings Corp.
(CCT Holdings) and Charter Communications Long Beach, Inc. (CC-LB), all Delaware
corporations (collectively referred to as "CCA Group" or the "Company") and
their subsidiaries. The combined financial statements of each of these companies
have been combined by virtue of their common ownership and management. All
material intercompany transactions and balances have been eliminated.
CCA Holdings commenced operations in January 1995 in connection with
consummation of the Crown Transaction (as defined below). The accompanying
financial statements include the accounts of CCA Holdings; its wholly-owned
subsidiary, CCA Acquisition Corp. (CAC); CAC's wholly-owned subsidiary, Cencom
Cable Entertainment, Inc. (CCE); and Charter Communications Entertainment I,
L.P. (CCE-I), which is controlled by CAC through its general partnership
interest. Through December 23, 1998, CCA Holdings was approximately 85% owned by
Kelso Investment Associates V, L.P., an investment fund, together with an
affiliate (collectively referred to as "Kelso" herein) and certain other
individuals and approximately 15% by Charter Communications, Inc. (Charter),
manager of CCE-I's cable television systems.
CCT Holdings was formed on January 6, 1995. CCT Holdings commenced
operations in September 1995 in connection with consummation of the Gaylord
Transaction (as defined below). The accompanying financial statements include
the accounts of CCT Holdings and Charter Communications Entertainment II, L.P.
(CCE-II), which is controlled by CCT Holdings through its general partnership
interest. Through December 23, 1998, CCT Holdings was owned approximately 85% by
Kelso and certain other individuals and approximately 15% by Charter, manager of
CCE-II's cable television systems.
In January 1995, CAC completed the acquisition of certain cable television
systems from Crown Media, Inc. (Crown), a subsidiary of Hallmark Cards,
Incorporated (Hallmark) (the "Crown Transaction"). On September 29, 1995, CAC
and CCT Holdings entered into an Asset Exchange Agreement whereby CAC exchanged
a 1% undivided interest in all of its assets for a 1.22% undivided interest in
certain assets to be acquired by CCT Holdings from an affiliate of Gaylord
Entertainment Company, Inc. (Gaylord). Effective September 30, 1995, CCT
Holdings acquired certain cable television systems from Gaylord (the "Gaylord
Transaction"). Upon execution of the Asset Purchase Agreement, CAC and CCT
Holdings entered into a series of agreements to contribute the assets acquired
under the Crown Transaction to CCE-I and certain assets acquired in the Gaylord
acquisition to CCE-II. Collectively, CCA Holdings and CCT Holdings own 100% of
CCE-I and CCE-II.
CC-LB was acquired by Kelso and Charter in May 1997. The accompanying
financial statements include the accounts of CC-LB and its wholly owned
subsidiary, Long Beach Acquisition Corp. (LBAC) from the date of acquisition.
Through December 23, 1998, CC-LB was owned approximately 85% by Kelso and
certain other individuals and approximately 15% by Charter, manager of LBAC's
cable television systems.
F-60
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through
a series of transactions. In conjunction with Mr. Allen's acquisition, Charter
acquired 100% of the outstanding stock of CCA Holdings, CCT Holdings and CC-LB
on December 23, 1998.
In 1998, CCE-I provided cable television service to customers in
Connecticut, Illinois, Massachusetts, Missouri and New Hampshire, CCE-II
provided cable television service to customers in California and LBAC provided
cable television service to customers in Long Beach, California, and certain
surrounding areas.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997,
cash equivalents consist primarily of repurchase agreements. These investments
are carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installation. The costs of disconnecting a residence are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, and equipment replacement costs and betterments are
capitalized.
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
Cable distribution systems........................... 3-15 years
Buildings and leasehold improvements................. 5-15 years
Vehicles and equipment............................... 3-5 years
In 1997, the Company shortened the estimated useful lives of certain property,
plant and equipment for depreciation purposes. As a result, additional
depreciation of $8,123 was recorded during 1997.
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable television systems represent the excess
of the cost of properties acquired over the amounts assigned to net tangible
assets at date of acquisition and are amortized using the straight-line method
over 15 years.
OTHER ASSETS
Debt issuance costs are amortized to interest expense over the term of the
related debt. The interest rate cap costs are being amortized over the terms of
the agreement, which approximates three years.
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Income taxes are recorded in accordance with SFAS No. 109, "Accounting for
Income Taxes."
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS:
In 1997, CC-LB acquired the stock of LBAC for an aggregate purchase price,
net of cash acquired, of $147,200. In connection with the completion of this
acquisition, LBAC recorded $55,900 of deferred income tax liabilities resulting
from differences between the financial reporting and tax basis of certain assets
acquired. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the date of acquisition was $190,200 and is
included in franchises.
In 1996, the Company acquired cable television systems in three separate
transactions for an aggregate purchase price, net of cash acquired, of $122,000.
The excess of the cost of properties acquired over the amounts assigned to net
tangible assets at the dates of acquisition was $100,200 and is included in
franchises.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of the acquisitions.
Unaudited pro forma operating results for the 1997 acquisitions as though
the acquisitions had been made on January 1, 1997, with pro forma adjustments to
give effect to amortization of franchises, interest expense and certain other
adjustments as follows:
YEAR ENDED
DECEMBER 31,
1997
(UNAUDITED)
-------------
Revenues............................................ $303,797
Income from operations.............................. 14,108
Net loss............................................ (94,853)
The unaudited pro forma information has been presented for comparative
purposes and does not purport to be indicative of the results of operations had
these transactions been completed as of the assumed date or which may be
obtained in the future.
3. RECEIVABLE FROM RELATED PARTY:
In connection with the transfer of certain assets acquired in the Gaylord
Transaction to Charter Communications Properties, Inc. (CCP), Charter
Communications Properties Holding Corp. (CCP Holdings), the parent of CCP and a
wholly owned subsidiary of Charter, entered into a $9,447 promissory note with
CCT Holdings. The promissory note
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
bears interest at the rates paid by CCT Holdings on the Gaylord Seller Note.
Principal and interest are due on September 29, 2005. Interest income has been
accrued based on an average rate of interest over the life of the Gaylord Seller
Note, which approximates 15.4% and totaled $1,899 for the period from January 1,
1998, through December 23, 1998, and $1,806 and $1,547 for the years ended
December 31, 1997 and 1996, respectively. As of December 31, 1997, interest
receivable totaled $3,643.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1997:
Cable distribution systems............................ $ 426,241
Land, buildings and leasehold improvements............ 15,443
Vehicles and equipment................................ 24,375
---------
466,059
Less -- Accumulated depreciation...................... (113,199)
---------
$ 352,860
=========
Depreciation expense for the period from January 1, 1998, through December
23, 1998, and for the years ended December 31, 1997 and 1996, was $72,914,
$59,599 and $39,575, respectively.
5. OTHER ASSETS:
Other assets consists of the following at December 31, 1997:
Debt issuance costs..................................... $13,416
Note receivable......................................... 2,100
Other................................................... 1,342
-------
16,858
Less -- Accumulated amortization........................ (3,127)
-------
$13,731
=======
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1997:
Accrued interest........................................ $ 8,389
Franchise fees.......................................... 6,434
Programming expenses.................................... 5,855
Accounts payable........................................ 4,734
Public education and governmental costs................. 4,059
Salaries and related benefits........................... 3,977
Capital expenditures.................................... 3,629
Other................................................... 11,477
-------
$48,554
=======
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1997:
CCE-I:
Term loans............................................. $274,120
Fund loans............................................. 85,000
Revolving credit facility.............................. 103,800
--------
462,920
--------
CCE-II:
Term loans............................................. 105,000
Revolving credit facility.............................. 123,500
--------
228,500
--------
LBAC:
Term loans............................................. 85,000
Revolving credit facility.............................. 8,000
--------
93,000
--------
Total debt..................................... 784,420
Less -- Current maturities............................... (25,625)
--------
Total long-term debt........................... $758,795
========
CCE-I CREDIT AGREEMENT
CCE-I maintains a credit agreement (the "CCE-I Credit Agreement"), which
provides for a $280,000 term loan that matures on September 30, 2006, an $85,000
fund loan that matures on March 31, 2007, and a $175,000 revolving credit
facility with a maturity date of September 30, 2006. Amounts under the CCE-I
Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as
defined, plus a margin of up to 2.75%. The variable interest rate ranged from
6.88% to 8.06% at December 23, 1998, and from 7.63% to 8.50% and 7.63% to 8.38%
at December 31, 1997 and 1996, respectively.
Commencing June 30, 2002, and at the end of each calendar quarter
thereafter, available borrowings under the revolving credit facility and the
term loan shall be reduced on an annual basis by 12.0% in 2002 and 15.0% in
2003. Commencing June 30, 2002, and at the end of each calendar quarter
thereafter, the available borrowings for the fund loan shall be reduced on an
annual basis by 0.75% in 2002 and 1.0% in 2003. A quarterly commitment fee of
between 0.375% and 0.5% per annum is payable on the unborrowed balance of the
revolving credit facility.
COMBINED CREDIT AGREEMENT
CCE-II and LBAC maintain a credit agreement (the "Combined Credit
Agreement") which provides for two term loan facilities, one with the principal
amount of $100,000 that matures on March 31, 2005, and the other with the
principal amount of $90,000 that matures on March 31, 2006. The Combined Credit
Agreement also provides for a $185,000 revolving credit facility, with a
maturity date of March 31, 2005. Amounts under the Combined Credit Agreement
bear interest at either the LIBOR Rate or Base
F-64
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Rate, as defined, plus a margin of up to 2.5%. The variable interest rate ranged
from 6.56% to 7.59% at December 23, 1998, and from 7.50% to 8.38% at December
31, 1997, respectively.
Commencing March 31, 2001, and at the end of each quarter thereafter,
available borrowings under the revolving credit facility and one term loan shall
be reduced on an annual basis by 5.0% in 2001, 15.0% in 2002 and 18.0% in 2003.
Commencing in December 31, 1999, and at the end of each quarter thereafter,
available borrowings under the other term loan shall be reduced on annual basis
by 0.5% in 1999, 0.8% in 2000, 1.0% in 2001, 1.0% in 2002 and 1.0% in 2003. A
quarterly commitment fee of between 0.25% and 0.375% per annum, based upon the
intercompany indebtedness of the Company, is payable on the unborrowed balance
of the revolving credit facility.
CCE CREDIT AGREEMENT
In October 1998, Charter Communications Entertainment, L.P. (CCE L.P.), a
98% direct and indirect owner of CCE-I and CCE-II and indirectly owned
subsidiary of the Company, entered into a credit agreement (the "CCE L.P. Credit
Agreement") which provides for a term loan facility with the principal amount of
$130,000 that matures on September 30, 2007. Amounts under the CCE L.P. Credit
Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a
margin of up to 3.25%. The variable interest rate at December 23, 1998, was
8.62%.
Commencing June 30, 2002, and the end of each calendar quarter thereafter,
the available borrowings for the term loan shall be reduced on an annual basis
by 0.75% in 2002 and 1.0% in 2003.
CCE-II HOLDINGS CREDIT AGREEMENT
CCE-II Holdings, LLC (CCE-II Holdings), a wholly owned subsidiary of CCE
L.P. and the parent of CCE-II, entered into a credit agreement (the "CCE-II
Holdings Credit Agreement") in November 1998, which provides for a term loan
facility with the principal amount of $95,000 that matures on September 30,
2006. Amounts under the CCE-II Holdings Credit Agreement bear interest at either
the LIBOR Rate or Base Rate, as defined, plus a margin of up to 3.25%. The
variable rate at December 23, 1998, was 8.56%.
Commencing June 30, 2002, and at the end of each quarter thereafter,
available borrowings under the revolving credit facility and one term loan shall
be reduced on an annual basis by 0.5% in 2002 and 1.0% in 2003.
The credit agreements require the Company to comply with various financial
and nonfinancial covenants, including the maintenance of annualized operating
cash flow to fixed charge ratio, as defined, not to exceed 1.0 to 1.0. These
debt instruments also contain substantial limitations on, or prohibitions of,
distributions, additional indebtedness, liens asset sales and certain other
items.
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. NOTES PAYABLE:
Notes payable consists of the following at December 31, 1997:
HC Crown Note............................................ $ 82,000
Accrued interest on HC Crown Note........................ 36,919
Gaylord Seller Note...................................... 165,688
Accrued interest on Gaylord Seller Note.................. 63,595
--------
Total.......................................... $348,202
========
In connection with the Crown Transaction, the Company entered into an
$82,000 senior subordinated loan agreement with a subsidiary of Hallmark, HC
Crown Corp., and pursuant to such loan agreement issued a senior subordinated
note (the "HC Crown Note"). The HC Crown Note was an unsecured obligation. The
HC Crown Note was limited in aggregate principal amount to $82,000 and has a
stated maturity date of December 31, 1999 (the "Stated Maturity Date"). Interest
has been accrued at 13% per annum, compounded semiannually, payable upon
maturity. In October 1998, the Crown Note and accrued interest was paid in full.
In connection with the Gaylord Transaction, CCT Holdings entered into a
$165,700 subordinated loan agreement with Gaylord (the "Gaylord Seller Note").
Interest expense has been accrued based on an average rate of interest over the
life of the Gaylord Seller Note, which approximated 15.4%.
In connection with the Gaylord Transaction, CCT Holdings, CCE L.P. and
Gaylord entered into a contingent payment agreement (the "Contingent
Agreement"). The Contingent Agreement indicates CCE L.P. will pay Gaylord 15% of
any amount distributed to CCT Holdings in excess of the total of the Gaylord
Seller Note, Crown Seller Note and $450,000. In conjunction with the Paul G.
Allen acquisition of Charter and the Company, Gaylord was paid an additional
$132,000 pursuant to the Contingent Agreement and the Gaylord Seller Note was
paid in full.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1997, is as follows:
1997
--------------------------------
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
-------- -------- -----
DEBT
Debt under credit agreements...................... $784,420 $ -- $784,420
HC Crown Note (including accrued interest)........ 118,919 -- 118,587
Gaylord Seller Note (including accrued
interest)....................................... 229,283 -- 214,074
INTEREST RATE HEDGE AGREEMENTS
Swaps............................................. -- 405,000 (1,214)
Caps.............................................. -- 120,000 --
Collars........................................... -- 190,000 (437)
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As the long-term debt under the credit agreements bear interest at current
market rates, their carrying amount approximates fair market value at December
31, 1997. Fair value of the HC Crown Note is based upon trading activity at
December 31, 1997. Fair value of the Gaylord Seller Note is based on current
redemption value.
The weighted average interest pay rate for the Company's interest rate swap
agreements was 7.82% at December 31, 1997. The weighted average interest rate
for the Company's interest rate cap agreements was 8.49% at December 31, 1997.
The weighted average interest rates for the Company's interest rate collar
agreements were 9.04% and 7.57% for the cap and floor components, respectively,
at December 31, 1997.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the Company's
exposure through its use of interest rate hedge agreements. The amounts
exchanged are determined by reference to the notional amount and the other terms
of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Company would receive or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Company's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Company's Senior Credit Facility thereby reducing the exposure
to credit loss. The Company has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the results of
operations or the financial position of the Company.
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMON STOCK:
The Company's common stock consist of the following at December 31, 1997:
CCA Holdings:
Common stock -- Class A, voting, $.01 par value, 100,000
shares authorized; 75,515 shares issued and
outstanding............................................ $ 1
Common stock -- Class B, voting, $.01 par value, 20,000
shares authorized; 4,300 shares issued and
outstanding............................................ --
Common stock -- Class C, nonvoting, $.01 par value, 5,000
shares authorized; 185 shares issued and outstanding... --
---
1
---
CCT Holdings:
Common stock -- Class A, voting, $.01 par value, 20,000
shares authorized; 16,726 shares issued and
outstanding............................................ --
Common stock -- Class B, voting, $.01 par value, 4,000
shares authorized; 3,000 shares issued and
outstanding............................................ --
Common stock -- Class C, nonvoting, $.01 par value, 1,000
shares authorized; 275 shares issued and outstanding... --
---
CC-LB:
Common stock -- Class A, voting, $.01 par value, 31,000
shares authorized, 27,850 shares issued and
outstanding............................................ --
Common stock -- Class B, voting, $.01 par value, 2,000
shares authorized, 1,500 shares issued and
outstanding............................................ --
Common stock -- Class C, nonvoting, $.01 par value, 2,000
shares authorized, 650 shares issued and outstanding... --
---
Total common stock................................ $ 1
===
CCA HOLDINGS
The Class A Voting Common Stock (CCA Class A Common Stock) and Class C
Nonvoting Common Stock (CCA Class C Common Stock) have certain preferential
rights upon liquidation of CCA Holdings. In the event of liquidation,
dissolution or "winding up" of CCA Holdings, holders of CCA Class A and Class C
Common Stock are entitled to a preference of $1,000 per share. After such amount
is paid, holders of Class B Voting Common Stock (CCA Class B Common Stock) are
entitled to receive $1,000 per share. Thereafter, Class A and Class C
shareholders shall ratably receive the remaining proceeds.
If upon liquidation, dissolution or "winding up" the assets of CCA Holdings
are insufficient to permit payment to Class A and Class C shareholders for their
full preferential amounts, all assets of CCA Holdings shall then be distributed
ratably to Class A and Class C shareholders. Furthermore, if the proceeds from
liquidation are inadequate to pay Class B shareholders their full preferential
amounts, the proceeds are to be distributed on a pro rata basis to Class B
shareholders.
Upon the occurrence of any Conversion Event (as defined within the Amended
and Restated Certificate of Incorporation) Class C shareholders may convert any
or all of their outstanding shares into the same number of Class A shares.
Furthermore, CCA Holdings
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
may automatically convert outstanding Class C shares into the same number of
Class A shares.
CCA Holdings is restricted from making cash dividends on its common stock
until the balance outstanding under the HC Crown Note is repaid.
Charter and Kelso entered into a Stockholders' Agreement providing for
certain restrictions on the transfer, sale or purchase of CCA Holdings' common
stock.
CCT HOLDINGS
The Class A Voting Common Stock (CCT Class A Common Stock) and Class C
Nonvoting Common Stock (CCT Class C Common Stock) have certain preferential
rights upon liquidation of CCT Holdings. In the event of liquidation,
dissolution or "winding up" of CCT Holdings, holders of CCT Class A Common Stock
and Class C Common Stock are entitled to a preference of $1,000 per share. After
such amount is paid, holders of Class B Voting Common Stock (CCT Class B Common
Stock) are entitled to receive $1,000 per share. Thereafter, Class A and Class C
shareholders shall ratably receive the remaining proceeds.
If upon liquidation, dissolution or "winding up" the assets of CCT Holdings
are insufficient to permit payment to Class A Common Stock and Class C
shareholders for their full preferential amount, all assets of the Company shall
then be distributed ratably to Class A and Class C shareholders. Furthermore, if
the proceeds from liquidation are inadequate to pay Class B shareholders their
full preferential amount, the proceeds are to be distributed on a pro rata basis
to Class B shareholders.
Upon the occurrence of any Conversion Event (as defined within the Amended
and Restated Certificate of Incorporation), Class C shareholders may convert any
or all of their outstanding shares into the same number of Class A shares.
Furthermore, CCT Holdings may automatically convert outstanding Class C shares
into the same number of Class A shares.
CCT Holdings is restricted from making cash dividends on its common stock
until the balance outstanding under the note payable to seller is repaid.
Charter and Kelso entered into a Stockholders' Agreement providing for
certain restrictions on the transfer, sale or purchase of CCT Holdings' common
stock.
CC-LB
The Class A Voting Common Stock (CC-LB Class A Common Stock) and Class C
Nonvoting Common Stock (CC-LB Class C Common Stock) have certain preferential
rights upon liquidation of CC-LB. In the event of liquidation, dissolution or
"winding up" of CC-LB, holders of CC-LB Class A Common Stock and Class C Common
Stock are entitled to a preference of $1,000 per share. After such amount is
paid, holders of Class B Voting Common Stock (CC-LB Class B Common Stock) are
entitled to receive $1,000 per share. Thereafter, Class A, Class B and Class C
shareholders shall ratably receive the remaining proceeds.
If upon liquidation, dissolution or "winding up" the assets of CC-LB are
insufficient to permit payment to Class A and Class C shareholders for their
full preferential amount,
F-69
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
all assets of the Company shall then be distributed ratably to Class A and Class
C shareholders. Furthermore, if the proceeds from liquidation are inadequate to
pay Class B shareholders their full preferential amount, the proceeds are to be
distributed on a pro rata basis to Class B shareholders.
CC-LB Class C Common Stock may be converted into CC-LB Class A Common Stock
upon the transfer of CC-LB Class C Common Stock to a person not affiliated with
the seller. Furthermore, CC-LB may automatically convert outstanding Class C
shares into the same number of Class A shares.
11. RELATED PARTY TRANSACTIONS:
Charter provides management services to the Company under the terms of a
contract which provides for annual base fees equal to $9,277 and $9,485 for the
period from January 1, 1998, through December 23, 1998, and for the year ended
December 31, 1997, respectively, plus an additional fee equal to 30% of the
excess, if any, of operating cash flow (as defined in the management agreement)
over the projected operating cash flow. Payment of the additional fee is
deferred due to restrictions provided within the Company's credit agreements.
Deferred management fees bear interest at 8.0% per annum. The additional fees
for the periods from January 1, 1998, through December 23, 1998, and the years
ended December 31, 1997 and 1996, totaled $2,160, $1,990 and $1,255,
respectively. In addition, the Company receives financial advisory services from
an affiliate of Kelso, under terms of a contract which provides for fees equal
to $1,064 and $1,113 per annum as of January 1, 1998, through December 23, 1998,
and December 31, 1997, respectively. Management and financial advisory service
fees currently payable of $2,281 are included in payables to manager of cable
television systems -- related party at December 31, 1997.
The Company pays certain acquisition advisory fees to an affiliate of Kelso
and Charter, which typically equal approximately 1% of the total purchase price
paid for cable television systems acquired. Total acquisition fees paid to the
affiliate of Kelso for the period from January 1, 1998, through December 23,
1998, were $-0-. Total acquisition fees paid to the affiliate of Kelso in 1997
and 1996 were $-0- and $1,400, respectively. Total acquisition fees paid to
Charter for the period from January 1, 1998, through December 23, 1998, were
$-0-. Total acquisition fees paid to Charter in 1997 and 1996 were $-0- and
$1,400, respectively.
The Company and all entities managed by Charter collectively utilize a
combination of insurance coverage and self-insurance programs for medical,
dental and workers' compensation claims. 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 period from January 1, 1998, through December
23, 1998, the Company expensed $1,950 relating to insurance allocations. During
1997 and 1996, the Company expensed $1,689 and $2,065, respectively, relating to
insurance allocations.
Beginning in 1996, the Company and other entities managed by Charter
employed the services of Charter's National Data Center (the "National Data
Center"). The National Data Center performs certain customer billing services
and provides computer network, hardware and software support to the Company and
other affiliated entities. The cost of these services is allocated based on the
number of customers. Management considers this
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
allocation to be reasonable for the operations of the Company. For the period
from January 1, 1998, through December 23, 1998, the Company expensed $843
relating to these services. During 1997 and 1996, the Company expensed $723 and
$466 relating to these services, respectively.
CCE-I maintains a regional office. The regional office performs certain
operational services on behalf of CCE-I and other affiliated entities. The cost
of these services is allocated to CCE-I and affiliated entities based on their
number of customers. Management considers this allocation to be reasonable for
the operations of CCE-I. From the period January 1, 1998, through December 23,
1998, the Company expensed $1,926 relating to these services. During 1997 and
1996, CCE-I expensed $861 and $799, respectively, relating to these services.
12. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases certain facilities and equipment under noncancelable
operating leases. Lease and rental costs charged to expense for the period from
January 1, 1998, through December 23, 1998, was $2,222. Rent expense incurred
under these leases during 1997 and 1996 was $1,956 and $1,704, respectively.
The Company also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Company anticipates that such
rentals will recur. Rent expensed incurred for pole attachments for the period
from January 1, 1998, through December 23, 1998, was $2,430. Rent expense
incurred for pole attachments during 1997 and 1996 was $2,601 and $2,330,
respectively.
LITIGATION
The Company is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
13. REGULATION IN THE CABLE TELEVISION INDUSTRY:
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have
F-71
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CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
resulted in additional regulatory oversight by the FCC and local or state
franchise authorities. The Cable Acts and the corresponding FCC regulations have
established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 23,
1998, the amount refunded by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The Company does not believe that the amount of any such refunds would have a
material adverse effect on the financial position or results of operations of
the Company.
The 1996 Telecom Act, among other things, immediately deregulated the rates
for certain small cable operators and in certain limited circumstances rates on
the basic service tier, and as of March 31, 1999, deregulates rates on the cable
programming service tier (CPST). The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on
the Company's financial position or results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation. The Company is subject to state regulation in
Connecticut.
14. INCOME TAXES:
Deferred tax assets and liabilities are recognized for the estimated future
tax consequence attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured using the enacted
tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Deferred income tax expense or benefit is
the result of changes in the liability or asset recorded for deferred taxes. A
valuation allowance must be established for any portion of a deferred tax asset
for which it is more likely than not that a tax benefit will not be realized.
F-72
229
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
For the period from January 1, 1998, through December 23, 1998, and the
years ended December 31, 1997 and 1996, no current provision (benefit) for
income taxes was recorded. The effective income tax rate is less than the
federal rate of 35% primarily due to providing a valuation allowance on deferred
income tax assets.
Deferred taxes are comprised of the following at December 31, 1997:
Deferred income tax assets:
Accounts receivable................................... $ 252
Other assets.......................................... 7,607
Accrued expenses...................................... 4,740
Deferred revenue...................................... 624
Deferred management fees.............................. 1,654
Tax loss carryforwards................................ 80,681
Tax credit carryforward............................... 1,360
Valuation allowance................................... (40,795)
---------
Total deferred income tax assets.............. 56,123
---------
Deferred income tax liabilities:
Property, plant and equipment......................... (38,555)
Franchise costs....................................... (117,524)
Other................................................. (11,407)
---------
Total deferred income tax liabilities......... (167,486)
---------
Net deferred income tax liability............. $(111,363)
=========
At December 31, 1997, the Company had net operating loss (NOL)
carryforwards for regular income tax purposes aggregating $204,400, which expire
in various years from 1999 through 2012. Utilization of the NOLs carryforwards
is subject to certain limitations.
15. EMPLOYEE BENEFIT PLANS:
The Company's employees may participate in the Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 15% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Company contributes an amount equal to 50% of the first 5% of contributions by
each employee. For the period from January 1, 1998, through December 23, 1998,
the Company contributed $585 to the 401(k) plan. During 1997 and 1996, the
Company contributed approximately $499 and $435 to the 401(k) Plan,
respectively.
Certain employees of the Company are participants in the 1996 Charter
Communications/Kelso Group Appreciation Rights Plan (the "Plan"). The Plan
covers certain key employees and consultants within the group of companies and
partnerships controlled by affiliates of Kelso and managed by Charter. As a
result of the acquisition of Charter and the Company, the Plan will be
terminated and all amounts will be paid by Charter in 1999. For the period from
January 1, 1998, through December 23, 1998, the Company recorded $5,684 of
expense, included in management fees, and a contribution from Charter related to
the Appreciation Rights Plan.
F-73
230
CCA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
16. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings
(loss).
F-74
231
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CharterComm Holdings, L.P.:
We have audited the accompanying consolidated balance sheet of CharterComm
Holdings, L.P. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, partners' capital and cash flows for the
period from January 1, 1998, through December 23, 1998, and for the years ended
December 31, 1997 and 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CharterComm Holdings, L.P.
and subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for the period from January 1, 1998, through December 23,
1998, and for the years ended December 31, 1997 and 1996, in conformity with
generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 5, 1999
F-75
232
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,742
Accounts receivable, net of allowance for doubtful
accounts of $330....................................... 3,158
Prepaid expenses and other................................ 342
--------
Total current assets.............................. 6,242
--------
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property, plant and equipment............................. 235,808
Franchises, net of accumulated amortization of $119,968... 480,201
--------
716,009
--------
OTHER ASSETS................................................ 16,176
--------
$738,427
========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 5,375
Accounts payable and accrued expenses..................... 30,507
Payables to manager of cable television systems -- related
party.................................................. 1,120
--------
Total current liabilities......................... 37,002
--------
DEFERRED REVENUE............................................ 1,719
--------
LONG-TERM DEBT, less current maturities..................... 666,662
--------
DEFERRED MANAGEMENT FEES.................................... 7,805
--------
DEFERRED INCOME TAXES....................................... 5,111
--------
REDEEMABLE PREFERRED LIMITED UNITS -- 577.81 units,
issued and outstanding.................................... 20,128
--------
PARTNERS' CAPITAL:
General Partner........................................... --
Common Limited Partners -- 220.24 units issued and
outstanding............................................ --
--------
Total partners' capital........................... --
--------
$738,427
========
The accompanying notes are an integral part of these consolidated statements.
F-76
233
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
PERIOD FROM
JANUARY 1,
1998, YEAR ENDED
THROUGH DECEMBER 31
DECEMBER 23, --------------------
1998 1997 1996
------------ ---- ----
REVENUES........................................ $196,801 $175,591 $120,280
-------- -------- --------
OPERATING EXPENSES:
Operating costs............................... 83,745 75,728 50,970
General and administrative.................... 14,586 12,607 9,327
Depreciation and amortization................. 86,741 76,535 53,133
Management fees -- related party.............. 14,780 8,779 6,014
-------- -------- --------
199,852 173,649 119,444
-------- -------- --------
Income (loss) from operations.............. (3,051) 1,942 836
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income............................... 211 182 233
Interest expense.............................. (66,121) (61,498) (41,021)
Other, net.................................... (1,895) 17 (468)
-------- -------- --------
(67,805) (61,299) (41,256)
-------- -------- --------
Loss before extraordinary item............. (70,856) (59,357) (40,420)
EXTRAORDINARY ITEM -- Loss on early retirement
of debt....................................... (6,264) -- --
-------- -------- --------
Net loss................................... (77,120) (59,357) (40,420)
REDEMPTION PREFERENCE ALLOCATION:
Special Limited Partner units................. -- -- (829)
Redeemable Preferred Limited units............ -- -- (4,081)
NET LOSS ALLOCATED TO REDEEMABLE PREFERRED
LIMITED UNITS................................. 20,128 2,553 4,063
-------- -------- --------
Net loss applicable to partners' capital
accounts................................. $(56,992) $(56,804) $(41,267)
======== ======== ========
NET LOSS ALLOCATION TO PARTNERS' CAPITAL
ACCOUNTS:
General Partner............................... $(56,992) $(21,708) $(38,391)
Common Limited Partners....................... -- (35,096) (2,876)
-------- -------- --------
$(56,992) $(56,804) $(41,267)
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-77
234
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(DOLLARS IN THOUSANDS)
COMMON
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- -----
BALANCE, December 31, 1995........................ $ 29,396 $ 2,202 $ 31,598
Capital contributions........................... 30,703 2,300 33,003
Allocation of net loss.......................... (38,391) (2,876) (41,267)
-------- -------- --------
BALANCE, December 31, 1996........................ 21,708 1,626 23,334
Capital contributions........................... -- 33,470 33,470
Allocation of net loss.......................... (21,708) (35,096) (56,804)
-------- -------- --------
BALANCE, December 31, 1997........................ -- -- --
Capital contributions........................... 4,920 -- 4,920
Allocation of net loss.......................... (56,992) -- (56,992)
-------- -------- --------
BALANCE, December 23, 1998........................ $(52,072) $ -- $(52,072)
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-78
235
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
PERIOD FROM
JANUARY 1,
1998,
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 23, -----------------------
1998 1997 1996
------------ ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $ (77,120) $ (59,357) $ (40,420)
Adjustments to reconcile net loss to net cash
provided by operating activities --
Extraordinary item -- Loss on early
retirement of debt......................... 6,264 -- --
Depreciation and amortization................ 86,741 76,535 53,133
Amortization of debt issuance costs, debt
discount and interest rate cap
agreements................................. 14,563 14,212 9,564
Loss on disposal of property, plant and
equipment.................................. 1,714 203 367
Changes in assets and liabilities, net of
effects from acquisition --
Accounts receivable, net................... 2,000 369 (303)
Prepaid expenses and other................. (203) 943 245
Accounts payable and accrued expenses...... (1,970) 3,988 9,911
Payables to manager of cable television
systems, including deferred management
fees.................................... 9,456 3,207 3,479
Deferred revenue........................... 770 (82) 452
Other operating activities................. 5,378 -- --
--------- --------- ---------
Net cash provided by operating
activities.............................. 47,593 40,018 36,428
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (85,044) (72,178) (48,324)
Payments for acquisitions, net of cash
acquired..................................... (5,900) (159,563) (145,366)
Other investing activities...................... 5,280 1,577 (2,089)
--------- --------- ---------
Net cash used in investing activities........ (85,664) (230,164) (195,779)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.................... 547,400 231,250 260,576
Repayments of long-term debt.................... (505,300) (67,930) (34,401)
Partners' capital contributions................. -- 29,800 --
Payment of debt issuance costs.................. (3,651) (3,593) (11,732)
Payment of Special Limited Partnership units.... -- -- (43,243)
Repayments of note payable -- related party..... -- -- (15,000)
Payments for interest rate cap agreements....... -- -- (35)
--------- --------- ---------
Net cash provided by financing activities.... 38,449 189,527 156,165
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 378 (619) (3,186)
CASH AND CASH EQUIVALENTS, beginning of period.... 2,742 3,361 6,547
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.......... $ 3,120 $ 2,742 $ 3,361
========= ========= =========
CASH PAID FOR INTEREST............................ $ 61,559 $ 42,538 $ 28,860
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-79
236
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
CharterComm Holdings, L.P. (CharterComm Holdings) was formed in March 1996
with the contributions of Charter Communications Southeast Holdings, L.P.
(Southeast Holdings), Charter Communications, L.P. (CC-I) and Charter
Communications II, L.P. (CC-II). This contribution was accounted for as a
reorganization under common control and, accordingly, the consolidated financial
statements and notes have been restated to include the results and financial
position of Southeast Holdings, CC-I and CC-II.
Through December 23, 1998, CharterComm Holdings was owned 75.3% by
affiliates of Charterhouse Group International, Inc., a privately owned
investment firm (collectively referred to herein as "Charterhouse"), indirectly
owned 5.7% by Charter Communications, Inc. (Charter), manager of the
Partnership's (as defined below) cable television systems, and owned 19.0%
primarily by other institutional investors.
Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through
a series of transactions. In conjunction with Mr. Allen's acquisition, Charter
acquired 100% of the outstanding partnership interests in CharterComm Holdings
on December 23, 1998.
The accompanying consolidated financial statements include the accounts of
CharterComm Holdings and its subsidiaries collectively referred to as the
"Partnership" herein. All significant intercompany balances and transactions
have been eliminated in consolidation.
In 1998, the Partnership through its subsidiaries provided cable television
service to customers in Alabama, Georgia, Kentucky, Louisiana, North Carolina,
South Carolina and Tennessee.
CASH EQUIVALENTS
The Partnership considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997,
cash equivalents consist primarily of repurchase agreements. These investments
are carried at cost that approximates market value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable television
transmission and distribution facilities, and the cost of new customer
installation. The costs of disconnecting a customer are charged to expense in
the period incurred. Expenditures for repairs and maintenance are charged to
expense as incurred, and equipment replacement and betterments are capitalized.
F-80
237
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is provided on the straight-line basis over the estimated
useful lives of the related assets as follows:
Cable distribution systems............................. 3-15 years
Buildings and leasehold improvements................... 5-15 years
Vehicles and equipment................................. 3-5 years
In 1997, the Partnership shortened the estimated useful lives of certain
property, plant and equipment for depreciation purposes. As a result, an
additional $4,775 of depreciation was recorded during 1997.
FRANCHISES
Costs incurred in obtaining and renewing cable franchises are deferred and
amortized over the lives of the franchises. Costs relating to unsuccessful
franchise applications are charged to expense when it is determined that the
efforts to obtain the franchise will not be successful. Franchise rights
acquired through the purchase of cable television systems represent the excess
of the cost of properties acquired over the amounts assigned to net tangible
assets at date of acquisition and are amortized using the straight-line method
over periods up to 15 years.
OTHER ASSETS
Debt issuance costs are being amortized to interest expense over the term
of the related debt. The interest rate cap costs are being amortized over the
terms of the agreement, which approximates three years.
IMPAIRMENT OF ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If a review indicates that the carrying value of
such asset is not recoverable based on projected undiscounted cash flows related
to the asset over its remaining life, the carrying value of such asset is
reduced to its estimated fair value.
REVENUES
Cable television revenues from basic and premium services are recognized
when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
estimated average period that customers are expected to remain connected to the
cable television system. As of December 31, 1997, no installation revenue has
been deferred, as direct selling costs exceeded installation revenue.
Fees collected from programmers to guarantee carriage are deferred and
amortized to income over the life of the contracts. Local governmental
authorities impose franchise fees on the Partnership ranging up to a federally
mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are
collected from the Partnership's customers and
F-81
238
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are periodically remitted to local franchises. Franchise fees collected and paid
are reported as revenue.
INTEREST RATE HEDGE AGREEMENTS
The Partnership manages fluctuations in interest rates by using interest
rate hedge agreements, as required by certain debt agreements. Interest rate
swaps, caps and collars are accounted for as hedges of debt obligations, and
accordingly, the net settlement amounts are recorded as adjustments to interest
expense in the period incurred. Premiums paid for interest rate caps are
deferred, included in other assets, and are amortized over the original term of
the interest rate agreement as an adjustment to interest expense.
The Partnership's interest rate swap agreements require the Partnership to
pay a fixed rate and receive a floating rate thereby creating fixed rate debt.
Interest rate caps and collars are entered into by the Partnership to reduce the
impact of rising interest rates on floating rate debt.
The Partnership's participation in interest rate hedging transactions
involves instruments that have a close correlation with its debt, thereby
managing its risk. Interest rate hedge agreements have been designed for hedging
purposes and are not held or issued for speculative purposes.
OTHER INCOME (EXPENSE)
Other, net includes gain and loss on disposition of property, plant and
equipment, and other miscellaneous items, all of which are not directly related
to the Partnership's primary line of business. In 1996, the Partnership recorded
$367 of nonoperating losses for its portion of insurance deductibles pertaining
to damage caused by hurricanes to certain cable television systems.
INCOME TAXES
Income taxes are the responsibility of the partners and are not provided
for in the accompanying financial statements except for Peachtree Cable TV, Inc.
(Peachtree), an indirect wholly owned subsidiary, which is a C corporation and
for which taxes are presented in accordance with SFAS No. 109.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACQUISITIONS:
In 1998, the Partnership acquired cable television systems in one
transaction for a purchase price net of cash acquired, of $5,900. The excess
cost of properties acquired over
F-82
239
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the amounts assigned to net tangible assets at the date of acquisition was
$5,000 and is included in franchises.
In 1997, the Partnership acquired cable television systems in three
separate transactions for an aggregate purchase price, net of cash acquired, of
$159,600. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the date of acquisition was $126,400 and is
included in franchises.
In 1996, the Partnership acquired cable television systems in three
separate transactions for an aggregate purchase price, net of cash acquired, of
$145,400. The excess of the cost of properties acquired over the amounts
assigned to net tangible assets at the date of acquisition was $118,200 and is
included in franchises.
The above acquisitions were accounted for using the purchase method of
accounting, and accordingly, results of operations of the acquired assets have
been included in the financial statements from the dates of acquisition.
Unaudited pro forma operating results for the 1997 acquisitions as though
the acquisitions had been made on January 1, 1997, with pro forma adjustments to
give effect to amortization of franchises, interest expense and certain other
adjustments are as follows.
YEAR ENDED
DECEMBER 31,
1997
------------
(UNAUDITED)
Revenues............................................... $182,770
Income from operations................................. 2,608
Net loss............................................... (61,389)
The unaudited pro forma information does not purport to be indicative of
the results of operations had these transactions been completed as of the
assumed date or which may be obtained in the future.
3. DISTRIBUTIONS AND ALLOCATIONS:
For financial reporting purposes, redemption preference allocations,
profits and losses are allocated to partners in accordance with the liquidation
provision of the applicable partnership agreement.
As stated in the Partnership Agreement, the Partnership may make
distributions to the partners out of all available funds at such times and in
such amounts as the General Partner may determine in its sole discretion.
4. REDEEMABLE PREFERRED LIMITED UNITS:
As of December 31, 1995, certain Redeemable Preferred Limited Partner units
of CC-I and CC-II were outstanding. During 1996, the Partnership issued certain
Redeemable Preferred Limited Partner units of CharterComm Holdings.
The Preferred Limited Partners' preference return has been reflected as an
addition to the Redeemable Preferred Limited Partner units, and the decrease has
been allocated to
F-83
240
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the General Partner and Common Limited Partner consistent with the liquidation
and distribution provisions in the partnership agreements.
At December 23, 1998, the balance related to the CharterComm Holdings
Preferred Limited Partner units was as follows:
Contribution, March 1996................................. $ 20,052
1996 redemption preference allocation.................. 2,629
Allocation of net loss................................. --
--------
Balance, December 31, 1996............................... 22,681
1997 redemption preference allocation.................. --
Allocation of net loss................................. (2,553)
--------
Balance, December 31, 1997............................... 20,128
1998 redemption preference allocation.................. --
Allocation of net loss................................. (20,128)
--------
Balance, December 23, 1998............................... $ --
========
The 1998 and 1997 redemption preference allocations of $4,617 and $4,020,
respectively, have not been reflected in the Preferred Limited Partners' capital
accounts since the General Partner and Common Limited Partners' capital accounts
have been reduced to $-0-.
5. SPECIAL LIMITED PARTNER UNITS (CC-I):
Prior to March 28, 1996, certain Special Limited Partner units of CC-I were
outstanding. CC-I's profits were allocated to the Special Limited Partners until
allocated profits equaled the unrecovered preference amount (preference amounts
range from 6% to 17.5% of the unrecovered initial cost of the partnership units
and unrecovered preference amounts per annum). When there was no profit to
allocate, the preference return was reflected as a decrease in Partners'
Capital.
In accordance with a purchase agreement and through the use of a capital
contribution from Charter Communications Southeast, L.P. (Southeast), a wholly
owned subsidiary of Southeast Holdings, resulting from the proceeds of the Notes
(see Note 9), CC-I paid the Special Limited Partners $43,243 as full
consideration for their partnership interests on March 28, 1996.
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31,
1997:
Cable distribution systems............................... $274,837
Land, buildings and leasehold improvements............... 5,439
Vehicles and equipment................................... 14,669
--------
294,945
Less -- Accumulated depreciation......................... (59,137)
--------
$235,808
========
F-84
241
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense for the period from January 1, 1998, through December
23, 1998, and for the years ended December 31, 1997 and 1996, was $44,307,
$33,634 and $16,997, respectively.
7. OTHER ASSETS:
Other assets consist of the following at December 31, 1997:
Debt issuance costs....................................... $18,385
Other assets.............................................. 3,549
-------
21,934
Less -- Accumulated amortization.......................... (5,758)
-------
$16,176
=======
As a result of the payment and termination of the CC-I Credit Agreement and
CC-II Credit Agreement (see Note 9), debt issuance costs of $6,264 were written
off as an extraordinary loss on early retirement of debt for the period from
January 1, 1998, through December 23, 1998.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31, 1997:
Accrued interest.......................................... $ 9,804
Franchise fees............................................ 3,524
Programming costs......................................... 3,391
Accounts payable.......................................... 2,479
Capital expenditures...................................... 2,099
Salaries and related benefits............................. 2,079
Other..................................................... 7,131
-------
$30,507
=======
9. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1997:
Senior Secured Discount Debentures....................... $146,820
11 1/4% Senior Notes..................................... 125,000
Credit Agreements:
CC-I................................................... 112,200
CC-II.................................................. 339,500
--------
723,520
Less:
Current maturities..................................... (5,375)
Unamortized discount................................... (51,483)
--------
$666,662
========
F-85
242
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SENIOR SECURED DISCOUNT DEBENTURES
On March 28, 1996, Southeast Holdings and CharterComm Holdings Capital
Corporation (Holdings Capital), a wholly owned subsidiary of Southeast Holdings
(collectively the "Debentures Issuers"), issued $146,820 of Senior Secured
Discount Debentures (the "Debentures") for proceeds of $75,000. Proceeds from
the Debentures were used to pay fees and expenses related to the issuance of the
Debentures and the balance of $72,400 was a capital contribution to Southeast.
The Debentures are secured by all of Southeast Holdings' ownership interest in
Southeast and rank pari passu in right and priority of payment to all other
existing and future indebtedness of the Debentures Issuers. The Debentures are
effectively subordinated to the claims of creditors of Southeast Holdings'
subsidiaries, including the Combined Credit Agreement (as defined herein). The
Debentures are redeemable at the Debentures Issuers' option at amounts
decreasing from 107% to 100% of principal, plus accrued and unpaid interest to
the redemption date, beginning on March 15, 2001. The Debentures Issuers are
required to make an offer to purchase all of the Debentures, at a purchase price
equal to 101% of the principal amount, together with accrued and unpaid
interest, upon a Change in Control, as defined in the Debentures Indenture. No
interest is payable on the Debentures prior to March 15, 2001. Thereafter,
interest on the Debentures is payable semiannually in arrears beginning
September 15, 2001, until maturity on March 15, 2007. The discount on the
Debentures is being accreted using the effective interest method at an interest
rate of 14% from the date of issuance to March 15, 2001.
11 1/4% SENIOR NOTES
Southeast and CharterComm Capital Corporation (Southeast Capital), a wholly
owned subsidiary of Southeast (collectively the "Notes Issuers"), issued
$125,000 aggregate principal amount of 11 1/4% Senior Notes (the "Notes"). The
Notes are senior unsecured obligations of the Notes Issuers and rank pari passu
in right and priority of payment to all other existing and future indebtedness
of the Notes Issuers. The Notes are effectively subordinated to the claims of
creditors of Southeast's subsidiaries, including the lenders under the Combined
Credit Agreement. The Notes are redeemable at the Notes Issuers' option at
amounts decreasing from 105.625% to 100% of principal, plus accrued and unpaid
interest to the date of redemption, beginning on March 15, 2001. The Notes
Issuers are required to make an offer to purchase all of the Notes, at a
purchase price equal to 101% of the principal amount, together with accrued and
unpaid interest, upon a Change in Control, as defined in the Notes Indenture.
Interest is payable semiannually on March 15 and September 15 until maturity on
March 15, 2006.
Southeast and Southeast Holdings are holding companies with no significant
assets other than their direct and indirect investments in CC-I and CC-II.
Southeast Capital and Holdings Capital were formed solely for the purpose of
serving as co-issuers and have no operations. Accordingly, the Notes Issuers and
Debentures Issuers must rely upon distributions from CC-I and CC-II to generate
funds necessary to meet their obligations, including the payment of principal
and interest on the Notes and Debentures.
F-86
243
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMBINED CREDIT AGREEMENT
In June 1998, CC-I and CC-II (the "Borrowers") replaced their existing
credit agreements and entered into a combined credit agreement (the "Combined
Credit Agreement"), which provides for two term loan facilities, one with the
principal amount of $200,000 that matures on June 30, 2007, and the other with
the principal amount of $150,000 that matures on December 31, 2007. The Combined
Credit Agreement also provides for a $290,000 revolving credit facility, with a
maturity date of June 30, 2007. Amounts under the Combined Credit Agreement bear
interest at the LIBOR Rate or Base Rate, as defined, plus a margin of up to
2.0%. The variable interest rates ranged from 6.69% to 7.31% at December 23,
1998.
Commencing March 31, 2002, and at the end of each calendar quarter
thereafter, the available borrowings for the revolving credit facility and the
$200,000 term loan shall be reduced on an annual basis by 11.0% in 2002 and
14.6% in 2003. Commencing March 31, 2002, and at the end of each calendar
quarter thereafter, the available borrowings for the $150,000 term loan shall be
reduced on an annual basis by 1.0% in 2002 and 1.0% in 2003. A quarterly
commitment fee of between 0.25% and 0.375% per annum is payable on the
unborrowed balance of the revolving credit facility.
The Debentures, Notes and Combined Credit Agreement require the Partnership
to comply with various financial and nonfinancial covenants including the
maintenance of a ratio of debt to annualized operating cash flow, as defined,
not to exceed 5.25 to 1 at December 23, 1998. These debt instruments also
contain substantial limitations on, or prohibitions of, distributions,
additional indebtedness, liens, asset sales and certain other items.
CC-I CREDIT AGREEMENT
CC-I maintained a credit agreement (the "CC-I Credit Agreement") with a
consortium of banks for borrowings up to $127,200, consisting of a revolving
line of credit of $63,600 and a term loan of $63,600. Interest accrued, at
CC-I's option, at rates based upon the Base Rate, as defined in the CC-I Credit
Agreement, LIBOR, or prevailing bid rates of certificates of deposit plus the
applicable margin based upon CC-I's leverage ratio at the time of the
borrowings. The variable interest rates ranged from 7.75% to 8.00% and 7.44% to
7.50% at December 31, 1997 and 1996, respectively.
In June 1998, the CC-I Credit Agreement was repaid and terminated in
conjunction with the establishment of the Combined Credit Agreement.
CC-II CREDIT AGREEMENT
CC-II maintained a credit agreement (the "CC-II Credit Agreement") with a
consortium of banks for borrowings up to $390,000, consisting of a revolving
credit facility of $215,000, and two term loans totaling $175,000. Interest
accrued, at CC-II's option, at rates based upon the Base Rate, as defined in the
CC-II Credit Agreement, LIBOR, or prevailing bid rates of certificates of
deposit plus the applicable margin based upon CC-II's leverage ratio at the time
of the borrowings. The variable interest rates ranged from 7.63% to 8.25% and
7.25% to 8.125% at December 31, 1997 and 1996, respectively.
In June 1998, the CC-II Credit Agreement was repaid and terminated in
conjunction with the establishment of the Combined Credit Agreement.
F-87
244
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
A summary of debt and the related interest rate hedge agreements at
December 31, 1997, is as follows:
CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE
-------- -------- -----
DEBT
Senior Secured Discount Debentures........ $ 95,337 $ -- $115,254
11 1/4% Senior Notes...................... 125,000 -- 136,875
CC-I Credit Agreement..................... 112,200 -- 112,200
CC-II Credit Agreement.................... 339,500 -- 339,500
INTEREST RATE HEDGE AGREEMENTS
CC-I:
Swaps................................... -- 100,000 (797)
CC-II:
Swaps................................... -- 170,000 (1,030)
Caps.................................... -- 70,000 --
Collars................................. -- 55,000 (166)
As the CC-I and CC-II Credit Agreements bear interest at current market
rates, their carrying amounts approximate fair market values at December 31,
1997. The fair value of the Notes and the Debentures is based on current
redemption value.
The weighted average interest pay rate for CC-I interest rate swap
agreements was 8.07% at December 31, 1997.
The weighted average interest pay rate for CC-II interest rate swap
agreements was 8.03% at December 31, 1997. The weighted average interest rate
for CC-II interest cap agreements was 8.48% at December 31, 1997. The weighted
average interest rates for CC-II interest rate collar agreements were 9.01% and
7.61% for the cap and floor components, respectively, at December 31, 1997.
The notional amounts of interest rate hedge agreements do not represent
amounts exchanged by the parties and, thus, are not a measure of the
Partnership's exposure through its use of interest rate hedge agreements. The
amounts exchanged are determined by reference to the notional amount and the
other terms of the contracts.
The fair value of interest rate hedge agreements generally reflects the
estimated amounts that the Partnership would receive or pay (excluding accrued
interest) to terminate the contracts on the reporting date, thereby taking into
account the current unrealized gains or losses of open contracts. Dealer
quotations are available for the Partnership's interest rate hedge agreements.
Management believes that the sellers of the interest rate hedge agreements
will be able to meet their obligations under the agreements. In addition, some
of the interest rate hedge agreements are with certain of the participating
banks under the Partnership's credit facilities thereby reducing the exposure to
credit loss. The Partnership has policies regarding the financial stability and
credit standing of major counterparties. Nonperformance by the counterparties is
not anticipated nor would it have a material adverse effect on the results of
operations or the financial position of the Partnership.
F-88
245
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES:
The book value of the Partnership's net assets (excluding Peachtree)
exceeds its tax reporting basis by $2,919 as of December 31, 1997.
As of December 31, 1997, temporary differences and carryforwards that gave
rise to deferred income tax assets and liabilities for Peachtree are as follows:
Deferred income tax assets:
Accounts receivable..................................... $ 4
Accrued expenses........................................ 29
Deferred management fees................................ 111
Deferred revenue........................................ 24
Tax loss carryforwards.................................. 294
Tax credit carryforwards................................ 361
-------
Total deferred income tax assets................ 823
-------
Deferred income tax liabilities:
Property, plant and equipment........................... (1,372)
Franchises and other assets............................. (4,562)
-------
Total deferred income tax liabilities........... (5,934)
-------
Net deferred income tax liability............... $(5,111)
=======
12. RELATED PARTY TRANSACTIONS:
Charter provides management services to the Partnership under the terms of
contracts which provide for fees equal to 5% of the Partnership's gross service
revenues. The debt agreements prohibit payment of a portion of such management
fees (40% for both CC-I and CC-II) until repayment in full of the outstanding
indebtedness. The remaining 60% of management fees, are paid quarterly through
December 31, 1998. Thereafter, the entire fee may be deferred if a multiple of
EBITDA, as defined, does not exceed outstanding indebtedness of CC-I and CC-II.
In addition, payments due on the Notes and Debentures shall be paid before any
deferred management fees are paid. Expenses recognized under the contracts for
the period from January 1, 1998, through December 23, 1998, were $9,860.
Expenses recognized under the contracts during 1997 and 1996 were $8,779 and
$6,014, respectively. Management fees currently payable of $1,432 are included
in payables to manager of cable television systems -- related party at December
31, 1997.
The Partnership and all entities managed by Charter collectively utilize a
combination of insurance coverage and self-insurance programs for medical,
dental and workers' compensation claims. The Partnership 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 Partnership. For the period from January 1, 1998, through
December 23, 1998, the Partnership expensed $1,831 relating to insurance
allocations. During 1997 and 1996, the Partnership expensed $1,524 and $1,136,
respectively, relating to insurance allocations.
F-89
246
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Partnership employs the services of Charter's National Data Center (the
"National Data Center"). The National Data Center performs certain customer
billing services and provides computer network, hardware and software support
for the Partnership and other entities managed by Charter. The cost of these
services is allocated based on the number of basic customers. Management
considers this allocation to be reasonable for the operations of the
Partnership. For the period from January 1, 1998, through December 23, 1998, the
Partnership expensed $685 relating to these services. During 1997 and 1996, the
Partnership expensed $606 and $345, respectively, relating to these services.
CC-I, CC-II and other entities managed by Charter maintain regional
offices. The regional offices perform certain operational services. The cost of
these services is allocated based on number of basic customers. Management
considers this allocation to be reasonable for the operations of the
Partnership. For the period from January 1, 1998, through December 23, 1998, the
Partnership expensed $3,009 relating to these services. During 1997 and 1996,
the Partnership expensed $1,992 and $1,294, respectively, relating to these
services.
The Partnership pays certain acquisition advisory fees to Charter and
Charterhouse for cable television systems acquired. Total acquisition fees paid
to Charter for the period from January 1, 1998, through December 23, 1998, were
$-0-. Total acquisition fees paid to Charter in 1997 and 1996 were $982 and
$1,738, respectively. Total acquisition fees paid to Charterhouse for the period
from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition
fees paid to Charterhouse in 1997 and 1996 were $982 and $1,738, respectively.
During 1997, the ownership of CharterComm Holdings changed as a result of
CharterComm Holdings receiving a $25,000 cash contribution from an institutional
investor, a $3,000 cash contribution from Charterhouse and a $2,000 cash
contribution from Charter, as well as the transfer of assets and liabilities of
a cable television system through a series of transactions initiated by Charter
and Charterhouse. Costs of $200 were incurred in connection with the cash
contributions. These contributions were contributed to Southeast Holdings which,
in turn, contributed them to Southeast.
13. COMMITMENTS AND CONTINGENCIES:
LEASES
The Partnership leases certain facilities and equipment under noncancelable
operating leases. Lease and rental costs charged to expense for the period from
January 1, 1998, through December 23, 1998, was $642. Rent expense incurred
under leases during 1997 and 1996 was $615 and $522, respectively.
The Partnership also rents utility poles in its operations. Generally, pole
rentals are cancelable on short notice, but the Partnership anticipates that
such rentals will recur. Rent expense incurred for pole rental attachments for
the period from January 1, 1998, through December 23, 1998, was $3,261. Rent
expense incurred for pole attachments during 1997 and 1996 was $2,930 and
$2,092, respectively.
F-90
247
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
The Partnership is a party to lawsuits that arose in the ordinary course of
conducting its business. In the opinion of management, after consulting with
legal counsel, the outcome of these lawsuits will not have a material adverse
effect on the Partnership's consolidated financial position or results of
operations.
REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act" and together with
the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996
(the "1996 Telecom Act"), establish a national policy to guide the development
and regulation of cable television systems. The Federal Communications
Commission (FCC) has principal responsibility for implementing the policies of
the Cable Acts. Many aspects of such regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. Legislation
and regulations continue to change, and the Company cannot predict the impact of
future developments on the cable television industry.
The 1992 Cable Act and the FCC's rules implementing that act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established rate regulations.
The 1992 Cable Act permits certified local franchising authorities to order
refunds of basic service tier rates paid in the previous twelve-month period
determined to be in excess of the maximum permitted rates. As of December 23,
1998, the amount returned by the Company has been insignificant. The Company may
be required to refund additional amounts in the future.
The Company believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including the rate setting provisions
promulgated by the FCC. However, in jurisdictions that have chosen not to
certify, refunds covering the previous twelve-month period may be ordered upon
certification if the Company is unable to justify its basic rates. The Company
is unable to estimate at this time the amount of refunds, if any, that may be
payable by the Company in the event certain of its rates are successfully
challenged by franchising authorities or found to be unreasonable by the FCC.
The 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
F-91
248
CHARTERCOMM HOLDINGS, L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ultimate effect of the 1996 Telecom Act on the Company's financial position or
results of operations.
The FCC may further restrict the ability of cable television operators to
implement rate increases or the United States Congress may enact legislation
that could delay or suspend the scheduled March 1999 termination of CPST rate
regulation. This continued rate regulation, if adopted, could limit the rates
charged by the Company.
A number of states subject cable television systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. State governmental agencies are
required to follow FCC rules when prescribing rate regulation, and thus, state
regulation of cable television rates is not allowed to be more restrictive than
the federal or local regulation.
14. EMPLOYEE BENEFIT PLANS:
The Partnership's employees may participate in Charter Communications, Inc.
401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can
contribute up to 15% of their salary, on a before tax basis, subject to a
maximum contribution limit as determined by the Internal Revenue Service. The
Partnership contributes an amount equal to 50% of the first 5% of contributions
by each employee. For the period from January 1, 1998, through December 23,
1998, the Partnership contributed $305. During 1997 and 1996, the Partnership
contributed $262 and $149, respectively.
Certain Partnership employees participate in the 1996 Charter
Communications/Charterhouse Group Appreciation Rights Plan (the "Appreciation
Rights Plan"). The Appreciation Rights Plan covers certain key employees and
consultants within the group of companies and partnerships controlled by
Charterhouse and managed by Charter. As a result of the acquisition of Charter
and the Partnership, the Plan will be terminated and all amounts will be paid by
Charter in 1999. For the period from January 1, 1998, through December 23, 1998,
the Partnership recorded $4,920 of expense, included in management fees, and a
contribution from Charter related to the Appreciation Rights Plan.
15. ACCOUNTING STANDARD NOT YET IMPLEMENTED:
In June 1998, the Financial Accounting Standards Board adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Partnership
has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated
financial statements nor has it determined the timing or method of its adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings
(loss).
F-92
249
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Greater Media, Inc.:
We have audited the accompanying combined balance sheets of Greater Media
Cablevision Systems (see Note 1) (collectively, the "Combined Systems") included
in Greater Media, Inc., as of September 30, 1998 and 1997, and the related
combined statements of income, changes in net assets, and cash flows for each of
the three years in the period ended September 30, 1998. These combined financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Combined Systems, as of September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 2, 1999
F-93
250
GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
